Five things for the week of February 2, 2015:
- Pres. Obama Releases His Proposed 2016 Budget
- Severance Taxes Make Noise in Two States
- The Colorado Oil and Gas Task Force Whittles Down its Recommendation List
- Jobs Report Shows a Dip for Oil and Gas
- DOE Releases Report on Natural Gas Infrastructure
Our interview this week is with Curt Dacar, the CEO of RockPile Energy, a completion services company in Colorado.
1. Pres. Obama Releases His Proposed 2016 Budget
The President released his proposed budget for the fiscal year 2016, which begins this fall. Under the current Republican Congress, his proposal is unlikely to receive much traction, but it is an important anchor for future debate. The President hopes to reverse the “mindless austerity” of recent years and grow the budget to levels above the existing spending caps. As he has in past years, the President proposed raising taxes on oil and gas production by eliminating a series of what he calls tax “loopholes.” As summarized by the Oil & Gas Journal, the proposal would:
- Modify rules for dual capacity taxpayers, which would raise a projected $533 million in fiscal 2016,
- Repeal expensing of intangible drilling costs (IDCs) to raise $2.27 billion in 2016,
- Repeal percentage depletion for oil and gas wells to raise $1.12 billion in 2016,
- Increase geological and geophysical amortization from 5 to 7 years to raise $91 million in 2016, and
- Make the oil and gas industry ineligible for the domestic manufacturing deduction under the American Jobs Creation Act to raise an estimated $647 million in 2016.
The American Petroleum Institute was unimpressed.
Over at the Environmental Protection Agency, the administration has proposed a new $4 billion Clean Power State Incentive Fund. This would provide money to states that commit to exceed the minimum requirements established in the President’s Clean Power Plan to reduce carbon pollution from electricity generation. As increased natural gas use is a major component of the plan, it would seem a lot of that money could wind up in natural gas powerplants.
On a somewhat related note, the Department of Energy pulled the plug last week on a pilot project that was supposed to capture carbon emissions from a coal plant in Illinois. The project was a partnership with FutureGen Industrial Alliance that received over $1 billion in federal funding. The DOE says it remains committed to carbon capture. In fact, the only mention of natural gas policy in Sec. Ernest Moniz’s budget speech was to say the agency was making a major “thrust” on carbon sequestration from natural gas plants.
Finally, the Department of Interior seems bent on bringing in new funding from oil and gas production. The budget asks for increased funding to speed up permitting for drilling for both onshore and offshore drilling on federal land. It would also enact “policy changes and more rigorous oversight” in order to increase royalties. It appears that would include eliminating royalty sharing with the Gulf of Mexico states.
2. Severance Taxes Make Noise in Two States
Ohio’s Republican Gov. John Kasich also released his proposed budget for next year. He has been seeking an increased severance tax on oil and gas production for several years. That is a tax on the value of the resource as it comes out of the ground. Ohio has long had a severance tax on clay, sandstone, shale, conglomerate, gypsum, dolomite, gravel, sand, limestone, salt, coal, natural gas, and oil. Gov. Kasich has argued the current severance tax rates are too low. They are currently 2.5 cents per thousand cubic feet (MCF) on natural gas and 10 cents per barrel for oil. In the past, Gov. Kasich has argued for a 2.75% tax, but he has said he would keep raising the proposal the more industry fights him. Last week, he proposed a 6.5% tax. The Ohio Oil and Gas Association said it has “serious concerns.”
Pennsylvania also saw some movement on a severance tax. Pennsylvania does not currently have a tax, instead they have an “impact fee” that is a flat charge for each well drilled. It amounts to a severance tax of a percent or two. New Democratic Gov. Tom Wolf campaigned on the idea of enacting a five percent severance tax. He has not formally proposed anything yet, but state legislators are off to the races on their own. A group of Democrats have proposed an 8% severance tax, and a group of Republicans have proposed a 3.2% tax that would come on top of the existing impact fee. Two of the Republicans supporting the tax increase were kind enough to explain their views on camera.
Here is Republican State Rep. Gene Digirolamo:
And here is Republican State Rep. Tom Murt:
3. The Colorado Oil and Gas Task Force Whittles Down its Proposal List
Colorado Gov. John Hickenlooper clarified a few days ago that the oil and gas task force should seek consensus proposals, but also offer recommendations where the group did not find agreement. With that clarified, the group set out to work through proposals submitted by group members. On Tuesday, the group voted on all the proposals. Those that received a majority vote moved forward and will appear in the final report. In that report, however, only items that received a 2/3rds vote will be official recommendations of the group.
Unfortunately, the substantive debate over these issues is really not being made available to the public. A local reporter shared this picture of the less-than-transparent process for working through these recommendations.
