Issue Monday Looks at Energy Insanity & Its Remedies

An overflow crowd packed the CCU Business School on August 9 as Centennial Institute resumed its Issue Monday series. “Energy Insanity and Its Remedies” was the topic. John Harpole, founder and president of Denver-based Mercator Energy, and Jim Felton, director of communications for the oil and gas heavyweight Bill Barrett Corporation, were the speakers.

I launched the discussion by noting that whereas fashionable opinion calls for ever less energy use, we at Centennial Institute see the increasing use of energy as a proxy for the increasing well-being of everyone—a key to human flourishing. Among the questions we invited Felton and Harpole to address were:

How are Bill Ritter’s anti-oil policies hurting the Colorado economy? How are Ken Salazar’s anti-oil policies hurting the US economy? What’s the real potential of renewables & the best way to get there? How well has our state’s wind mandate lived up to promises? What are the policy priorities for this election and next year?

John Harpole (at right in photo) warned that a train wreck is impending as government-mandated wind energy collides with EPA pollution standards. His PowerPoint presentation is here. Jim Felton’s remarks were based on the following text:

I’m asked to talk about energy a bit, But I see timing isn’t the best right now, at least as the nation is concerned. After all energy is a topic a bit down the list of those issues of primary importance to Americans. The Pew Research Center recently found the economy, jobs, and terrorism to be the top three of 21 issues listed as their importance to the American commonweal these days

Of the 21 categories listed, energy was squeezed in the middle of the pack between the military and health insurance. Global warming, BTW, came in at 21.

Energy, however, certainly impacts those top three, and further impacts the military deficit spending, the environment as several other issues on the list. I’ll try to cover that ground a bit in the next 15-20 minutes.

But first, a word from our sponsors: Thanks to Centennial Institute for this opportunity to introduce Bill Barrett Corp to many of you. For those not familiar with BBC, we are a Denver based exploration and production company who just this week completed its 8th year in business. You’re a true local if you remember it was Barrett Resources back nearly 30 years ago that first solved the engineering and geology by getting natural gas to flow from the tight gas formations that provide the basis of energy development in the area today

Six years ago we bought the rights to some 19,000 acres South of Silt, and have since spent north of a billion dollars in developing the natural gas resource

We also hold a 90% in some 40 thousand acres atop the Roan Plateau, which is about 60 square miles. To put that acreage number in perspective, the Roan, defined geologically by the outcropping of the mesa Verde formation, is nearly a million acres, or 15-hundred square miles. Also known as the Naval oil shale reserve, you are TRULY a local if you remember when the federal government designated it as an energy asset of national importance- THAT happened nearly a CENTURY AGO.

SO LET’S EXAMINE ENERGY IN THE CONTEXT OF WHAT”S on AMERICA’S MIND TODAY

Top of the list, THE ECONOMY- some regarding energy and the economy in Colorado

Several years ago, the state legislature pursued an economic impact of oil and gas in Colorado. The School of Mines did the analysis, and it found oil and gas to be a $23 billion dollar industry.

The figure is interesting, by the way, because 23 billion is what the industry generated for the federal treasury in 2008…..in other words oil and gas production, which takes place on less than half a percent of all federal lands, was the second biggest source of income for the federal government after, you guessed it- IS and our friendly collection agency known as the IRS.

SO, if numbers give you indigestion after dinner, you might want to grab a Rolaid or two for a bit

INCOME

90% ($21 billion) is directly tied to A DRILL BIT TURNING (D And c and extraction)

$61 K salary is 32% higher than state average (2003)

OUTPUT

O and G accounts for 70% of state mineral royalties

O and G accounts for over three quarters of all federal mineral royalties

O and G account for nearly 90% of all severance tax (88.7%)

Over $1.2 B generated in mineral royalty and lease payments. Over 60% (approx. $550 million) is then re-spent in Colorado.

