West Texas Oil Boom: THE HOT SPOT Q&A with Ed Hirs

The Permian Basin of West Texas has been a hot-spot of oil and natural gas drilling for decades. However, due to steady price increases and the development of new technologies, Texas is experiencing an “Oil Boom” as never before. For the first time ever, Texas has exported more oil than it’s imported. According to the Energy Department, Texas is now on track to produce more oil than Iran or Iraq, which would make Texas the new number 3 oil producer in the world.

To discuss what this means for the US economy, domestic oil prices, energy investors and new technologies in this industry, we set up a two-part Q&A with one of our Senior Managing Directors at Transformation Holdings - Ed Hirs. Ed is an internationally recognized expert and economist in all forms of energy, BDO Fellow for Natural Resources, Energy Fellow at the University of Houston, and Managing Director of Hillhouse Resources LLC, an independent E&P company (See Ed’s full bio below).

What has changed in the last few years that has allowed Texas to ramp up oil production at such an increasingly large rate?

The primary area of this boom is the Permian Basin (in West Texas). Oil has been produced in that area for 80-90 years, but what has happened to make it even more interesting is the current economics. The significant increase in prices over the last 10-15 years has made it more economical to drill these reserves. New technology has also lowered the cost of developing these reserves and continues to improve.

For example, hydraulic fracturing and long horizontal laterals have allowed the operators to access more reserves more efficiently. Fracking three wells that have three miles of laterals in the space of 21 days is now common; just 5 years ago, fracking a one mile lateral in 21 days was the state of the art.

In a recent Forbes article you wrote, you explain that, although the price of oil has risen and there exist more effective technologies, some oil companies are losing money (for the details on why this is, read the article here). Big picture wise, what are these companies doing wrong?

The challenge with many companies is old-fashion executive management and how they were funded and put together. The companies that have been in the Permian basin for the longest time have very cheap assets on their books. The new arrivals have followed the siren song of the shale play and, with backing from private equity and Wall Street, bid up the value of the acreage to fantastic prices.

As an example, in our prior company, we were among the leaders of the Niobara shale development. We built a 166,000 acre position at an average cost of $12 per acre. Today, folks are spending $20,000-to-$30,000 per mineral acre. It’s difficult to compete with those high entry costs. The last player in is paying too much, and that’s what we’ve seen here in Texas. In an increasing price environment where capital is chasing a limited resource, and certainly mineral acreage in the Permian Basin is the limited resource, the game is taking on some characteristics of a Ponzi scheme for some energy investors.

What business advice do you give your students, potential future leaders of this industry, since we know that it is a fragile industry where a lot of mistakes have been made?

It’s the same as with every business--one has to pay primary attention to the revenue engine of the company. Pay attention to the costs, the stewardship of the assets, employees and, of course, pay attention to the constituencies of your community--the workers, the city, the county, the state. All factors impact business decisions that need to be made by the executive team or the board of directors.

What is the effect, if any, of the Texas Oil Boom on the domestic and international price of oil?

It’s a world market, so any barrel we add to the world market from West Texas, from Denver, or from California, produces supply that can help push the price of crude down. But the thing to remember here is that crude oil from West Texas in general is among the highest cost oil coming to market, so it’s very vulnerable to an instigation of a price war such as we saw conducted by OPEC from 2014-2016.

OPEC has the ability to ramp up production of its low cost crude and seriously damage the US oil industry just as it did then. That price war destroyed $250 billion in capital; it directly caused the loss of 250,000 jobs; and it cost the US more than $200 billion in annual GDP over this period of time.  It was a strategic execution of an old-fashioned price war.

Ed Hirs Bio

I am a BDO Fellow for Natural Resources and a UH Energy Fellow at the University of Houston, where I teach energy economics for all types of energy—critical, data driven, and apolitical analysis of energy markets and policy decisions—to undergraduate and graduate students. I am a Managing Director for Hillhouse Resources LLC, an independent E&P company developing onshore conventional oil and gas discoveries; I previously served as chief financial officer for an early leader in the Niobrara shale play.

I have worked as an investment banker and co-founded an independent power producer. Early in my career, I worked in the Department of Energy’s Office of Conservation and Solar Energy, where we convened DOE’s first national conference on energy conservation and alternative energy. I also chair an energy conference at Yale University where we consider the developing energy markets, investments, and new technologies.