Boom Or Bust, Fracking Is Permanently Changing Texas and Undercutting OPEC

Stock investors are souring on the oil and gas industry as oil prices have declined. For an industry whose fortunes are bound to the cycles of economic growth and the caprices of a commodity market, anyone could have guessed that the boom would eventually deflate. It happens every few decades.But this time something is different. Fracking technology has fundamentally changed the oil and gas industry, altering the nature of the boom-bust cycle in ways that hit Texas directly. Here are a few ways that the fracking revolution has changed how Texas experiences an oil and gas downturn.Reducing operations now means focusing on Texas, rather than pulling out of Texas.A number of oil and gas producers are cutting their drilling budgets, some drastically, as they struggle to meet investor expectations. Wells that use fracking and horizontal drilling tend to peter out quickly and require large levels of investment to keep production steady, leaving operations vulnerable to any decline in oil and gas prices.Irving’s Pioneer Natural Resources, for example, cut a quarter of its workforce this year and winnowed down operations to focus on the Permian Basin. The question is, can Pioneer find investors who are satisfied with low-and-steady production rather than explosive growth?“We lost the growth investors,” Pioneer chief executive Scott Sheffield told The Wall Street Journal. “Now we’ve got to attract a whole other set of investors.”Even as oil and gas prices decline and the industry contracts, pipeline and chemical companies continue to build infrastructure in Texas. Work hasn’t stopped on pipelines designed to connect the Permian and other oil fields to the Gulf Coast. And earlier this month Chevron Phillips Chemical and Qatar Petroleum announced an $8 billion investment in a new petrochemical plant on the Gulf Coast. The infrastructure should keep Texas at the center of the oil industry, even through an industry decline. OPEC market share is down. According to Bloomberg, the Organization of Petroleum Exporting Countries has produced at least 30% of the world’s crude for decades. But this year, that share will almost certainly dip below 30% for the first time since 1991. OPEC’s historic strategy of constricting production in order to support prices hasn’t worked in the face of the fracking boom, giving U.S. companies opportunity to snatch market share. The alternative for OPEC, boosting production at a time when oil prices are declining, is also self-defeating.And it’s possible that the future will bring a new kind of fracking revolution. Chinese demand for oil has buoyed the industry for years, as environmental regulations and better energy efficiency have tempered demand for oil in the West. China has invested billions in a domestic fracking industry designed to wean the country from foreign fuel. The effort has allowed China to reduce its use of coal in favor of natural gas, though recent earthquakes have halted some operations.Texas might have overcome its most recent bout of Permania, what the locals call the fracking frenzy in West Texas. But the state is forever changed.  Continue reading...

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