TAXES

$640 MM (property tax on production and equipment, severance taxes, fed and state royalties, $30 million state royalties)

NOW IN THE PICEANCE

COST ENVIRONMENT

“PB has the most expensive overall investment for d and c in the state”

At about $1.6 mm to D and C, is about three times what it costs to D and C in the Northern DC

Reasons: tight sands need more intensive stimulation

Topo

Deeper wells (average > 8,000)

CAP EX

Over a quarter (27%) of D and C and re-completes stay in the basin; 43% stays in basin OR STATE

TOTAL D and C and Re-complete investment ins 2005 dollars was nearly $1.3 billion ($1,288,511,555)

BONUS AND LEASE PAYMENTS

Over $80,000 per well (5159 wells)

20% of all royalty and lease payments stay in the basin or over $83 million

Two thirds of that was considered disposable income, or some $58 million

SUM TOTALS

Direct (f: D and C and Re-completes) + extraction is 3.1 billion (88% is from extraction- $2.7 billion)

Induced and indirect (as per IMPLAN guidelines) account for another $266 million for a total of

$3.4

SO…ONTO TO JOBS,

As I look out and see business owners and entrepreneurs, I know the announcement this week by the Labor Department showing Grand Jct. lost more jobs per capita than anyplace else in the country is months of old news.

I consider anyone who creates a job for another person an American Hero, and I salute you.

SO , condolences to many in your area, who, it seems, have had to bear YOUR inordinate amount of pain this past year. My own company had two rounds of lay offs last year, and it’s sad and scary.

Colorado lost 100,000 jobs in 2009 alone.

News from our state capital notes – our Unemployment office is getting 14,000 calls a week and the state is paying out $20 million a WEEK in unemployment benefits (lent to Colorado from the federal government lent by the Chinese) – compare that to 2007 when we paid out $300 million a year!

So what does Oil and Gas mean to EMPLOYMENT in Colorado

Again, the School of mines notes

71,000

Direct Multiplier is another 71,000 jobs

Indirect multiplier is 1.67

TOTAL: 190,000 direct and indirect jobs

WHERE THE JOBS COME FROM IN THE VALUE CHAIN

90% of those are derived directly from turning the drill bit (d and c and extraction)

D and C and Extraction pay the highest, and are the biggest multiplier (2 and 5.63, respectively)

Government is the biggest benefactor of the indirect jobs at 14% (approx.)

Payroll is $4.3 billion (2003)

INDIRECT:

Legal services

Custom computer programming

Management of companies

Real estate

Power generation

Architectural and engineering

Scientific research and development

Truck transportation

INDUCED:

Health care (doctors/dentists)

Restaurants and bars

Real estate

Hospital

Moto vehicle and parts

Food and beverage stores

Insurance carriers

General merchandise

63% related to D and C and recompletions

PAYROLL: $399 million, 51% directly related to D and D and RC

SALARIES “earnings per work in the industries that DIRECTLY support oil and gas were $74,000 in 2005. INDIRECT earnings were $50,000, INDUCED were $31,000

SO, BOTTOM LINE IN THE PICEANCE:

School of Mines shows : 4092 direct

2574 indirect

TOTAL: 6694

Financial impact of 3.4 billion

CONSERVATIVE FOR TWO REASONS: basin wide, NOT state wide. Did NOT contemplate big transmission or transportation projects like pipelines.

If you want more, google CERI, CSM and look for publications

KEEPING WITH THE UPBEAT TONE OF TODAY’S SPEECH, let’s address Energy and TERRORISM

Does anyone really think we’re spending nearly $10 billion a month to spread democracy in Iraq?

They don’t like us because we are over there, and we are over their for their oil…

I mean, remember that just a few years before barack Obama was bowing before the Saudi prince last year, George Bush holding hands with another one when oil was over $130 barrel .

Our need for imported oil means $700 billion a year to fund madrassas, to brainwash a whole new generation of suicide bombers. That blood and treasure weakens our industrial base, weakens our dollar, and strengthens our enemies by giving them more resources with which to try to destroy us.

The peace dividend would not only include bringing more soldiers home, but it would mean using less energy. The DOD biggest energy consumer in the country ..

SO, some thoughts about foreign oil and reducing our dependency on it.

