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More than 500 people gathered at the Cajun Dome Convention Center to talk business over breakfast.

Business over breakfast is the Chamber of Lafayette’s second largest event of the year. The hot topic for today, the oil industry. 
KATC’s Chris Welty spoke with Don Briggs of the Louisiana Oil and Gas Association on the current and future state of the industry.

For the first time in decades the industry is growing.

“Our oil production is producing six million barrels a day and this will continue to grow and lessen our dependence on foreign oil.”

Briggs says the oil and gas industry is in an energy revolution. Changes in the way drilling is done is helping the industry expand, but just two years ago the future of oil and gas in Louisiana and along the Gulf Coast was uncertain because of the moratorium on drilling after the crude disaster.

“It certainly hurt Louisiana because we had 30 less rigs working in the Gulf of Mexico for some period of time. It cost companies hundreds of millions of dollars to stand-by and shut down those wells and pay rig time and pay employees,” said Briggs.

Since the moratorium, rig count is back up in the Gulf, but it hasn’t grown to the capacity that it was. Don Briggs says he’s confident offshore drilling will bounce back and soon exceed previous production numbers. 

”You can’t say enough good things for it because Louisiana especially out of Lafayette and Southern Louisiana, so much of the energy infrastructure come out of Lafayette. Lafayette is really a core part of the service sector of the industry that supplies the services that we need to drill and explore for oil.”

The U.S. Chamber of Commerce Chief Executive Officer Karen Harbert was the guest speaker at breakfast, discussing current issues in the oil industry and possible solutions.

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For the first time since the BP oil spill, millions of acres in the Central Gulf of Mexico are up for grabs during an oil and gas lease sale taking place in New Orleans. In all, 39 million acres of potential oil and gas drilling are for sale, with 48 companies submitting bids on hundreds of tracts – anywhere from three miles to more than 230 miles off the Louisiana coast.

Wednesday’s oil and gas lease sale is the first in the Central Gulf, since the Deepwater Horizon exploded more than two years ago. It is attracting attention and added scrutiny.

“It can be intimidating for a regular person to just walk into a meeting by industry and by government,” said Anne Rolfes, director of the Louisiana Bucket Brigade. “And so, this is a way to train people on how to use their voice.”

The Louisiana Bucket Brigade and others are forming a Citizens’ Monitoring Group to keep tabs on Wednesday’s sale.

“This is a very important event that will affect the public, public property,” said Kristen Evans, who is helping to organize the Citizens’ Monitoring Group. “The very effect of seeing and being seen, reminds government and industry, that they have responsibilities and that they are accountable to the public.”

In addition, several environmental organizations are suing the federal government, in an attempt to stop the sale altogether, because of concerns about potential oil spills.

“We’ve drilled literally thousands and thousands of wells in the Gulf of Mexico and you can ask any fishermen out there how important the infrastructure is out there for fishing,” said Don Briggs, President of the Louisiana Oil and Gas Association. “I expect environmentalists to do what they’re going to do, but it’s unjustified.”

The sales demand is high in the Central Gulf, in part, because Congressman Steve Scalise said there is uncertainty about when the next sale will be.

“Just like in this case, we’re expecting a whole lot of interest because it’s been so long and it’s also coupled by the fact that President Obama has still yet to release his five-year lease sale plan,” said Rep. Scalise, R-Louisiana.

The oil and gas lease sale will take place at the Superdome on Wednesday, beginning at 9 a.m. Secretary of the Interior Ken Salazar will be on hand to announce the results of the sale at noon.

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Sen. David Vitter has formally thanked Gov. Bobby Jindal for signing into law a legacy lawsuit solution passed by the Louisiana Legislature.

“I want to thank the state Legislature for passing this strong solution to the legacy lawsuit issue which Governor Jindal signed into law,” Vitter (R-La.) said. “It will help clean up real contamination and shut down the trial lawyer bonanza, which has been hurting job creation in our energy sector.  [The solution] happened for one reason – legislators did their job, faced a tough issue and voted the right way in the House, and in the Senate.”

