Former House Speaker and Republican presidential candidate Newt Gingrich, watching the failed attempt of the Congressional Super Committee last year to find an additional $1.5 trillion in debt savings over 10 years, pondered the possibility that oil and gas development might be a solution offering long-term national security benefits. He also recognized the fact that the federal government holds mineral rights to 279 million acres.
Gingrich called Noble Royalties Inc. founder, president and chief executive Scott Noble and posed this question: “If the federal government were to manage the American people’s land with a fiduciary attitude comparable to that of a private firm, how much royalty would you generate, and in the process of that economic activity, how much in taxes would be generated?” It turns out the amount was larger than the Super Committee was looking for.
Taking on the task, the Noble team discovered that cumulative acres leased on federal lands have declined by 66% since the Reagan Administration, from 126 million in 1984 to 39 million in 2010, and by 86% for average acres leased per year, from 9 million annually to 1.4 million.
Basing the premise on returning to 1984 levels of leasing activity on federal lands both onshore and offshore, and with the aid of Netherland, Sewell & Associates Inc., Noble determined the government is leaving $785 billion in unrealized royalty revenues over a 30-year period. “That is $785 billion that could be generated from royalties alone rather than taxing the American people,” says Noble. Add to that another $1 trillion estimated in tax revenues from the economic activity that would be generated from the $5 trillion in working interest.
“We showed that if you opened federal lands and just returned them to the norm of how much they were leased before, that over 30 years $1.8 trillion would be contributed to the Treasury. That is in excess of 10% of the total national debt,” says Noble. ”That level of oil and gas activity will create significant blue-collar jobs and make a meaningful difference in the lives of middle-class families.”
“This is the first election in which you could decisively change the outcome of the election based on energy,” Gingrich says.
“The stage has been set. The price of gasoline on Labor Day was the highest on that day in American history. The economy is so bad people are willing to pay attention. And (the oil and gas industry) is participating in one of the great revolutions in American energy supply. The combination of horizontal drilling and fracing has created an opportunity with tight oil and gas that changes every projection.”
Gingrich and Noble presented their findings at Hart Energy’s A&D Strategies and Opportunities conference in Dallas in September. Together, they discussed this and energy policy in America with Oil and Gas Investor in an exclusive interview.
Investor What role does energy play in the upcoming election?
Gingrich Energy is extraordinarily important. It is the No. 1 plank in (Republican candidate Mitt) Romney’s plan for the middle class. It is something people instinctively believe represents opportunity. They identify it with jobs and economic growth, with national security, and lower prices. From their standpoint, it’s a triple win. Energy itself is a job producer. Look at North Dakota at 3% unemployment. Less-expensive energy is a manufacturing-jobs producer. So in a state like Ohio, which now has an oil play, a gas play and a big manufacturing base, you’ve got a lot of positive talking points.
Noble Our industry has to learn how to message that correctly, to show how oil and gas development is opportunity, it is jobs, and how it can make a difference in people’s lives.
Investor How can energy help bring the U.S. out of economic stagnation?
Noble Start with the federal lands. How are they managed, and can we (energy) be a solution to solving the national debt? In the past two years, access to federal lands has been reduced by 50%, from 2.6 million acres (annually in 2008) to 1.4 million in 2010. This is shocking. Onshore annual leasing is at 10% of the 1985 level. Ninety-one percent of undiscovered resources on onshore federal lands are either inaccessible or restricted.
Investor Should federal lands both onshore and offshore be opened up to exploration?
Gingrich Take all of the most scenic places—the national parks—and make them off limits. That leaves hundreds of millions of acres. We the American people own 69% of the state of Alaska. Alaska is more than twice the size of Texas. That means we own about one and a half Texases in public land in Alaska. The odds of finding oil and gas are amazing. Eighty-four percent of Nevada is federal land. The last geological survey was in 1984, using 1984 technology and with 1984 assumptions about what drilling was practical. Half the U.S. land has never been analyzed, and the other half was analyzed 30 years ago. To say to the American people, we’re not going to allow you access to your own patrimony to develop these resources, is wrong.
Noble We calculated that if the Alaskan pipeline had been kept full, the government would have made $36.4 billion in lost royalties and bonuses to date, and another $295 billion in oil and gas sales that did not happen. Only 30 wells have been drilled total in the past 10 years in Alaska on federal lands. It’s just alarming.
Investor If the surface footprint in Alaska looked like it does in West Texas, you would have pushback from the public. How do you address those concerns?
Noble West Texas was drilled to 10 and five-acre spacing. That’s not necessary today. We can get six to 12 wellbores on one small pad site. The Pinedale area (in Wyoming) has shown us that we can have the least amount of disturbance with the most amount of reserves. The time is right. Technical innovation has allowed developers to maximize production of oil and natural gas while minimizing environmental impact.
Investor What are your thoughts on how the Obama administration handled the Gulf drilling moratorium?
Gingrich When we talked with technical experts in Houston shortly thereafter, they said the government actually made it worse, and that it should have been solved much faster than it was. You have offshore drilling worldwide. It is done safely and effectively every day. We ought to have a policy to maximize our ability to apply the most modern technology to maximize our production.
Investor Does this include areas currently off limits for offshore drilling?
Gingrich I would allow each state to decide. Virginia has said clearly they want to develop offshore. South Carolina has a huge natural gas find it would like to develop offshore. If California doesn’t want to develop offshore for the moment, fine. But frankly, if you give coastal states the same split on royalties for offshore drilling that states that drill on land enjoy, you’ll have state legislatures like California asking, “Now, how many billion dollars is that?” You would suddenly find lots of state legislatures saying maybe they could have some development.