What if we replaced 25% OF OUR Oil consumption (we import well over half our oil) with domestic natural gas?

It would work like this- you may want to reach for the Rolaids again)

The latest is

19,489,000 a day equates to displacing 4,874,000 bbl

Over a billion and a half barrels displaced over a year

One barrel equals 6000 cubic feet of gas = roughly 8 TP TCF

Volume of natural gas necessary to displace 25% of domestic oil consumption = 8 tcf/yr perspective…produced 20.5 in 2008, the highest level in nearly 30 years.

Percent increase in natural gas production to achieve 25% displacement of oil = 39 %

Consumer savings associated with displacing 25% of domestic oil consumption with natural gas $59 billion (at $6 gas and $80 oil)

Additional jobs created NATIONALLY by increasing natural gas production by 39% = 1.4 million jobs (extrapolated from CERI study)…i.e. direct and indirect

Additional jobs created in COLORADO by increasing regional natural gas consumption by 39% = 120,000 jobs

Additional revenue to government (advalorum, severance, and government royalty) in COLORADO by increasing natural gas production by 39 % (based on $6/mcf) = $300 million/yr

It would take about FIVE years to get to 28 TCF a year

There are environmental benefits as well.

Electric Power Sector (4 TCF per Year to replace 75 Worst Coal Plants)

Reduce SO2 (sulphur Dioxide) Emissions by 55%

Reduce Mercury emissions by 32%

Reduce GHG emissions by 15%

Perhaps most promising of all, the last four years have seen a revolution in our ability to product clean burning, domestic, abundant affordable natural gas.

Technological advances have unleashed what many see is a century’s worth of supply of this versatile and efficient (energy generated for energy consumed) fuel

Natural gas, I contend, is emerging as perhaps the most significant element in strengthening a balanced domestic energy portfolio than ever before…

Let’s look at said Portfolio HANDOUT

CROSSHATCH

Hand out cross hatch…

Here is a takeaway I want you all to have….it’s energy policy on one page.

Each side adds up to 100% of the demand and supply equation….look at petroleum and natural gas in relation to transportation…the example I mentioned above gives you a sense as to what could happen if you adopt a strategy to decrease foreign imports, trade deficits, or greenhouse gasses.

GIVE THEM A MINUTE

SO what about our environment?

Well, you’re all aware of the new COGCC rules, whose adoption of an additional 177 pages of additional rules led the Wall Street Journal to refer to them as the most far-reaching drilling restrictions in the nation.

But in the west, the feds are the landlord.

*Roughly 50% of the land in the west is owned by Federal and state governments

-The Energy Information Administration of the Dept of Energy notes that:

??Multiple agencies have regulatory and permitting requirements

-10 Agencies and over 100 regulations have to met to drill one well

»Department of Energy

»Department of Interior

»Bureau of Land Management

»National Forest Service

»National Wildlife and Fisheries

»Environmental Protection Agency

»Department of Transportation

»State Oil and Gas Commissions

»County Planning Commissions

»State Wildlife Agencies

State Historical Preservation Office and more.

Just SOME of the federal laws are…………

Minerals leasing Act

Federal Land Policy and Management Act

National Environmental Policy Act

Clean Water Act

Clear Air Act

Safe Drinking Water Cat

Endangers Species Act

National Historic Preservation Act

The clean air act itself occupies over 12,000 pages in the federal register.

Back to Policy on a Page

I contend policy should be strategic and forward looking, not a reaction to past developments.

That’s what the Nature Conservancy has done. The organization has tackled the idea of energy sprawl, in other words, a kind of kilowatt per acre comparison.

Here’s some examples:

America has one million MW of installed capacity. Because U.S. demand for electricity has been growing at about 2% per year – we need to build 10-20,000 MW of new capacity every year to keep pace with growth.

I’m sure most of us have seen the 7.5 acres of solar panels at DIA. That array, for $13 million dollars, supplies the facility with just TWO percent of the airport’s energy needs. Sadly, that that 2% is a LOT higher than the overall percentage contribution solar is currently making nation wide

Multiplying everything by 50 to get to the 100%, a rough calculation shows then that you would need 350 acres at a cost, then, upwards of half a BILLION dollars, just to power DIA with solar.

