With record energy costs and high earnings, the oil and natural gas industry has come under the scrutiny of not... Read more

With record energy costs and high earnings, the oil and natural gas industry has come under the scrutiny of not only consumers but also policymakers nationwide. However, this American industry is often misunderstood by its critics and mischaracterized in the media. In an effort to “punish” American oil and natural gas companies, some groups are calling for policies, such as a Windfall Profits Tax, that would only hurt America by discouraging investment in domestic energy resources and increasing the nation’s reliance on foreign oil.
The domestic oil and natural gas companies that explore and produce energy for the country are made up of thousands of small, “independent” businesses operating in over 30 states and in the offshore, not the large, major companies such as Exxon Mobil or BP. These “independents” generally employ fewer than 20 employees, but collectively, they are the backbone of America’s oil and natural gas supply.

Today, independents drill 90 percent of the nation’s wells. According to the Independent Petroleum Association of America (IPAA), independent producers are responsible for supplying 68 percent of domestic oil production and 82 percent of overall domestic natural gas. These trends will continue. And that’s what makes this energy sector important to many investors, as well as manufacturers and other industrial consumers.

We need American energy.Today, we import more than 65 percent of our oil from often unstable countries. Natural
gas imports are rising rapidly too.The administrations of Presidents Reagan, Bush and Clinton all declared rising oil imports a threat to national security. Part of the solution is right here at home – underneath the ground.

Energizing the industry
Oil and natural gas currently supply two-thirds of America’s energy needs and,according to the Census Bureau, our population will grow 20 percent over the next 25 years. As a result, we will need 30 percent more energy in 2030 to meet,in part, the energy needs of a growing population. Currently, oil and natural gas generate 27 percent of the nation’s electricity. Oil and natural gas are the feedstock for a wide range of consumer products including life-saving medicines, beverage containers, fertilizers and camping equipment. The fact remains that oil and gas will be our main source of fuel for the foreseeable future.
Escalating energy prices have significant and far-reaching consequences on American industry and individual consumers, costing jobs and hurting families. They were a primary factor in the loss of 100,000 jobs nationwide in the chemical industry. The forest and paper industry has closed 200 mills and cut 146,000 jobs since the run-up in natural gas prices began. According to the results of a national survey released this past winter by the National Association of Manufacturers, nearly 45 percent of those surveyed said they will be forced to lay off workers or impose wage freezes or reductions.

The domestic oil and natural gas industry has also seen its share of job losses. Independent oil and natural gas producers are exclusively in the domestic exploration and production segment of the industry, with no marketing (i.e., gasoline stations) or large refineries within their operations. Over the last decade, the number of independents (broadly defined) has decreased from over 10,000 to approximately 5,000. Employment in the exploration and production sector of the oil and natural gas industry in 2005 averaged 270,200 up over 43,000 employees compared to 1999, due mainly to higher earnings that have been reinvested into new projects. However, over the last decade, the upstream oil and natural gas industry has shed 1,100,000 jobs. This loss of experienced personnel continues to seriously constrain the industry’s ability to meet incremental demand challenges. Adding to this problem is the fact that nearly 40 percent of the industry’s skilled professionals will reach retirement age during this decade. But the government and industry is working hard to encourage universities to continue their petroleum programs and train new workers.

Pushing the frontier
Domestic petroleum and natural gas production has changed over the years, particularly since the mid-1980s. Maturing production areas in the lower 48 states and the need to respond to shareholder expectations have resulted in major integrated petroleum companies shifting their exploration and production focus toward the offshore in the United States and into foreign countries. More and more, these large companies must rely on large producing fields that are found only in frontier areas. Consequently, domestic production in both the lower 48 states and in the offshore are areas where the role of independents is increasing. The nation will need a strong independent exploration and production industry to meet it future domestic needs.

The Independent Petroleum Association of America predicts that these prices and industry health are sustainable for 2006, and that opportunities exist for the upstream segment of the industry. That’s good news for American consumers and industry who increasingly demand more energy for a healthy economy.

According to the Independent Petroleum Association of America, the industry is now pushing for access in frontier U.S. areas – much of which has been off-limits due to federal restrictions. These areas, believed to hold billions of barrels of oil and trillions of cubic feet of natural gas, include the Alaska National Wildlife Refuge, the Eastern Gulf of Mexico, and the east and west coasts offshore. Non-conventional resources, such as coalbed natural gas, are booming in the Intermountain West, and new technologies are again producing impressive volumes of oil and natural gas from fields that were considered mature.
On Sept. 5, independent producer Devon Energy of Oklahoma City announced along with Chevron and Norway’s Statoil that they had discovered a new deepwater reservoir in the Gulf of Mexico that could boost America’s oil reserves by 50 percent. Projects like these, which could cost billions of dollars in investment, can only be done with the government’s help – not policies that discourage oil companies from investing within our borders.

Some politicians are calling for a “Windfall Profits Tax” or a new fuel-use act that would determine which industries can use oil or natural gas. A new tax would especially harm independent producers, who, according to a study by energy industry consultant John S. Herald, reinvest up to 150 percent of their cashflow into new exploration projects.

America does have an abundance of oil and natural gas that will be important for the nation to secure for future generations. But it will be important for the industry, consumers and policymakers to work together, to learn together and to generate new ideas together. It’s time we all take a closer look at this important American industry.

Barry Russell is president of the Independent Petroleum Association of America, which represents the thousands of independent oil and natural gas producers and service companies across the United States. Visit: www.ipaa.org


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