Texas Attorney Blog

The conventional wisdom is that when oil prices are high, gasoline prices follow. Yet is that really true? Just recently, oil prices were up more than 9%, yet gas prices at the pump actually dropped 15 cents, to 3.30 a gallon. Why is this? Well, it turns out the conventional wisdom is mostly true, but gasoline prices do not follow oil prices perfectly, and each has its own reasons for prices rising and falling.

First, why do gas prices tend to follow oil prices on an upward climb? According to one source, it is simply because when oil prices rise, gas dealers raise their prices in order to avoid losing money. At the same time, when oil prices go down, it can take anywhere from two days to three weeks for gas prices to fall. Another reason may have to do with the type of crude oil on the market. When crude oil is plentiful, but gas prices are still high, the reason may be because the crude is heavy and sour, which requires greater processing -- as opposed to light, sweet crude oil, which is easier to refine.

If this is the case, then why do oil and gas prices sometimes vary? There are several reasons, most very specific to the way oil and gas are produced and to their intended purpose. While nearly half of crude oil -- 42% -- is used for producing gas, the other 58% is used for diesel fuel, jet fuel, and is even used to make everyday products such as tires. Therefore, the more demand for these items, the more the price of oil will be affected.

As for why gas prices rise and fall, the reasons range from the methods of production to the state of the economy. First, gas prices are affected by demand -- when people travel in the summer, prices tend to go up. During the winter, with less travel, prices tend to drop. Second, there is not just demand for oil in the United States, but all across the world. China, India, and Brazil, all enjoying economic expansion, require more energy to keep their economies moving. Less oil means that it is more valuable, which increases the price of any product associated with it, including gas.

Third, gas is not just made of oil, but also of fuels meant to make gas cleaner burning. These fuels, such as ethanol, are often required additives, and their presence increases the cost of a gallon of gasoline. Even when all of these factors are taken into account, probably the biggest reason for gas’s continued high prices -- even while oil prices remain low -- is taxes. Taxes are imposed by both the state and federal government on every gallon you use, adding enormously to what you pay at the pump.

In short, high gas and oil prices are not part of some nefarious scheme cooked up by the oil industry to bilk consumers. There are a variety of reasons for oil and gas prices to be the way they are, mostly just having to do with the way each is processed. That said, if more oil and gas drilling were permitted, some of the pressures might be reduced, resulting in lower prices at the gas pump.

In what is hopefully a sign of a healthy Texas oil and gas industry, as well as good news for Texas mineral owners, Apache Corporation (the subject of a recent post) has not only renewed its lease of 365,000 square feet at its Post Oak Central office building, but has also leased another 132,000 square feet of space. This represents a 36 percent office space increase, bringing Apache’s total square footage to 467,000. The company also extended its current lease term to 2018, a five year add-on to their agreement, which was set to expire at the end of this year. The Houston office complex is owned by JP Morgan and is distinct for its three 24 story glass and steel towers.

Apache’s move to expand its operations was likely prompted by the company’s healthy profit margins. The Wall Street Journal recently reported that Apache’s fourth quarter earnings were up 73 percent as the company benefited from high oil prices and increased production. Apache’s fourth quarter profit was $1.9 billion, or $2.98 a share. That is a substantial increase over their $689 million profit and $1.77 share price from 2011. Chief Executive G. Steven Farris said the company expected to spend $9.5 billion on drilling capital this year, up from $8 billion in 2011. Revenue also increased for the company by about 25 percent to $4.3 billion. Apache’s global production was up by 4.2 percent from a year earlier and average prices went up 24 percent for oil and nearly 3 percent for natural gas. These reports on Apache’s success are good news for the Texas energy industry and a benefit to Houston, the company’s headquarters.

This comes on the heels of other big real estate transactions in Houston, a city fortunate to be at the center of the oil and gas industry’s resurgence. In January, Noble Energy signed a lease for 467,000 ft2 of office space at the former headquarters of Hewlett Packard, taking over the northwest Houston building in its entirety. The 10 story building opened in 1998 as the headquarters for Compaq Computer Corporation. The building was one of Houston’s largest vacant office buildings and Noble’s lease is helping bring the city’s vacancy numbers down significantly—showing once again how a robust and profitable energy industry can help the economy as a whole.

In December, Shell Oil renewed its 1.2 million ft2 office lease at One Shell Plaza and Two Shell Plaza in downtown Houston. Shell’s Houston lease was the biggest lease signed in the United States in 2011. Last year, 1.8 million square feet of office space was occupied in Houston and that number is expected to be the same or greater this year, spurring new construction for the first time in years.

This energy boom is rippling across Houston’s economy and not just in real estate circles. Houston is the first major metropolitan area in the US to regain all the jobs lost during the recent recession. The region added 76,000 jobs last year according to the Texas Workforce Commission and is on track to create tens of thousands of more jobs this year, almost entirely thanks to the profitable and growing energy industry.