Duke Energy’s 51-megawatt Kit Carson Windpower Project will occupy 6,000 acres near Burlington

The Kit Carson project will consist of 34 GE wind turbines, each capable of generating 1.5 MW of electricity, Duke said. Given today’s wind generally operates at 33% capacity, that translates to half a megawatt a day from what, at 300 foot high each, looks like a futuristic city landscape covering OVER NINE SQUARE MILES for 17 megawatts…

REMEMBER…we need 10 to 20 thousand megawatts of additional power A YEAR for the U.S….that’s 6 million acres of wind A YEAR…..that covers our entire state in 11 years

And finally- What is needed on calm days and cold nights for back up? Only natural gas provides the immediate back up power to

Until electricity can be stored, wind and solar can realistically be considered supplements, not replacements. After all, in 2008, old fashioned, dirty, inefficient WOOD produced more energy for America than wind and solar combined.

What the Nature Conservancy ultimately determined is that, within the next 20 years, the nation will need land the size of Colorado to accommodate energy infrastructure, production and transmission facilities.

Again, one last string of numbers for perspective

66 million in Colorado

23 acres are federal

8 are either wilderness or de facto wilderness: Areas of Critical Environmental Concern, Road less, Wilderness Study Areas and the like

2.5 Piceance

Nearly 1 million for the Roan

Who is going to allow? Where? When everything proposed is litigated….HOW

Remember, the census bureau projects 100 million more Americans by 2050

A growing population and growing (hopefully by 2050 then) economy makes conservation and efficiency more important than ever. That said, I think it nearly impossible to reverse demand through conservation…..I think you can merely slow it tho

So back to our policy on a page: My point is we need it all, we have what we need, but in what ratios?

We need it all, and we’ll need more of all of it

Still, we haven’t allowed anyone to build a new refinery in the U.S. in over 30 years. We expect the lights to come on when we flip the switch, but we don’t like coal, the source of 40% of our electricity – it’s dirty and mining scars the earth. We also don’t like nuclear power, the source of nearly 20% of our electricity—it’s clean, but we’re afraid of it. Hydropower, the source of about 6% of our electricity is clean and renewable. But it has also been blacklisted – dams hurt fish.

SO with that, some closing thoughts;

There is no energy panacea: renewables are inefficient, have big footprints, and require fossil fuel back up. Nuclear has its waste issues. Ethanol burns a lot of gas, and requires four gallons of water for every gallon of fuel produced. Fossil fuels emit carbon.

Self determination for rural communities, even entire states in the west, is becoming increasingly difficult. There are literally BILLIONS of dollars from out of state foundations focused on limiting the multiple use charter that is the mandate of managers of public lands.

If you don’t actively chart your own destiny as a state or community, someone else will

FINALLY : our ability to control our own energy destiny is MORE RELIANT ON POLICY THAN GEOLOGY- we are legislating deepening dependence at our own peril. There are those who say Russia, because of its energy reserves, is more powerful than any time in its history. There are those who say China and India are striking energy alliances around the globe to compete with the U.S. for resources and economic power.

Energy is too important to our national and economic security to be politicized. Much has been made of Geo Bush allowing oil and gas to lease wherever industry wanted, but Bill Clinton allowed 50 percent more acreage to be leased than George Bush, and it was Bill Clinton who signed into law the transfer of the Roan from the DOE (which had drilled a few dozen wells up there) to the BLM for the expressed purpose of developing what many geologists say is the most prolific undrilled on shore natural gas province in the country on a per acre basis at nearly 9 trillion cubic feet.

I suggest Mark Twain’s advice: respect those who seek the truth, be wary of those who claim to have found it. You’ve been very generous with your time….thank you.

Jim Felton

Communications Manager

303-312-8103

___________________________

BILL BARRETT CORPORATION

1099 18th Street, Suite 2300

Denver, CO 80202

T- 303.293.9100 | F- 303.291.0420

www.billbarrettcorp.com

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