Investor Is hydraulic fracturing changing how America should look at energy?
Gingrich This is a historic turning point. The combination of multistage fracing and horizontal drilling has made us the largest natural gas producer in the world. With the right policies, we could also be the largest oil producer. North Dakota, for example, has gone from 150 million barrels of reserves to 24 billion. Add to that in North Dakota unemployment is down to 3%, it had seven consecutive tax cuts and a state surplus of $1 billion in the rainy-day fund for a $3-billion budget. It’s a good story. Recently, the U.S. Geological Survey re-estimated Ohio at 42 times as much natural gas as they thought they had. Not 42%—4,200% more natural gas. The current guess, and it’s only a guess, is there are 5 billion barrels of reserves in Ohio. Nobody in Washington and nobody in the news media has come to grips yet with the degree that this is a change so profound that it restates the game—in jobs, in manufacturing, in foreign exchange, and in national security.
Investor Do you support exporting liquefied natural gas (LNG)?
Gingrich We’re on the edge of a revolution in availability, which will allow markets rather than governments to decide. You now have between a 125- and 200-year supply. Price is going to stabilize at a level that enables drilling to be profitable, because if it’s below that, you won’t get any new wells. I see no reason why you wouldn’t want to export a fair amount of that. By the end of the decade, with the right policies, we could be a net exporter of energy, and where we have eliminated our balance of payments problem totally, strengthened the dollar dramatically, and put ourselves in a position to once again be the valid reserve currency in the world.
Investor The petrochemical and manufacturing industries are lobbying heavily to keep our natural gas reserves at home to keep those jobs here. How do you balance your message of jobs with exporting?
Gingrich Both will be taken care of. There is going to be an equilibrium price for natural gas in the U.S., substantially below the cost of LNG to China. The U.S. will have the least-expensive natural gas of any industrial country in the world. So the chemical guys are going to get their natural gas supply, and the exporters can get their supply.
Investor Will the Keystone XL pipeline get built?
Gingrich Romney said if he’s elected he will sign the executive order on the very first day. What Obama will do I have no idea. But, the idea that we are driving Canada into a Chinese alliance, in every possible way it’s destructive to us. It’s to our advantage on a practical level to have it come through Houston. The pipeline can clearly be done in an environmentally safe way. We’ve been doing pipelines for 140 years. This is not exotic technology.
Noble When you take a half a million barrels a day out of the pipeline (from Canada), you have to send that money overseas. Take that same amount of money and create jobs and opportunity at home.
Investor What role might renewables have in an energy plan?
Gingrich: Investing in renewables at a research level makes sense. In the long run, it’s an additional part of your technological arsenal. It gives you a range of choices. It helps you at the margin on concerns like global warming. But the idea that we’re going to take a renewable that is three to five times as expensive and be able to sustain it by public subsidy, or by making it so expensive to use fossil fuels (by raising the price of oil, gas and coal) to make artificial competitiveness, those aren’t sustainable economically. People don’t mind a little subsidy. They don’t mind paying 10% more. But when you tell them you might be paying four times as much, they think it’s crazy.
Investor Similarly, the natural gas industry is looking for backing for CNG (compressed natural gas) or LNG as a transportation fuel. Should the government subsidize that?
Gingrich You can buy natural gas for your truck at a dramatically lower price than you can buy diesel. You have a vested interest in refitting your truck. If the people who run the gas stations decide there is a market, they have a vested interest in investing in that market. I suspect you’re going to see all of this develop. People will go and do it.
Investor Is energy independence realistic in today’s world?
Gingrich If by energy independence you mean North America, which is what Romney talks about, I have zero doubt we can achieve continental independence, and not rely on Venezuela and the Middle East. If you say only the U.S., I’m not sure the price patterns quite fit that. On natural gas, clearly we will be the leading producer in the world. By the end of the decade, with the right policies, we could be the leading oil producer in the world. If you add to that Canadian and Mexican production, clearly you have North American energy independence.
Noble I see us quickly getting from importing 11 million barrels down to about 4 million. The challenge becomes the decline of the shale plays, which will be offsetting while growing at the same time. But we’re discovering and developing a new shale play every month. Going from 4 million to zero will be more geopolitical. That will be a tough decision. Who will have the last three contracts? That will be when the price of oil really comes down, because the news will be there is an oversupply of oil and America is finally there.
Investor What does it take to get there?
Noble It takes everybody working together. That means opening up federal lands, to go from choking and restricting to regulating. We have to be responsible managers of our federal lands. At the same time we have to be responsible managers of our private lands. It takes a nice balance between the environmental community and the oil and gas community to be able to lower cost of living for your average person, as well as lowering costs for manufacturing.
Investor What do you think America’s energy future will look like in five years?
Gingrich A lot depends on the election. You have a growing sense of bureaucracy and regulation that is anti-energy, whether it is the Fish and Wildlife Department, Environmental Protection Agency, or the Interior Department. The continual processes are slowing you down. Then you have litigation effects that also slow you down and raise the price even more. If we retain an anti-energy bias in the Obama administration, you’re going to get slower growth. The fact is, the opportunities are so enormous, that even determined government opposition only slows it down. The Romney recovery will start in energy, and energy will pull forward manufacturing. The two of them will pull forward the value of the dollar, and our capacity to purchase worldwide will go up dramatically as the balance of payments shifts to positive for the first time in a long time. That’s very conceivable. You could see virtually all of the turnaround by the end of the decade.