Will oil save the day?

NO GAS: The Mineral Board’s June sale brought in just $1.4 million—a three-year low—for 11 leases primarily in the northern parishes, which is the location of the Haynesville Shale natural gas field.

By Jeremy Alford (Contact)

Tuesday, June 30, 2009

Will oil save the day? via

In the not-so-distant past, the vitality of oil and gas prices quite literally sent state government on a multi-year spending spree that easily overshadows the $1.3 billion shortfall threatening education and health care today. Last year’s $800 million surplus was the coup de grace in a way, capping off previous back-to-back $1 billion surpluses—meaning the extra cash the state had coming in, chiefly because of high oil prices, as opposed to the amount it actually needed to spend. In light of the current economic situation, more than one columnist and editorial writer has referred to the period as an “embarrassment of riches.”

Needless to say, the energy sector has a dynamic role to play in Louisiana’s operating budget, and represents about 15% of the total nut. It’s volatile as well; For every $1 fluctuation in oil prices, the Legislature’s economists insert or remove about $12 million from the state’s coffers. If nothing else, such a formula explains why so much fiscal emphasis is placed on mineral production.

So, with a shortfall-plagued state budget finally in play, it’s only natural that lawmakers and the administration are hoping that oil prices will help turn the tide. But if you listen to those who work closely with the fiscal-forecasting process, it might just be wishful thinking.

Greg Albrecht, chief economist for the Legislative Fiscal Office, anticipates that oil prices will average around $49 a barrel for the coming fiscal year that begins July 1. Members of the Revenue Estimating Conference, which decides how much money the state has to spend, won’t be swaying from that figure anytime soon. Gov. Bobby Jindal and the Legislature must also hold to the $49 threshold when deciding how to spend the state’s money.

Nonetheless, a gaggle of national energy experts, ranging from academics to industry analysts, contend Louisiana officials wouldn’t be completely mad to expect a rosier future, perhaps even one that could result in an upward adjustment—however minimal—for the state when the estimating conference meets again in December to readjust its forecasts. Any money identified would technically be a surplus, which would provide state government with another spending opportunity.

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The reasons for the cheery outlook by these national experts are varied. From a time when oil prices where sinking to the $30 mark just three months ago, prices surpassed $71 earlier this month. Of course, the price of oil last year was closer to $147 a barrel, but this most recent uptick might have momentum. BP Global CEO Tony Hayward, for one, has told reporters that the $90 range could possibly be breached in coming weeks. Moreover, for the first time in a decade, proven reserves—meaning the oil and gas resources in existence that are thought to be recoverable with a high degree of certainty—are dropping.

Bruce Bullock, director of the Dallas-based Maguire Energy Institute, says it’s understandable that many, like the state, are staying on the conservative side, especially since there are so many different factors competing to produce the unusual spike in oil prices that economists are studying right now. “Current oil prices are not reflective of market fundamentals such as supply and demand,” Bullock says. “The recent increases result largely from money flows into commodity markets, the value of the dollar, and indications of a nascent economic recovery. Thus, it’s very difficult to predict how high they could go.”


PLAYING THE NUMBERS: Greg Albrecht, chief economist for the Legislative Fiscal Office, predicts oil prices will average around $49 a barrel for the fiscal year that begins July 1.
Don Briggs, president of the Louisiana Oil and Gas Association, is staying on the conservative side as well, but also notes that most analysts are overlooking the relationship between prices for oil and prices for gas. He said earlier this month that the “good news” is that oil should average out at about $67 a barrel for the rest of 2009 and the “really bad news” is that natural gas prices could fall further—a dichotomy that could keep lawmakers from swimming around in a megasurplus later this year.

Like the oil industry, the natural gas industry is swollen with surplus production Briggs says—to the point of being 17% above the five year previous average. The Energy Information Administration predicts that natural gas stocks will reach 3,659 billion cubic feet by the end of October, trumping the previous record set in 2007.

Briggs also says that Beltway politics, most notably the hard-line policies of President Barack Obama, are keeping oilmen from investing money in the holdings they have. While he admits the industry has survived previous anti-oil White Houses, Briggs says the economy has kicked in to create a unique situation for those who want to speculate.

“In Acadiana, we know how to adjust to the peaks and valleys of the industry caused by supply and demand,” Briggs says. “Right now, however, the focus of most industry executives is on the uncommon ground of politics in Washington, D.C. Proposals before Congress, if passed, will literally throw the fundamentals out the window.”

Even if oil prices reach another record level this summer, the rest of the economy would have to pick up and sustain itself for any real impact to be felt on the state level, Albrecht says. There are simply too many competing problems for oil to save the day all by itself. For instance, he had to adjust his models downward by $30 million last month because of a lower forecast for business and sales-tax payments.


THE GOOD AND THE BAD: Don Briggs, president of the Louisiana Oil and Gas Association, says the ‘good news’ is that oil should average about $67 a barrel for the rest of 2009, but the ‘really bad news’ is that natural gas prices should continue to fall.
As it usually does, the Revenue Estimating Conference followed Albrecht’s advice and compensated for the anticipated changes. “It looks like corporate is going to be worse than expected. It’s highly volatile. It’s not surprising it can be like that, but it was the biggest downward adjustment for me,” Albrecht said during the May meeting. “I think Louisiana consumers are retrenching like everybody else.”

Other fiscal factors are sure to surface in coming months as well, but oil prices continue to offer just as much promise—and instability—today as ever before, analysts say. But even if oil prices do spike enough to lift Louisiana out of its economic shortfall, the same increases will negatively affect consumers at the pumps and create what would be another puzzle piece in this new, emerging economy.

SEEDS OF DOUBT

If you still think oil and gas will save Louisiana’s fledgling budget, here are a few more factors to consider:

• Like practically every other month this year, the June mineral lease sale conducted recently dashed expectations. This time, it hit a three-year low by bringing in only $1.4 million for the state. In all, the Louisiana Mineral Board awarded 11 leases mostly located in northern parishes. By comparison, last year’s June sale produced more than $35.8 million in payments for the state and 38 leases for oilmen and independent producers.

• A recent study by Economist Loren Scott found that the Haynesville Shale contributed about $2.4 billion in new business sales statewide last year and created more than 32,000 new jobs. That frenzy is over, however, and many companies are choosing to sit on their 2008 investments instead of continuing to suck up leases and push for more work. The findings in a forecast released last month by Mike Zoller, an associate economist with Moody’s Economy.com, were not kind. “The Haynesville natural gas field is not growing as fast as expected,” Zoller said.

• The state’s offshore leases have sat pretty much dormant since January and recent active rig counts by the Houston-based Baker Hughes Inc., a respected reporting agency, take only a few fingers to add up. When asked about the trend, Zoller admitted that the recession in Louisiana hasn’t been as bad as the rest of the nation, but the drop in offshore oil drilling has been “a thorn in the side” of the state.

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