It is a testament to the power of American oil and gas that prices have softened so much, even in the face of Middle East strife. Libya’s oil industry remains in chaos, with rival government arguing over who controls it. Iraq’s and Russia’s output has been flat. Iran is down to 3 million bpd from 3.7 mm in 2012.
If the U.S. were not adding so many barrels, “oil would be sky high,” says White. That said, anything could happen, he says. “If anyone thinks they know oil 5 years out they’re a crank.”
Indeed a lot could happen in five years. In 2009 absolutely no one predicted the growth in U.S. oil supply. So what will happen between now and 2019? Should American drillers, already worried about oil prices slipping below their marginal costs, worry too about competition from shale drilling in the rest of the world?
Eh, not so much.
“There’s going to be shale plays developed in other parts of the world, but we’ve got a big headstart,” says White. We already have pipelines, rigs, a trained workforce, and tons of mental capital.
To a large extent these factors are more important than having amazing geology because they dramatically reduce upfront costs. Argentina, for instance, has world-class shale formations, but the politics muddies the waters.
And then, says Pickens, there’s perhaps the biggest factor in America’s favor: private ownership of mineral rights. America is virtually unique in the world in that private landowners, rather than the state, hold title to the oil and gas under their acres. With average royalty rates in Texas paying landowners 25% off the top for any oil and gas recovered, that’s an enormous incentive for ranchers and farmers to welcome drilling rigs onto their land.
That’s not the case in Russia, Mexico, China, the Middle East, and virtually everywhere else — where the government owns the minerals and farmers have to be coerced into giving access to drillers.
The most striking comments from the panel came in response to a question about whether they believed the oil and gas liberalizations underway in Mexico (i.e. allowing private companies to operate alongside state monopoly Pemex) would succeed in spurring production growth there.
Pickens’ answer: “No. It will fail.”
Why? First of all, because Pemex in its “Round Zero” licensing phase will already cherrypick the best prospects. Second, because corruption in Mexico’s oil sector remains rife. Third, because security costs will be substantial in areas controlled by drug cartels — that includes the Burgos Basin region between the Rio Grande and Monterrey into which the Eagle Ford extends from Texas.
“Eagle Ford gas production is so much cheaper than in the Burgos Basin,” says Bill White. So on pure economic grounds it would make more sense for Mexico to import cheap U.S. gas.
Indeed, with so many opportunities in the U.S., the captains of capital will be thinking: why should I try to reinvent the wheel elsewhere when I can just invest in America?