Legacy lawsuits proved to be a contentious issue for legislators during their 2012 regular session. The state Senate and House of Representatives ultimately accepted a procedural compromise presented by state Sen. Bret Allain.

“Landowners wanted more oversight,” Allain (R-Jeanerette) said after presenting SB-731 an alternative to HB-618 in April. “So what I did was set up as an oversight committee comprised of the Department of Natural Resources, Commission of Conservation, Department of Environmental Quality, Wildlife and Fisheries, Department of Agriculture, Department of Health and Hospitals and, in coastal parishes, and the Coastal Protection and Regulation Authority. “

Allain argued that by giving each agency a say in the matter, individual cases would be fully addressed without landowners and oil companies having to come back later to address added complaints.

Throughout legislative debate, Vitter argued that a stalemate regarding legacy lawsuits favored trial attorneys who he said seek millions in damages, above actual cleanup costs.

“The Louisiana Oil and Gas Association would like to give particular praise to Sen. Vitter for his leadership as a driving force that resulted in this much-needed solution to these frivolous legacy lawsuits,” LOGA President Don Briggs said. “While this was not a Capitol Hill battle, Sen. Vitter made his voice heard in our home state of Louisiana. These two pieces of legislation successfully passing out of the state legislature would not have been possible without his willingness to speak out on behalf of the industry and keep the issue on the forefront of the public debate.”

“The Louisiana Landowners Association appreciates that the Governor’s Office has helped to achieve this compromise,” Louisiana Landowners Association Executive Director Paul Frey said. “We add a special thanks to Sen. Allain who is a key advocate for landowners.”

“To reach a compromise, it was important that we came to a balance that enables us to continue to lead the country in energy production and also be good stewards of the environment,” Natural Resource Secretary Scott Angelle said in the news release from the governor’s office. “This compromise provides for transparency in the process, accelerates clean up of the environment and protects innocent parties from punitive damages.”

Vitter highlighted key components that he fought for and that became part of the solution. The senator’s contributions to legislation allows operators to accept responsibility and be credited for cleaning up sites, calls for pretrial public hearings and makes sure the clean-up plan is publicly available and admissible in court.

The term legacy lawsuits refer to claims brought by landowners against oil and gas operations in relation to contamination of property related to drilling and extraction sites.  These lawsuits are often filed against every operator who has ever worked a section of property.

Until now, lawsuits could include multiple companies, even if some lease-holding companies are not the ones responsible for contamination that occurred prior to their ownership.

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The governor also signed a pair of bills — House Bill 618 and Senate Bill 555 — that will change the complex legal process for dealing with so-called “legacy lawsuits” that seek millions of dollars in damage claims and that the oil and gas companies claim are stymieing energy exploration in the state.

At issue is the state’s procedures for cleaning up environmental damage to property caused years ago when energy companies searched, developed and exploited oil and natural gas fields. Following acceptable procedures of the time, the energy companies often left messes on-site, then sold the leases to others, usually smaller oil companies.

Landowners contend that litigation, which carries the threat of an expensive verdict, seems the only motivation to get the oil companies to clean up.

Big oil companies counter that agreeing to a cleanup opens them to much larger verdicts for less documented damages, such as financial losses from being unable to use the land.

In order to accelerate cleanup, the compromise outlined in SB555 and HB618 would allow a party to admit responsibility for environmental damage and to clean it to the regulatory standard.

The changes would set certain benchmarks and timelines in handling cases.

Once the oil company admits responsibility, the Department of Natural Resources would draft a feasible cleanup plan, according to the two bills. Two other agencies, the Department of Environmental Quality and the Department of Agriculture, would also weigh in on the cleanup plan.

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The Tangipahoa Parish Council on Monday unanimously introduced and set for public hearing a proposal to regulate oil and gas drilling in the parish.

It’s the council’s second attempt to adopt an ordinance that, if passed at a June 25 meeting, would regulate the drilling and production of crude oil, natural gas and other minerals from formations located deep below the surface of the parish

Over the past year, thousands of acres of land have been leased in the parish for possible drilling sites.

