POSTED ON FEBRUARY 1, 2012:
Gas, Oil or Hot Air?
The local, state economy is still dependent on fossil fuels
So what is it about the term "fossil fuels" that we don't seem to understand?
Devon Energy's gargantuan $750 million glass and steel office tower soars skyward, dwarfing Oklahoma City's modest skyline, longing to be, destined to be the tallest building in Oklahoma by a few feet.
A block away sits the Chesapeake Energy Arena, where the NBA's Oklahoma City Thunder routinely attracts sellout crowds and has become something of a national sensation.
And just southeast of the nearby Bricktown entertainment district, the Devon and Chesapeake boathouses anchor the Oklahoma River, now home to world-class rowing.
The tower, arena and boathouses are oft-heralded as symbols of Oklahoma City's emergence as a modern, cosmopolitan, big-league city, reflecting a future brighter than most outsiders ever dared predict for a very recently, once-sleepy cowtown and government hub.
But they also serve, in the minds of some, as caution signs -- reminders, perhaps, of a painful era not so long ago when the struggles of a single industry plunged Oklahoma City, and the entire state, into economic darkness.
Then, as now, the industry was oil and gas. You no longer see the "Drive 75, Freeze A Yankee Alive" bumper stickers that characterized the '70s and early '80s boom. You see instead the Devon Tower under construction, the full-page newspaper ads with photos of Chesapeake's new employees, the improvements that SandRidge Energy is making to its downtown home in the old Kerr-McGee tower and environs, the announcement that Enid-based Continental Resources is relocating to the capital to the office space Devon is abandoning.
Then, as now, you see a state whose economy has better weathered a national economic crisis. Unemployment remains below the national average. And tax revenues -- while they took a serious hit -- ended up somewhat insulated thanks to high oil prices and a natural gas-drilling frenzy sparked by an extraction technique known as hydraulic fracturing -- or "fracking."
Bubble and Brew
In the '70s, it seemed the good times would never stop rolling. But, of course, they did. The oil bust in the early '80s rocked Oklahoma to its core and nearly brought down the American banking system. The defining bumper sticker slogan: "Lord, just give me one more oil boom. I promise not to p--- it away."
State and civic leaders promised to never be so dependent on one industry again. Diversification became the mantra. Thirty years later, the promise has not been realized fully.
The U.S. Bureau of Labor Statistics reports that about one-fourth of all Oklahoma jobs are still tied directly or indirectly to the energy industry.
"We consider the energy industry the defining industry in Oklahoma," said Dr. Steven C. Agee, dean of Oklahoma City University's Meinders School of Business. "It's the most significant, impactful industry we have" -- and "has been for the last 50 years."
Moreover, as economist and University of Central Oklahoma Business Dean Mickey Hepner put it, in an interview with StateImpact.org, "Our economy is as concentrated on the energy industry as it's really ever been."
A report prepared by Oklahoma City University's Economic Research and Policy Institute for the Oklahoma Energy Resources Board and released last June supports these assessments:
The number of jobs in the mining, quarrying and oil and gas extraction sector "enjoyed double-digit year-over-year employment gains" through much of the 21st Century's first decade -- from 26,898 jobs in 2002 to 54,071 in 2008.
The industry shed 13,000 jobs from October 2008 to October 2009, the report noted, but added 4,000. Overall, however, the number of jobs in the energy sector has nearly doubled since the 2001-02 recession -- up 46.2 percent.
But Roy Williams, president and CEO of the Greater Oklahoma City Chamber of Commerce, argues that Oklahoma City has diversified its economy and is no longer so dependent on one industry.
For example, he said, 10 percent of the gross metropolitan product of central Oklahoma is related to bioscience and aviation-aerospace, while oil and gas is "a little bit less."
Moreover, he said, in central Oklahoma at least, the energy industry doesn't employ nearly as many as biosciences or aviation-aerospace -- partly because many of the jobs tied to the Chesapeakes and Devons are elsewhere in Oklahoma, out-of-state or international.