— Dan Boyce (@BoyceDan) February 3, 2015
It seems clear, however, that the idea of local fracking bans are out the window. The group is, however, developing some kind of alternative dispute resolution process that would allow a degree of local input on drilling activity.
4. Jobs Report Shows a Dip for Oil and Gas
Last month’s job report showed positive overall news for the country, but also a slip in oil and gas employment. It was the first monthly employment drop since March 2014. Nonetheless, the industry is still at historically high employment levels. The recent low point was 118,600 jobs in December 2013, and last week’s job report showed jobs fell from 201,400 to 199,500. That is not great, but certainly no disaster yet. And despite the drop in employment, production still ticked up.
5. DOE Report on Natural Gas Infrastructure
The Department of Energy has released a new report entitled, “Natural Gas Infrastructure Implications of Increased Demand from the Electric Power Sector.” The report was part of the DOE’s effort to publish a Quadrennial Energy Review, which is “a multiyear roadmap that outlines Federal energy policy objectives, legislative proposals to Congress, Executive actions, and financing and incentive programs.” The first portion of the Review is supposed to cover transmission, storage, and distribution infrastructure. For now, all that has been published is a couple reports.
This particular report says that the shale boom has increased the use of natural gas in electricity generation. Because gas is cleaner than coal, gas is expected to be used more in the future. That creates challenges. The report notes that natural gas “cannot typically be stored on-site and must be delivered as it is consumed.” Therefore, “it is important to understand the implications of greater natural gas demand for the infrastructure required to deliver natural gas to end users, including electric generators.” The report made four key findings:
- Diverse sources of natural gas supply and demand will reduce the need for additional interstate natural gas pipeline infrastructure.
- Higher utilization of existing interstate natural gas pipeline infrastructure will reduce the need for new pipelines.
- Incremental interstate natural gas pipeline infrastructure needs in a future with an illustrative national carbon policy are projected to be modest relative to the Reference Case.
- While there are constraints to siting new interstate natural gas pipeline infrastructure, the projected pipeline capacity additions in this study are lower than past additions that have accommodated such constraints.
Interview with Curt Dacar, the CEO of RockPile Energy (Starts at 26:14)
Curt helped found RockPile Energy back in 2011. He was working as a consultant after a long career with Schlumberger, and was asked to help put together a new company to do well completions. He was RockPile’s only employee in September 2011, but the company has rapidly grown to 471 employees today (and it has job openings right now). The company also seems to do a great job of telling its story:
Curt started his career in the Williston Basin in the 1970s as a truck driver for a Schlumberger subsidiary, but when work dropped off in the region he was given the opportunity to go through the company’s “field engineering” program. After that, he worked in a variety of management roles across the country, including Mississippi, Wyoming, North Dakota, California, Colorado, and Texas. He said he was fortunate to be able to study engineering while working, and that the better path for folks interested in his type of work is to complete an engineering degree before getting started.
Curt says his roots are in the “pumping” side of the business. That includes cementing, fracturing, acidizing, and the like. He later moved on to sales and marketing, where he dealt with other business functions. He said that hydraulic fracturing was a commonly-used process throughout his career, but until recent years the U.S. only had a few fracturing crews. Fracking was a process used in a limited number of basins. Curt explained that the unconventional production is simply production from a well that would not produce without some type of stimulation. In his view, fracking technology has not changed dramatically in recent years. The bigger breakthrough is the ability to drill horizontally through a narrow productive zone.
RockPile was created as a subsidiary of Triangle Petroleum, an independent producer based out of Denver, Colorado. Curt said the company was unimpressed with the fracturing service providers in the area and decided to start their own completion company. RockPile put its first crew to work in the field within just a few months of being founded. The company initially served just Triangle, but has now expanded to serving other companies. During its operations, RockPile began to find other services where the market was not being well served. One example is “wireline” services, which includes perforating well casings. To fix the problem, RockPile started its own wireline division.
The company really touts its efficiency, which is even more important in a time of dropping oil prices. Curt said the key to efficiency is measuring everything, especially non-productive time. He said many of RockPile’s customers work with several completion service providers, and RockPile’s success is due to demonstrating its efficiency compared to other companies. Curt also gave credit to RockPile’s lean management structure.
RockPile also strives for efficiency in its supply chain. The company has sought to keep costs down through strong partnerships with a limited number of suppliers. One particular example is proppant sand. Curt complained that sand is typically moved around several times before being used at a well site. RockPile utilizes a “sandbox” system, where sand it loaded into a metal crate at the mine and then delivered directly to the well. This reduces both cost and dust pollution, and that is important moving forward as dust from proppant sand is becoming a concern for regulators.
Curt says he tries to take time out to educate the public on hydraulic fracturing, as the industry has done a poor job of it. He finds people are generally accepting of the technology once they understand it. Hopefully, this interview will help a little bit.
For more information, be sure to check out the company’s site at www.rockpileenergy.com.