At its May 14 meeting, an attempt to pass a similar measure failed. At the time, Council President Carlo Bruno and Councilmen David Vial and Lionel Wells agreed to meet with representatives of the Louisiana Oil and Gas Association in an attempt to rewrite the original proposed ordinance.

Bruno said Monday that the trio had worked well with representatives of LOGA and that both parties seem to be in agreement over the new version of the proposed ordinance.

The council will vote on the proposal following a public hearing set for 5:30 p.m. June 25 at the parish Courthouse Annex.

The proposal requires that companies planning to drill for minerals in the parish obtain permission from the Parish Permit Office.

Companies planning to drill will pay a $750 per well fee. The original ordinance called for a $2000 drilling fee.

Potential drillers must also disclose the type of hydro fracturing fluid they plan to use in their well. Such fluids are used to smash or “fracture” holes in domes that potentially hold petroleum deposits.

The ordinance also requires that drillers secure appropriate state and federal drilling permits before seeking a parish permit.

The ordinance encourages drillers to use non-drinking water in their process and to recycle water used in production.

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Over-reaching by federal regulators and local governments could stop the Tuscaloosa Marine Shale from ever booming in Louisiana and shift drilling activity to the Mississippi side of the oil-rich formation, Louisiana Oil and Gas Association Vice President Gifford Briggs said Thursday.

The Environmental Protection Agency has been trying to take control of the hydraulic fracturing permitting process from state governments for a long time, Briggs said.

The energy industry fears that any allegation of a problem could result in an instant ban on hydraulic fracturing, the same way that federal regulators placed a moratorium on offshore drilling after the BP well disaster.

“That would give the federal government the ability to shut down the oil and gas industry in the state with the swipe of a pen,” Briggs said. “That is very terrifying, and that is a very real concern that industry has.”

Briggs spoke at the Greater Baton Rouge Industrial Alliance’s annual meeting.

Most wells are drilled using hydraulic fracturing, where millions of gallons of water, mixed with sand and chemicals, are forced underground under high pressure to crack rock formations and release natural gas or oil. Environmentalists and some residents say the practice could contaminate surface water and water tables. There are also concerns about the enormous amount of water used in the process — a Colorado State University study found the average horizontal well in that state used 2.7 million gallons of water — and the effects of disposing wastewater from fracking.

Briggs said federal regulation would likely increase the time and the cost involved in drilling a well.

Meanwhile, Louisiana’s continuing budget shortfalls could mean the end for the severance tax break that drillers get for horizontal wells, Briggs said.

In 1994, Louisiana made horizontal wells exempt from severance taxes until a company recovers the cost of the well or for 24 months, whichever happens first.

At the time, the technology was fairly new, and legislators were trying to encourage drilling. In 2010 and 2011, the exemption meant that Louisiana didn’t collect around $300 million in severance taxes.

The energy industry says it creates billions of dollars in economic activity and investment, which generates tax dollars in other ways.

The Haynesville Shale, for example, had $31 billion in economic impact during the past two years, creating more than 60,000 jobs, Briggs said.

Briggs said he expects the tax break will be the No. 1 target in the next legislative session, even though Louisiana’s economy is heavily dependent on the oil and gas industry.

Drilling is already practically impossible in the Haynesville Shale, due to depressed natural gas prices, Briggs said. Without that incentive, the cost of drilling goes up incredibly, making it even less likely that drilling will take place, and the same goes for the Tuscaloosa Marine Shale.

Finally, drilling companies face problems at the local government level, Briggs said.

Once the Haynesville Shale got going, every local government wanted to create its own well permits, fees, road-use taxes and everything else to capitalize on the boom, Briggs said.

“And I’m sure those parishes in the Baton Rouge area, when they looked at what was going on, they said, ‘Well if we can just get that kind of activity and that kind of economic growth in our area we would do anything,’ ” Briggs said. “Well the Tuscaloosa shows up, and now all of a sudden we’ve got local ordinance issues in every parish that we’ve never had before.”

The local issues vary wildly, Briggs said.

In Beauregard and Vernon parishes, there were efforts to ban hydraulic fracturing. Other local governments have asked drillers to disclose the chemicals used in hydraulic fracturing, he said.