Some would argue that Oklahoma City has once again become the early 21st century equivalent of the old company town -- so many livelihoods inextricably linked to the success of companies like Devon, Chesapeake and SandRidge.
Chesapeake's CEO Aubrey McClendon
Thanks in part to the NBA's Thunder, the energy barons are celebrities of a sort in Oklahoma City. Like Jack Nicholson at the Lakers' games, for example, Chesapeake's Aubrey McClendon often is seated in the front-row -- albeit along the baseline, not at center court like Nicholson.
Of course, McClendon and Co. are among the team's owners, a group of Oklahoma City business elites who joined forces to buy Seattle's franchise and move it to the Sooner capital.
The Thunder's success inarguably serves as a unifying community force, the equivalent of Oklahoma football's and Oklahoma State basketball's glory days when national championships were in reach.
Williams said the energy companies were born in Oklahoma City, grew up here, as did their owners. Their roots run deeper than companies that were recruited to relocate.
"They're such great community members," he said. "That's why you see their names on things all over the city."
Even so, there is unease about what will happen to the city -- and to the entire state -- if and when the next significant downturn occurs. The fact is, the industry has a huge impact on the state's fiscal health, including its revenues and budgets.
According to the State Office of Finance, gross production taxes on oil and natural gas have helped drive Oklahoma's revenue recovery -- collections up 194 percent in November to $59 million. By comparison, sales tax collections yielded $147 million and motor vehicle tax collections $16.2 million the same month.
Even so, OCU'S Dr. Agee noted, gross production taxes are no longer a 900-pound gorilla when it comes to state revenues. Thirty years ago when the oil bust crippled the state, gross production taxes represented one-fourth of all state revenues. Now, he said, it's in the 12-14 percent range.
Which doesn't mean, he said, that it can't have a breathtaking impact on state revenues. He pointed, for example, to fall 2008 when the price of oil plummeted and the industry shed all those jobs. In September 2008, $180 million in gross production tax revenues poured into state coffers. In November 2008, gross production tax revenues plummeted to $80 million -- a $100 million hit in one month for the state treasury.
The industry, however, is more than a source of tax revenue, whether from production, salaries or purchases. It also harvests millions of dollars in state tax credits as incentives to do business in Oklahoma -- money that could be used for education, highways, child welfare or other essential state services.
Even the group responsible for the Thunder's relocation tapped the state treasury for help -- $60 million to help finance the move, including staff salaries.
What's particularly interesting about the tax breaks -- which are expected to the subject of considerable debate in the 2012 legislative session that begins Feb. 6 -- is that studies indicate they are among the least important factors when a company is deciding whether to drill.
Some oil and gas producers, like Tulsa's George Kaiser, argue the incentives should be eliminated and the money devoted to essential state services. But others argue they are important because of the substantial financial risks involved in production.
Oklahoma's history as an oil and gas state is well known. For much of the 20th century, Tulsa billed itself as the Oil Capitol of the World. The Golden Driller still stands at the Tulsa fairgrounds as a monument to an era when oil wealth drove the city's economic, civic and cultural agendas.
Houston began claiming the "oil capitol" moniker a half century ago, in no small measure because of its location -- near the gulf coast where tankers and refineries converged to create an energy colossus.
While Houston became home to the majors -- the industry's biggest firms such as ExxonMobil, even Oklahoma-bred ConocoPhillips -- Oklahoma has taken a different path, emerging as something of a hub for independents.
Chesapeake, Devon, SandRidge and Continental, for example, are among the nation's 50 largest oil and gas companies. And while they may be Oklahoma-based, they may be best known for work outside the state -- Chesapeake in Texas' Barnett Shale, Continental in the North Dakota portion of the Bakken Shale.
It's not that Oklahoma is some sort of oil and gas afterthought: Baker Hughes Inc. reported Jan. 21 that nearly 200 rigs are operating in Oklahoma, up more than 16 percent from the same time last year.
