Regulation, particularly on the federal level, has been extremely bad at recognising better techniques. […] They are constantly trying to catch up.

Ryan SITTON Commissioner RAILROAD COMMISSION OF TEXAS

On the right track

USA
February 6, 2017

TOGY talks to Ryan Sitton, commissioner of the Railroad Commission of Texas (RRC). The Railroad Commission of Texas regulates the exploration, production and transportation of oil and natural gas in the state.

Although it was established in 1891 to supervise Texas’ rail industry, the RRC’s jurisdiction has since shifted to cover other areas, including oil and gas exploration, production and transportation, as well as LNG, intrastate pipelines and alternative fuels research. In 2016, the RRC’s Oilfield Cleanup Program spent USD 8.5 million to plug 544 wells, spending around USD 15,700 to plug each well. RRC plans to plug 1,000 wells in 2017 and has a budget of around USD 14.4 million for the program.

• On regulation and technology: “Regulation, particularly on the federal level, has been extremely bad at recognising better techniques. […] They are constantly trying to catch up. […] At the RRC, we try to be as up to date as possible incorporating technology and techniques that would be affected by our regulations into our rules.”

• On US refining: “The big opportunity for the USA is not to be the world’s leading oil exporter. Oil is not that hard to get out of the ground, especially in countries such as Saudi Arabia. However, what do you do with all that crude oil? The advantage for the USA is our refined products.”

• On production gains in Texas: “Over the past 10 years, Saudi Arabia and Russia have continued to vie for the position of top oil producer. During that time, they both grew production by 2 million bopd. The state of Texas alone increased its production by 2 million bopd during this period.”

• On refining capacity: “Existing refineries will likely continue to expand. The USA had 300 refineries in 1980 and today we have about 140, but we refine about the same amount of crude oil that we did in 1980.”

Besides touching on these topics, TOGY talked to Ryan Sitton about the future of natural gas in the USA’s transportation sector, his predictions for the industry following a recovery in commodity prices and the accompanying job growth Texas will see when that happens. Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Ryan Sitton below.

 

What are the biggest changes you have seen in the market since the drop in commodity prices?
Since late 2014, the drop in commodity prices has defined the market almost entirely. The economies of energy-producing states – Texas being the biggest, but also Oklahoma, North Dakota, and Louisiana – have been sluggish because of the drop in commodity prices.
As oil prices have gone down, we’ve seen oilfield services companies make dramatic cuts and exploration and production companies reduce capital spending to prioritise maintaining their operating budgets. This has, in turn, reduced revenue for regulatory agencies such as the RRC, because we are almost entirely funded by permitting activities for drilling. That specifically has been the biggest challenge for the RRC.
Regulation-wise, the drop in commodity prices hasn’t made a big impact on our activities. If anything, it caused us to take some stock in how we need to prepare during a downturn for when markets pick up.

Where do you see opportunity for Texas in the oil and gas industry, given the current market climate?
Since June, well before the revised OPEC deal, I have been very public about forecasting a USD 60-per-barrel oil price for 2017. For a lot of Texas positions, that would make a profitable operation. We expect pretty substantial investment to come, particularly in this state.
As you look around the globe these days and where companies want to put capital, Texas has moved to the very top of the list. If companies have the sufficient acreage positions, we can expect that their first USD 100 million-1 billion are going to be invested here.
As a constrained agency in a downturned market, we are now preparing for what could by 2018 be a very big ramp-up in activity similar to the early 2010s. Drilling activities in 2016 have not changed much yet, but we are definitely looking forward to two years from now.

How does the state of Texas regulate oil and gas technology and techniques such as hydraulic fracturing?
The RRC does not regulate hydraulic fracturing. We regulate the completion of wells, and hydraulic fracturing is a completion technique. A permit is required from the RRC to begin to produce the well as production reports must be submitted, but you don’t need a permit from us to perform a frack job. When we talk about new technology coming online and it is simply a new take on completion activities that we already regulate, we may not play a big role.
Where regulations do meet up with technology is in well integrity. For example, in March 2016 the RRC passed regulatory changes around Rule 13 governing casing, cementing, drilling, well control and completion requirements. The big issue was trying to protect the outside casing of these wells with more cementing. There is technology that can case those wells with wraps. If you are only worried about corrosion, not the integrity from a strength perspective, wraps can do just as good a job.
Can we recognise that technology within our regulation? It’s about adapting RRC rules to incorporate technologies that might be just as effective, if not more than the status quo.
Regulation, particularly on the federal level, has been extremely bad at recognising better techniques. For example, in the refining industry techniques around inspection and non-destructive testing have moved light-years ahead of where the Occupational Safety and Health Administration’s regulation stands. They are constantly trying to catch up. It is pervasive in the Department of Transportation and the Environmental Protection Agency [EPA] as well.
At the RRC, we try to be as up to date as possible incorporating technology and techniques that would be affected by our regulations into our rules.

What are the biggest challenges the RRC faces from federal regulations?