See Our Related Blog Posts:

Apache Oil Purchase Good News for the Texas Panhandle

The battle in Texas and in the country in the oil and gas field over hydraulic fracturing, or “fracing", rages on, of course. There are several recent developments in the effort to uncover the facts about fracing, as opposed to unsubstantiated claims and political posturing. These research efforts are important resources for better understanding of this technology and how it affects the environment and the natural gas industry. With so much discussion and debate on the issue of fracing, a technology used for years but subject to intense criticism only recently, it is especially important to publicize the scientific evidence related to the process, rather than buying into the political hype (see a previous post on my opinions here).

The University of Texas at Austin released its preliminary findings, entitled "Boom or Bane: A Report on Hydraulic Fracturing of Shale", excerpted from an intensive ongoing research and study project on this issue, on November 9, 2011. The University’s Energy Institute examined the use of hydraulic fracturing in shale gas drilling. The preliminary findings indicate that there is no direct link between fracing and groundwater contamination. The researchers suggest that, at worst, any contamination is probably from above ground spills, mishandling of drilling waste products, or faulty cement casings—not the the hydraulic fracturing itself. Dr. Charles “Chip” Groat, a UT geology professor and Energy Institute associate director who is leading this research project, stated at the release of the preliminary findings: “Our goal is to inject science into what has become an emotional debate and provide policymakers a foundation to develop sound rules and regulations.” The final report is expected to be released soon, in the early part of this year. The Energy Institute has two other projects on hydraulic fracturing in shale gas development in the works which may also shed light on the issue in the near future.

In November of last year, the Environmental Protection Agency released its Plan to Study the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources. This study intends to look into the potential effects on drinking water from various natural gas drilling techniques associated with hydraulic fracturing. The EPA plans to use existing data as well as developing case studies at the Haynesville, Marcellus, Bakken, and Barnett fields. They will study drinking water at sites where fracing has already been used and collect data both before and after fracing at new sites where the process has not been used before. This report will be released in two parts, the first of which is expected by the end of 2012. That first report will contain the analysis of existing data. The longer-term results of this EPA project will be released in a supplemental report in 2014, which will include information and conclusions from the case studies of new sites.

On November 10, 2011, the Shale Gas Production Subcommittee of the Secretary of Energy Advisory Board released its final report, entitled "The SEAB Shale Gas Production Subcommittee Second Ninety Day Report", on shale gas production. This report focused on implementation of the 20 recommendations made in a related interim report, including more public information about shale gas production, disclosure of the fracturing fluid’s composition, and the creation of a shale industry organization dedicated to improving best practices. The final report speaks mostly in generalities. It calls for progress in reducing the environmental impact of shale gas production and creating partnerships between the industry, states, and federal agencies.

There will always be some who seek to demonize anything that the oil and gas industry does. However, fair-minded people should ensure that their elected officials base any policy decisions related to fracing on real evidence and not partisan posturing.

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Chesapeake Reduction in Gas Well Drilling & Exploration May Effect Texas Mineral Owners

NAT GAS Act May Be Misguided Legislation

Texas mineral owners who have signed oil and gas leases with Chesapeake Energy may be faced with some unanswered questions.

The American natural gas industry faces the paradox of having been too successful in recent years. A glut of natural gas on the market due to technological advances have allowed access to previously inaccessible gas, especially through horizontal drilling and hydraulic fracturing. The glut of gas has pushed prices down 45 percent in the past year. In fact, natural gas prices are at a ten year low right now. As a consequence, the second largest natural gas producer in the nation, Chesapeake Energy Corporation, recently announced that it will cut gas production by half. The company will only operate 24 of its dry gas drilling rigs, down from the 50 rigs it operated in 2011.

Chesapeake’s measures will only reduce America’s supply of gas by 1.4 percent. The indications from other natural gas companies regarding cutting gas production has been mixed. EQT Corporation stated that it would suspend natural gas drilling in Kentucky indefinitely because of low prices. Exxon declined to comment. Cabot Oil & Gas has no plans to cut production.

Chesapeake says it will take the $2 billion it plans to cut from natural gas production and shift it into the more profitable area of oil production, as oil prices have remained high even as natural gas prices have fallen. Chesapeake also plans to cut $2 billion from its land buying budget and immediately cut production by 8 percent. It is deferring new dry gas wells and pipeline connections where possible. Chesapeake is considering letting current mineral leases expire. The company expects its lowest expenditures for dry gas drilling since 2005.

While this may be good for Chesapeake’s financial stability and its investors, it raises questions for Texas mineral owners who have already signed mineral leases with Chesapeake. If you are a Texas mineral owner who has already signed a lease with Chesapeake, you may wish to have a Texas oil and gas attorney review your lease to determine what your options may be.

See Our Related Blog Posts:

Apache Oil Purchase Good News for the Texas Panhandle

NAT GAS Act May Be Misguided Legislation