By Cory Armstrong/reporter
PART I Energy Price and U.S. Economic Activity
Energy has always come at a price. Whether it is oil or natural gas, the future of the industry does not look any cheaper, an energy expert said last week.
“Gas prices by Memorial Day will be the highest they have ever been,” Dr. Stephen Brown said Feb. 19 on NW Campus.
Energy Prices and U.S. Economic Activity was the first part of a two-part Energy Conference: Pricing, Production and Legality.
Brown, the director of energy economics and microeconomic policy analysis for the Federal Reserve Bank of Dallas, has been quoted in many publications such as the New York Times and the Wall Street Journal and appeared on CNN’s Financial Report and ABC’s Financial World.
He is an associate editor of the academic journal Energy Economics and holds a bachelor’s in economics from California Polytechnic State University and a master’s and a doctorate in economics from the University of Maryland.
Brown began by explaining the correlation of gross domestic product and increase in energy.
“There have been 10 recessions since World War II, and nine out of 10 were preceded by sharp rising oil prices,” he said.
Brown concentrated on oil prices, gas prices, natural gas prices and economic effects of higher energy prices.
“Oil prices hit a high of $100 a barrel earlier this year,” he said. “In 2002-2003, they were only $25 to $30 a barrel.”
Situations that drive up the price of oil are strong growth in world demand, expectations that oil markets will remain tight, fear of supply disruptions, consumption not responding to price and a weaker dollar, Brown said.
Brown said OPEC’s excess is “essentially zero, or close to it” because the excess that is there is heavy crude, which is more difficult to make into product.
“The future of oil prices will remain in the vicinity of $90 a barrel,” he said.
It is difficult to use the futures market as a guide, Brown said, because these numbers are only good for three to six months.
“Oil prices will remain elevated for some time,” he said.
The alternatives for oil such as cellulosic ethanol, biodiesel and corn ethanol are cleaner but more expensive.
Alternatives such as tar sands, oil shale and coals to liquids are cheaper but have a greater greenhouse gas problem.
Gasoline is the main product from oil. The price of gasoline moves with oil, Brown said.
“Over 50 percent of the oil refined in the U.S. is for gasoline,” he said.
Natural gas and oil moved together in terms of price from 1994 to 2005 but since 2005 have had no correlation. In the long term, the price of natural gas will go up and will close the gap between natural gas and oil.
Are we headed for a recession?
“Probably not,” he said, “although we could be close.” “The primary driver of weakness in the economy is meltdown of housing market.”
The oil price hike can be good or bad based on the source of the price hike, Brown said. Good examples are increase in oil demand because of U.S. or foreign productivity gains. Bad examples are oil supply shocks, weaker dollar and speculative price shocks.
“Only recently have we begun seeing activity that weakens the economy,” he said.
The economic effects of higher energy prices are cumulative: real GDP loss of .4 to 1.2 percent, some upward pressure on short rates and “very small reductions of growth rates,” he said.
Brown said the major oil companies such as Exxon are not price gouging. They do not have control over the market prices.
Prices are high because of oil nationalism, Brown said. Nations are in charge of the oil, not large corporations such as in the past.
“The U.S. consumes 20-23 percent of the world’s oil,” he said.
PART II Oil and Gas Leasing in an Urban Environment
Owning property can have many different levels. Literally.
“When you just own the surface and not the minerals, you are helpless,” Judon Fambrough told an audience last week.
Fambrough spoke in the second part of a two-part Energy Conference: Pricing, Production and Legality Feb. 19 on NW Campus.
Fambrough made two presentations: Oil and Gas Leasing in an Urban Environmentand Pipeline Easements and Landowners’ Rights In Condemnation.
Fambrough is senior lecturer and attorney at law with the Texas Real Estate Center at Texas A&M University, where he teaches oil and gas law and agricultural law.
“Having the tools and using them correctly are two different things,” he said.
To illustrate, he showed a slide of the A&M University bookstore with plywood posted up inside the store on the windows.
Fambrough said employees were asked to put this plywood up in response to the hurricane warnings in 2005 to protect the windows. But on the inside of the windows, the wood would do no good.
Biblical advice when leasing, he said, is found in James 4:2: “Ye have not because ye ask not.”
“Secrets to negotiating and doing it well are knowing what your options are,” he said. “The only people that take the first offer are the needy and the greedy.”
Fambrough displayed some common terms when dealing with mineral rights and explained each.
“What do they mean when they say we are offering ‘$300 for a 1/5, three-year, paid-up lease, with a two year option to extend?’” he said.
The payment refers to mineral acre, Fambrough said.
“Everything is based on a mineral acre,” he said.
Fambrough said 1/5 means 20 percent of production belongs to the homeowner, paid in a royalty check. In a three-year paid-up lease, leases are divided into two terms.
A primary term is negotiable, Fambrough said. The oil company has three years to begin production and drill on the property.
An option to extend means at the end of the first three years, the company has the option to extend the contract.
“Never, never, never give them an extension,” he said. “Ninety percent of people grant these extensions.”
Things to remember when leasing, Fambrough said, are that all forms are not alike and all clauses are subject to negotiations. A form without any negotiated charges is okay as long as there is no production.
“It’s not what it says, it’s what it doesn’t say,” he said.
Fambrough listed essentials for citizens to insist on every lease. They include drilling, titles, payments and options.
One particular warning he gave pertained to a shut-in lease, which “protects an oil company from losing a lease simply because they are waiting for production,” Citizens should increase the amount, limit the time and terminate the lease if the deadlines are missed, Fambrough said.
Some exotic provisions to ask for when negotiating a lease, Fambrough said, include requirements on the royalty clause, a signed and filed “memorandum of lease,” indemnification agreement and a “favored nations clause.”
Tips for drilling leases
The following elements are essential when negotiating a lease.
1. Limitations to oil and gas that can be extracted through a borehole.
2. No warranty of title regarding the minerals.
3. All or nothing. When included in a pooled unit, larger tracts may need Pugh Clause, but this is probably not that important in an urban setting.
4. Depth Clause. Many people have lost money by not getting this clause.
5. Waiver of “all surface operations” as opposed to waiver of “all drilling operations.”
6. Limitations on shut-in provisions.
7. Requirement for all Division Orders to comply to sect. 91.402 of Natural Resources Code or home-owner need not sign it to receive royalty payments.
8. Definitions of strategic terms.
9. No extensions without additional consideration.
10. No right to refusal if another offer is tendered by another oil company during the primary term. This means the homeowners give the first company the right to match the offer before they can accept.
11. Compliance with all ordinances.
Source: Judon Fambrough