The biggest issue we have with federal regulations are ancillary, not direct impacts. For example, the major concern right now is methane emissions. The EPA has decided to treat methane as a greenhouse gas, therefore calling it a pollutant and regulating its emission. Regulating the emission of methane on one hand sounds fine, but on the other hand to what degree is it practical? If you are going to regulate methane down to tiny leaks that are extremely difficult to prevent, then the costs are going to become astronomical.
Here’s a realistic scenario: An operator has a good stripper well [marginal well] producing 40 barrels per month at USD 50 per barrel, making a couple thousand dollars a month operating this thing. It can barely break even. Now the EPA demands implementation of methane monitoring tactics such as installing an actual methane monitor, requiring operators to sniff the gaskets periodically and to replace seals around flanges. The operator cannot afford to operate with those requirements and will shut it down. To some degree, that is certainly bad for our local economy. We have thousands of stripper wells in Texas, which on an aggregate, produce a whole lot of oil and gas. Shutting those down would have a negative impact.
The bigger and more detrimental impact is when a well in this state is rendered inactive and the operator loses their P5 licence to operate. Responsibility for the well reverts to the RRC. If the EPA shuts down all these stripper wells and the RRC gets thousands of wells to plug, it is going to cost the state hundreds of millions of dollars. Those are regulatory situations that we monitor and the real impacts that we are trying to prevent.

What is the current state of CNG and natural gas vehicles in Texas and the USA as a whole?
This is probably a bold prediction, but I believe in my lifetime we will see 18-wheelers, trash trucks and city buses running mostly on natural gas. It is absolutely coming. Natural gas is extremely cheap to produce, especially in the Marcellus play. Pennsylvania is holding down natural gas prices for everyone. When you see natural gas prices get up to USD 3 or USD 4 per million Btu again, it will open up production from the Barnett and the Haynesville plays. Production will all go bonkers. There is plenty of natural gas in the USA.
Natural gas takes a lot more sophistication to harness and utilise. In places such as China, India and Pakistan, it is very hard to use natural gas. Oil is much easier because it is stable at room temperature and atmospheric pressure. The demand for oil will continue to rise around the world at a greater pace as developing countries become more urbanised. Natural gas is going to continue to be very affordable in the USA, even as we continue to export it.
When it comes to natural gas vehicles, it is a chicken and egg question: trucks won’t be converted to natural gas until they have sufficient fueling stations, and stations won’t be built until there are sufficient fleets to service. We have a total of about 120 CNG and LNG refueling stations in Texas. That may not sound high compared to gas stations, but pretty soon, we will hit a critical mass and you will see an exponential increase in natural gas fueling stations. The more stations that are built, the more trucks will be converted and the more trucks that are converted, the more stations will be built.
There was a bill in the previous Texas state legislature session to provide state loans to local governments to convert their vehicles to natural gas. The loan was not offered to private entities. For example, a school could borrow money from the state to convert all their school buses to natural gas. This is a good business decision, as we are not subsidising anything. I supported that bill, but it did not pass. There is public support for natural gas vehicles, and in the next five to 10 years, a noticeable chunk of fleets will switch fuels. However, it will be a lot longer before people convert their cars.

How will the global oil and gas industry evolve in the years to come?

The world is consuming more and more energy every day. Per-capita energy usage in the USA has actually gone down, but the demand is going to come from growing economies that are becoming more urbanised. A country such as Pakistan, for example, is going to predominantly use coal or oil, as natural gas is difficult to harness and you have to have a massive pipeline network.
Everyone knows that China’s economy is going to continue to grow, and even as their economy slows down, their per-capita energy usage is increasing faster than the economy is growing. China’s per-capita hydrocarbons usage is growing at a massive pace because they are trying to reduce coal-fired power plants. They don’t have all the scrubbing technology that the USA has, and thousands of people are dying due to smog particulates. Australia sells significant amounts of its natural gas to China. It’s a huge market that will continue to grow.
Over the past 10 years, Saudi Arabia and Russia have continued to vie for the position of top oil producer. During that time, they both grew production by 2 million bopd. The state of Texas alone increased its production by 2 million bopd during this period. The states of North Dakota, Oklahoma and New Mexico went from producing about 5 million bopd in 2007 to peaking at the beginning of 2016 around 10 million bopd. The USA is filling a bigger chunk of the market because it has increased production, no other country has come close to matching that.
The big opportunity for the USA is not to be the world’s leading oil exporter. Oil is not that hard to get out of the ground, especially in countries such as Saudi Arabia. However, what do you do with all that crude oil? The advantage for the USA is our refined products.

Do you expect US refining capacity to expand in the near future?

Existing refineries will likely continue to expand. The USA had 300 refineries in 1980 and today we have about 140, but we refine about the same amount of crude oil that we did in 1980. The newest refineries in the country – the Marathon refinery in Garyville, Louisiana and the Valero refinery in Corpus Christi – were both established in the late 1970s and both of those plants refine twice as much today as they did when they started out. Big refineries in the USA are expanding the acreage around them. It’s easier to do that than deal with a new grassroots installation, but new refineries are a possibility. If the USA is going to build one it will probably be in North Dakota because they are struggling to ship out all of the crude oil being produced there.

Do you see opportunity for oil and gas job growth in Texas?
Today, there are no jobs; companies are downsizing. However, in the future, oil prices will rise. For example, at USD 70 per barrel, we will easily see twice the amount of drilling activity in the USA that we see today. We are going to need people who can run rigs, drive trucks, run sand processing machines and all the components of the drilling activities, which is the big capital spend. Strategic roles in geology and engineering will ramp up a little slower because there is an economy of scale to doing large drilling activities. However, there will be a major gap in five to 10 years because the baby boomers are leaving the market.
In Texas, all our major universities and private schools are preparing to fill that gap in personnel. For example, in 2011, Texas A&M University announced a very aggressive programme to more than double its engineering students to 25,000 by 2025, and they are on pace to achieve that. Texas and the RRC are both prioritising long-term job creation.

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