Energy Sector Leads Long-Term Bailout to Save U.S. Economy State Panelists at BoyarMiller’s Energy Forum

Cleaner, Cheaper Energy Sources and Industry Expertise Cited by Panelists at BoyarMiller Energy Forum

HOUSTON, Texas (March 29, 2012) — The energy industry will lead the bailout of the U.S. economy, thanks to increased production of unconventional, cleaner fuels, improving drilling technology and techniques and lower natural gas prices, according to panelists at BoyarMiller’s “Perspectives on the Energy Industry” forum. And while investors are injecting capital into the industry, challenges brought on by cumbersome government regulation and permitting requirements threaten to slow down the country’s economic recovery.

Held at The Houstonian Hotel, BoyarMiller’s program featured: David Pursell, managing director and head of securities with Tudor, Pickering, Holt & Co.; Stephen Ingram, technology manager with Halliburton; Tom Hargrove, managing director with GulfStar Group; and Will Franklin, managing director with Lime Rock Partners.

Pursell called for “a sensible long-term energy policy instead of one that is dictated by short election cycles.” He emphasized the significance of the Keystone pipeline not only to the U.S. economy, but also to national security. “If the pipeline is not approved, Canada likely will sell its oil to China, which could lead U.S. refineries to import oil from Venezuela, Nigeria or Brazil,” he said.

Pursell pointed out that “oil tankers are responsible for most oil spills and that pipelines are a much safer and environmentally friendly way to transport oil,” because they reduce tanker mileage. “If you really care about the environment, you don’t put oil in a tanker, you put it in a pipeline,” he said.

One of the hottest topics of the day was hydraulic fracturing, or fracing, which has become a significant method to produce natural gas and enables lower gas prices and electricity prices.

“Extracting gas from shale catapults the U.S. into a new era of producing cleaner and more affordable fuel source,” Pursell said. “This is the shale revolution. Some of the cheapest BTUs (British thermal units) in the world are in U.S. domestic natural gas. If you look at the U.S. manufacturing sector, it is driven by natural gas and electricity. When gas prices are low it keeps power prices low, so the guy making widgets in the U.S. is now at a competitive advantage for the first time in a very long time relative to competitors anywhere else in the world. Low gas prices are good for the U.S. economy, for the manufacturing sector, and it is fantastic for the Gulf Coast because of the petrochemical and refining complex.”

Ingram focused on unconventional fuel sources, their development and common misconceptions about fracing technology in particular. All unconventional resources, including shale, coalbed methane and tight gas must be explored using hydraulic fracturing to be economically and commercially viable.

“If hydraulic fracturing was limited or even prohibited as a result of increased regulation, we would see a 45% decrease in natural gas production and a 17% decrease in oil production in the U.S. within the next three years,” he said. “These resources would have to be replaced by imported oil from Venezuela, Iran or Libya. One of the positive things that come from hydraulic fracing is that it brings energy production closer to the consumers.”

Unconventional resources are increasingly becoming a part of a global solution to energy demand. Ingram said 53 percent of all natural gas produced today in the United States comes from shale, coalbed methane and tight gas. In the last 10 years, shale gas grew from one percent to 17 percent of the entire U.S. natural gas production.

“From a global perspective, the demand for unconventional energy sources is constantly growing, Ingram said. “China’s increasing gas demand, Germany disbanding its nuclear program by 2022 and the U.S. Environmental Protection Agency substantially increasing regulations on the coal market, all point to an increased demand for natural gas. The United States has 25 percent of global gas reserves and 15 percent of global shale reserves. It also has more than 75% of the horsepower available for drilling those reservoirs globally. The rest of the world is beginning to understand the demand for this equipment and is asking us to build that equipment for them. We need low energy prices, so we can manufacture and export that equipment.”

Ingram addressed the risk of water contamination as well as the amount of water used in the process of fracing. The entire fracing industry in the U.S. uses less than one percent of the water used to irrigate the entire U.S. corn crop and less than 20 percent of golf course water. Moreover, shale gas development requires 2.3 gallons compared to 11 gallons for nuclear power and 2,500 gallons for biofuels per MMBTU (one million Btu) produced from these resources.

”Hydraulic fracing brings affordable energy to the market with little water use,” Ingram said. “The industry is further limiting the use of water by employing new technologies, utilizing non-potable water and recycling.

“Unconventional resources and fracing have a great future,” Ingram said. “They give us a great opportunity to collectively bring clean and cheap energy. The unconventional resources simply can and will be developed. They can and will provide environmentally friendly ways by working together between operators, regulatory bodies and service companies without sacrificing United States economy.”

Hargrove discussed the state of capital markets in the energy industry. “The market is progressing back to the level of transactions and capital available in 2007 and 2008,” he said. “There are a lot of buyers and sellers in the market right now. Moreover, lenders are getting aggressive again, making borrowing possible.” In periods of 2007 and 2008 there was a lot of capital raised in private equity market. Combined with the low level of spending that followed, Hargrove estimates $435 billion remain to be invested.

From a capital standpoint, shale plays require more equipment than conventional sources, Hargrove said. “A lot of companies started developing these resources, spent a lot of money and are already committed to developing them. That will require more equipment and more fracing,” he added.

“Low natural gas prices have a great impact on the petrochemical complex economics. This is the manufacturing sector in the United States where we have the biggest advantage over other countries, due to the concentration of refining and petrochemical infrastructure in one geographical location. The discussion frequently is focused on energy, but a lot of plastics and other products are manufactured here that require us to have those petrochemical resources.

“We’re as busy as we ever were before the recession,” Hargrove said. “It’s a very active marketplace for both strategic buyers and private equity buyers. This is a very good time to be in our business in Houston, Texas.”

According to Franklin, “energy is the future of this country. We are the bailout that saves this country for the long term. The energy industry currently employs 9.2 million people and contributes toward the creation of 35 to 40 percent of GDP.”

He added, “from an investment standpoint, the industry currently faces both positive and negative issues.” The major negative aspect is a tremendous uncertainly surrounding the industry, instability of oil and gas prices, oversupply of natural gas, and regulatory upheaval. Increased regulation and governmental overreaching usually deters investors. Another issue is the lack of fresh talent and qualified employees.

“Our industry is made of people and people are inherently good. I believe our industry is also good – people in this industry are very smart and innovative. Unlocking of the unconventional resources required amazing technology and engineering advances made in a relatively short period of time. The industry and new technologies such as fracing are a phenomenal opportunity for the U.S. to get its mojo back,” Franklin said. “There is a lot of capital chasing the energy industry.”

Franklin said natural gas is creating a great opportunity for this country. The supply of natural gas in the U.S. means relatively low long-term energy cost.

“This means that, for the first time in our lifetimes the U.S. has a long-term sustainable competitive advantage over other countries, namely the energy prices,” he said.

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