What Does Private Investment Mean in Energy? Innovation and Growth

By at 23 April, 2017, 9:57 am


by Raymond J. Keating-

The previously unfathomable revolution experienced over the past roughly dozen years in the U.S. energy sector has been all about investment and innovation. Indeed, it’s private entrepreneurship, investment and innovation that has taken the U.S. from assuming extensive energy dependence on other nations to being the globe’s top petroleum and natural gas producer.

As the U.S. Energy Information Administration has reported, “U.S. petroleum and natural gas production first surpassed Russia in 2012, and the United States has been the world’s top producer of natural gas since 2011 and the world’s top producer of petroleum hydrocarbons since 2013.”

And the good news in energy largely keeps chugging along. Consider a variety of recent reports:

Investment by on-shore oil companies in the fourth quarter 2016 increased markedly. The EIA reported: “Capital expenditure for 44 U.S. onshore-focused oil production companies increased $4.9 billion (72%) between the fourth quarter of 2016 and the fourth quarter of 2015 based on their public quarterly financial statements. This increase in investment spending was the largest year-over-year increase for any quarter by these 44 companies since at least the first quarter of 2012.”

Shale investment jumped in the first quarter of 2017, as technological advancements continue to reduce costs and increase productivity. As reported by Reuters, “In the first quarter, private equity funds raised $19.8 billion for energy ventures – nearly three times the total in the same period last year, according to financial data provider Preqin… The shale sector has become increasingly attractive to investors not because of rising oil prices, but rather because producers have achieved startling cost reductions – slashing up to half the cost of pumping a barrel in the past two years. Investors also believe the glut will dissipate as demand for oil steadily rises. That gives financiers confidence that they can squeeze increasing returns from shale fields – without price gains – as technology continues to cut costs.”

A analysis highlighted the vast improvements that have occurred on the shale front: “Productivity among U.S. shale producers continues to improve, boding well for the U.S. energy sector as it is now able to compete at far lower price points than in the recent past. One of the reasons many analysts and journalists act surprised by inventory levels in the U.S. is they are drawing conclusions based upon past performances per rig, when in reality, each rig that is added today, depending on where it’s located, can do as much work as two rigs in the past.” The numbers are striking: “All across shale basins and acreage, rigs are increasingly doing a lot more work than even two years ago. In the Permian Basin, rigs now reportedly do twice the work of one rig in 2014. Of the working onshore rigs, approximately 40 percent are located in the Permian. As for all shale areas, 395 rigs today could do the same amount of work as 641 rigs in 2014, according to oil executive Mike Wichterich.”

Advancements in offshore drilling are bringing new fields in the Gulf of Mexico into production. UPI has reported: “With two oil fields in the Gulf of Mexico starting production this year, and five on tap for 2018, offshore production is set to increase, a U.S. report found. Eight new fields in the U.S. waters of the Gulf of Mexico started producing oil last year, leading to a high-water mark of 1.6 million barrels per day, beating the previous record set in 2009 by 44,000 bpd… A March report from analytical group Wood Mackenzie found the cost to break even on oil and gas projects in deep waters, the U.S. Gulf of Mexico in particular, has dropped from around $70 per barrel to below $50 per barrel in some cases.”

And a report from New Mexico makes clear the larger economic benefits that spring from increased energy investment. As noted by the Santa Fe New Mexican, “As New Mexico’s elected leaders wrangle over raising taxes to plug a budget shortfall, major multinational energy companies have quietly spent more than $13 billion in recent months on assets in the state’s oil and gas hot spots. The new wave of investment bodes well for the industry being able to generate much-needed revenues for the struggling state over the long haul, analysts said.” And later in the report, it was pointed out: “The uptick in the industry can’t come soon enough as development in oil- and gas-rich corners of the state contribute about one-third of the revenues New Mexico uses each year to pay for education, public safety and other government services… ‘The fact is oil and gas is the most important industry for the state from an economic and jobs perspective,’ said Ryan Flynn, head of the New Mexico Oil and Gas Association. ‘When oil and gas is doing well, New Mexico is thriving. When oil and gas is hurting, New Mexico hurts.’”

The roles played by entrepreneurs and small business in energy innovation and production must be recognized

Indeed, it’s critical to keep in mind that entrepreneurs in the energy sector have driven much of the transformation in energy, as has been note by Matthew J. Slaughter Ph.D., the dean at the Tuck School of Business at Dartmouth College and a former member of the White House Council of Economic Advisers. Also, investment and growth in the sector very much are about the small businesses that overwhelmingly populate most energy sectors. For example, consider that 90.2% of employer firms among oil and gas extraction businesses and 80.7% of employer firms among support activities for oil and gas operations businesses have less than 20 employees.

Private-sector investment that drives innovation and growth always is a win-win for the economy, as has been made crystal clear by what has occurred and is ongoing in the oil and natural gas industry.

And keep in mind that much of this occurred during the Obama administration, which was overtly hostile towards carbon-based energy. Imagine what can happen under a rational, rather than hostile, federal regulatory regime.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP: The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.


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