Many of the proposed ordinances duplicate state regulations, while others would make drilling companies repair road damage; the industry is willing to pay for repairs, but oil and gas companies don’t have expertise in road repair.

Briggs said all of these challenges could mean that the much-anticipated Tuscaloosa Marine Shale boom might never materialize.

Drilling companies have an option, he said. They can just move their operations to the Mississippi side of the formation.

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The 90-day 2012 Louisiana legislative session has come to a close. While most sessions have their ups and downs, this particular session was an all-out battle for the oil and gas industry. Several pieces of legislation were filed that would have been injurious to the industry, and numerous other bills were filed that would benefit the industry and offer new ideas of how to better the future of oil and gas in Louisiana. Overall, the bad bills were killed and the good bills were passed, and the oil and gas industry is pleased at the outcome.

Specifically, the oil and gas industry was able to work with the necessary legislators and stakeholders to pass two bills designed to reduce the backlog of the so-called “legacy lawsuits” and speed up remediation of landowners’ properties. House Bill 618 by Rep. Neal Abramson and Senate Bill 555 by Sen. Robert Adley have now passed out of both chambers and are on their way to the governor’s desk for his signature. State Representative Gordon Dove (R-Houma) was recently quoted in reference to the new legislation as saying, “It allows oil companies to take responsibility for the environmental portion of the site only, clean it up and have that admissible in court.” The Legacy issue has caused, according to a report released by the LSU Center for Energy Studies, the loss of nearly 1,200 new wells in Louisiana, translating to an astonishing $6.8 billion dollars in lost drilling investments, and the forfeiture of over 30,000 jobs.

Also an ultra-deep units bill, HB 504, passed allowing the Department of Natural Resources to consolidate leased lands so operational costs for ultra-deep drilling exceeding 22,000 feet could be shared. This bill enhances drilling in the southern portion of the state of Louisiana allowing for new economic development to take place. Not only will this bill help bring about new jobs directly tied to the drilling itself, but it creates a ripple effect for that region adding jobs to industries such as the hotel, restaurant and transportation sectors.

Other positive pieces of legislation were passed pertaining to hydraulic fracturing, water usage, coastal restoration and alternative fuel for vehicles. Individually, these bills each touch the process of how oil and gas companies conduct their day-to-day activities. If

regulations are set at appropriate levels, the oil and gas industry is able to focus on exploration and production and not be bogged down by the red tape of laws that only hinder operations. When the industry is able to work with the legislators and come to peaceful compromise, we get the opportunity to see our democracy at work.

While this session brought about countless conversations, negotiations, and compromise, the end result was positive for the oil and gas industry.

The next step in the process is for the necessary bills to be signed into law, and the industry move forward in a positive direction, not only for oil and gas, but also for the entire state of Louisiana.

Don Briggs is president of the Louisiana Oil and Gas Association (LOGA).

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Cheniere Energy (LNG) has a great head start to become the first natural gas exporter in the United States. The company has everything in place with the majority of the permits and financing, now it has a clear trajectory to completing the building of its export facilities. While Cheniere bears have their valid points, the recent pullback of LNG may have created a buying opportunity.

Several articles have come out recently on the topic of the glut of natural gas in the United States and the growth of use worldwide.

This article discusses Exxon Mobile’s (XOM) desire to export natural gas, but the Department of Energy (DOE) won’t approve any more export applications until a study assessing the impact of LNG exports is completed. This is great for Cheniere Energy since it so far has the only approved natural gas export project in the US. Once Cheniere is ready to ship natural gas by 2015 or 2016, it will temporarily have a monopoly on US natural gas exportation. The first DOE study, released in January, found that significant levels of LNG exports could lead to a spike in US wellhead gas prices. The second study won’t come out until the end of summer. These delays have given Cheniere at least a one year lead over competing projects.

The International Energy Agency (IEA) expects total US gas production to rise from 653 billion cubic meters (BCM) in 2011 to 769 bcm in 2017. This excess supply will keep natural gas prices low in the United States which is necessary to keep exporting profitable.

The IEA predicts that natural gas consumption may rise 17% by 2017 from 2011 as demand surges in Asia and the US. Gas demand is projected to rise in Europe over last year as well.