But given the state's compact size and its long history of extraction, some can't help but wonder what the future holds.
Strike It Big
The Oklahoma Geological Survey reports that from 1901 to mid-2002 an estimated 14.5 billion barrels of oil and natural gas liquids and 90 trillion cubic feet of natural gas were produced and sold in Oklahoma.
How much is left to harvest? No one can be absolutely certain, though a decade-old U.S. Department of Energy survey of producers estimated about 610 million barrels of oil and 14 trillion cubic feet of natural gas are still available for harvest in Oklahoma.
Of course, what's available and what's affordable to produce are entirely different matters.
In the meantime, Devon's tower nears completion, dwarfing the Oklahoma City skyline -- perhaps symbolically given the importance of oil and gas to the state's economy.
Two giant red cranes still frame the structure on the city center's western core, adjacent the historic Colcord Hotel and just north of the city's Crystal Bridge botanical gardens.
Devon's CEO Larry Nichols
Devon will occupy the entire 50-story tower and complex that encompasses an estimated 1.8 million square feet. It is expected to be completed in the third quarter of the year. The tower, a company spokesman said, was designed and built "to accommodate future growth."
Williams, the Oklahoma City Chamber chief, said Devon's new tower actually helps the downtown area because it helps make available -- for the first time in decades -- 100,000-plus square foot Class A parcels large enough to attract headquarters-type tenants.
Besides Continental, which ultimately will locate 750 employees downtown, much of it in space vacated by Devon, the OG&E subsidiary Enogex is moving its headquarters from north Oklahoma City into a 130,000-square-foot space in downtown's Leadership Square.
Moreover, Williams said, a tax-increment-financing (TIF) district created in conjunction with the Devon tower also has created a $40 million fund to help recruit new headquarters to downtown Oklahoma City.
"We haven't built any new Class A office space -- no spec space -- in decades," he said. "It's always been like Devon--for the user.
"Now we've got the space (available), now we've got the resources (TIF)" to attract new headquarters, not only helping reshape downtown Oklahoma City as a commercial hub, but also as a residential area -- housing units are going up next to Bricktown and in the Mid-Town area just north of downtown.
Perhaps because of Oklahoma's long oil and gas history, it's been slow to embrace renewable energy, even though wind and solar both would seem naturals.
The state's top oil and gas companies insist they're working on expanding their business models to include green technologies, but others suggest there is a "natural" reluctance to tweak a financially successful blueprint.
"While all of these companies will pay some lip service to green technologies, they are anti-renewable," said one industry insider, who asked not be identified.
They tend to oppose government incentives for such technologies (think: the dust-up over the troubled solar power company Solyndra), often viewing it as direct competition for the taxpayer subsidies they currently enjoy.
"Their expertise and profitability is in fossil fuels," the insider said. "They know little about renewables and believe this market is not large enough to warrant their commitment."
Tulsan George Krumme, whose Bristow-based oil company has been in business since 1947, takes it a step further: He believes it also fuels resistance in the energy industry to the notion of climate change.
"It's a natural human trait," he said, "to avoid facing something that could be difficult for you" -- even though a willingness to pursue renewable technologies could eventually determine the fate of their companies.
The energy industry, of course, has been cyclical historically -- prices up, fueling exploration and production, then prices down, resulting in layoffs and bankruptcies.
No one knows for certain if or when the next will occur. But energy insiders concede there are some disquieting signs, including low natural gas prices, the result at least in part of a milder winter nationally. As a result, some firms, including Chesapeake and ConocoPhillips, have announced they are cutting back on some production because it's not financially viable in the current economy.
Some economists, though, believe high oil and liquefied gas prices are now a permanent fixture of the economy -- no more boom and bust, like the old days.
No matter what happens, Williams said he is certain Oklahoma City could weather the economic storm.
"We would be affected," he said, "there's no doubt about it." But, he added, "We're no longer a one-sector city."
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