This article, written a couple weeks ago and doesn’t even mention Cheniere Energy, says: “In this strange tale of two markets for the same commodity, North America’s rising natural gas production and lack of export infrastructure could ensure that its overflowing supply continues to sell for an astonishing discount to Asian prices for a few more years.”

This article comments on May 2012 Asian natural gas prices: “Spot Asian LNG prices have this month hit a four-year high of $18 per million British thermal units, up more than 35 per cent over the past year.” Compare this to US natural gas prices that are only around $2.50 per MMBtu.

In the years ahead, the United States will be dealing with austerity measures in paying off its massive debt. By holding growth back with the austerity, natural gas prices in the United States will be kept in check. The United States fiscal challenges make natural gas exportation all the more important.

Cheniere’s commercial contracts are similar to “take-or-pay”. Cheniere receives a tariff whether or not its customers fully use its liquification or regasification facilities. This is one advantage that comes with being the first mover. Even if competitors arrive afterwards that give customers a better deal, Cheniere will have already locked in its customers for the next 20 years. Cheniere already has such contracts in place in its import terminal with Chevron and Total.

Another question is whether Cheniere energy can charge the same fees to liquify the gas, regardless of whether natural gas rates decrease abroad. Perhaps Cheniere can continue charging its same fees despite the changes in natural gas prices worldwide. On the other hand, perhaps natural gas exporters will demand Cheniere reduce its rates if they are taking a hit in profits.

Sabine Pass LNG Terminal

Sabine Pass is located in Cameron Pass, Louisiana. It’s Cheniere Energy Partners (CQP) major project that has LNG storage capacity of approximately 16.9 Bcf (billions of cubic feet) of gas. It has an import terminal for regasification, and is now building an export terminal, Sabine Pass Liquefaction.

Sabine Pass LNG

Sabine Pass LNG is a regasification terminal that takes in approximately $250 million in revenue per year from importing natural gas from Chevron and Total. Total is obligated to make payments of approximately $125 million per year for 20 years starting in 2009. Chevron has a similar deal of approximately $125 per year in obligatory payments.

Sabine Pass LNG is operating at half its capacity. However, due to the oversupply of natural gas in the United States, it’s unlikely the Company will receive any more import revenue. For the same reason, these contracts with Chevron and Total expire in 2029 and most likely won’t get renewed.

Sabine Pass Liquefication

Sabine Pass Liquefication is designed for up to four LNG trains, each with a capacity of approximately 4.5 mtpa (million tons per annum). These trains liquefy the natural gas that comes to the Sabine Pass LNG receiving terminal which is located in Louisiana. The trains then transfer the gas to the receiving export ships. Trains 1&2 will be ready for operation in 2015 or 2016, and trains 3&4 will be ready by 2017 or 2018.

Louisiana is a good location for this terminal. It’s close to five natural gas fields, including Barnett and Haynesville shales – the two largest gas fields in the US which combined produce ~11 Bcf per day. It’s a good location to deliver natural gas to Europe. The only issue I see with the location is it’s quite a bit farther distance from Asia than Australia. Australia is the world’s largest LNG supermarket, and is expected to triple natural gas production over the next decade, as it says in this article. Asia can ship gas from Australia for lower shipping costs. However, the demand still seems to be big enough in Asia that Sabine Pass will export at its full capacity.

Cash Flow Analysis

While Cheniere Energy will have billions in revenues once it’s online, the question is whether it will be able to overcome its massive debt that it will have after its four modular LNG trains are built. A discounted cash flow analysis is needed to determine an appropriate value.

Everything has gone smoothly and it’s all turn key now, so it’s fairly straightforward to apply a discounted cash flow analysis to figure out roughly what the company is worth, although still complicated. Using the Company’s Corporate Presentation released on 5/29/12 is a useful initial guide. On page 3, it estimates EBITDA for Sabine Pass to be $2.8 billion for 2017. While that might be an overly optimistic forecast, if it’s accurate, it will be well more than enough to cover the debt and the stock is undervalued.

Disclosure: I am long LNG.

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