The Value of Necessity: Now it Gets Hard…But That’s Alright (Part I)

Author’s Note: This post will serve as the first of several related blog posts on this topic.  This first post is meant to introduce the general subject matter while the subsequent posts will each explore land acquisition trends and issues specific to a particular sector of the energy industry.

I was lucky enough to marry a woman who comes from one of the most beautiful places on earth – Vancouver, British Columbia.  It is a thoroughly metropolitan city with all the sophistication and refinement that can be found in this world.  It is one of the film production capitals of the world, it has a world class university, and is a western hub of finance, law, and scientific endeavor.  Within a one-hundred-mile radius around the city are some of the most majestic and awe-inspiring mountain ranges in the world. The world class resorts scattered throughout this area make it an outdoor playground unequaled the world over.

Now, go one mile past this belt of civilization and comfort and you enter one of the roughest, most uncompromising, and least survivable wildernesses left in the world.  Coastal terrain that is a temperate rain forest which makes starting fires very difficult and offers very little in the way of forage.  Steep mountains cutting right down to the sea makes hiking laborious at best and treacherous at worst.  For good measure, throw in snow over your head in the winter months, mountain lions that you will never see first, black bears protecting their cubs, and, if you go far enough north, brown bears that stand taller than you and can take your head off with a single good swipe of their massive paw.  You have passed the edge of civilization, people are few and far between and towns are almost nonexistent.  You have to be capable, competent, and determined to survive there.  You have to want to live, because in the wrong situation, dying is very easy.

Almost a century ago it was into this region that the governments of British Columbia, Canada, and the United States determined a road needed to be built.  In the late 1920’s proposals were advanced seeking to build a road connecting the Pacific Northwest states through the towns, resources plays, and timberlands of British Columbia and into the slowly developing territory of Alaska.  It was thought that an access corridor would link the population centers of the south with the land and resources of the north and speed development.  Unfortunately, “build it and they will come” apparently only works in baseball.  Theoretical development plans weren’t enough to secure the support and funding needed for the road.  In the late 1930’s, as war clouds began to darken the horizon, renewed interest in the road and its possibilities again pushed to the forefront of intergovernmental planning.  Again, nothing was to come of these discussions.  Storm clouds and theoretical invasions also were not enough to overcome the reluctance to build a road through one of the world’s toughest wildernesses. 

Then came the “Day of Infamy” on December 7, 1941, and in the hysteria that followed every city between San Diego and Juneau were convinced that an enemy fleet would momentarily be in their harbor shelling their homes and citizens.  San Diego, Los Angeles, San Francisco, and Seattle were well connected to the rest of the United States and could be readily provisioned, reinforced, and protected.  Alaska could not.  No roads or railways connected the Alaskan territory to the rest of the nation.  Everything needed for survival and defense had to travel by sea.  That made the entire territory exceedingly vulnerable.  Less than two months later, on February 6, 1942, the United States Army sought approval to construct the roadway itself, and this was granted by Congress and President Roosevelt five days later.  Construction began on the road on March 9, 1942, with one group working their way north from Washington State and another group working their way south from Alaska.  The roadway was completed and operational seven months later on October 28, 1942.

The road that could not be built over a two decade period, even as proposed budget allocations increased from an initial estimate in 1929 of $15 million to $38 million in 1937, even as the United States government offered the Canadian government an interest free loan of $15 million to cover the cost of materials and construction to spur engagement, even as senior members of both governments saw the value in such a roadway, was in fact authorized, planned, designed, carved out of 2,700 kilometers of the bogs, swamps, forests, and mountainsides of British Columbia, and built in just over seven months.  As soon as necessity and potential dire jeopardy entered the picture all the previous logical and financial impediments quickly evaporated.  The Japanese did attack, seize, and temporarily hold the small Aleutian Islands of Attu and Kiska, but the mainland of North America remained untouched by invasion for the duration of the war.  The road became possible as soon as it became necessary. 

This same imperative, that necessity and jeopardy are required elements before anything of scale or note can be accomplished is just as applicable in today’s energy industry as it was in early 1940’s geopolitics.  Very few nations have a defined, strategic energy policy.  Usually, it is only those countries who are fortunate enough to possess significant deposits of oil or natural gas such that they offer not only a means in which to generate power but also the creation of vast wealth for their society. Some countries choose to use this resource as a way to make a relatively few at the top of society incredibly wealthy while other societies, such as Norway, use this natural wealth to benefit their society as a whole.  Most countries allow market forces to determine how and by what means the power necessary to move industry, government, and society is created.  This approach can be muddled and confused in its implementation and can cause significant inefficiency and waste at the societal level.

The United States most certainly falls in the latter category. We hold to the notion that we are a free market economy in which the unfettered pursuit of a profitable goal will eventually and inevitably lead to the most efficient return on investment. And while there can be no doubt that this system has allowed the United States to provide for its energy needs it cannot be said that it does so in the most effective or efficient way possible.  Endemic to this approach is a significant degree of competition and associated waste. And while there are certainly benefits on many levels to competition, at least as to the individual sectors and corporations meeting the most success, society as a whole often suffers as a result of the lost opportunities and possibilities afforded by those industries and actors not rising to the forefront. Even as to the eventual winners in a competitive landscape quite often a portion of the price for their success is that what they accomplished often pales in comparison to what they could have accomplished in a more collaborative and well thought out programmatic approach.

The Oil & Gas Sector is the predominant source of fuel and power for both transportation and power generation in the United States. It has enjoyed relative stability as to contract and spot price over the last three years and the vast majority of America is able to move and function because of the power generated by the oil and natural gas extracted from this country. Lost in that story of success are the individual plays and basins that could not compete at various price points and so suffered negative returns on investment and would eventually and inevitably be curtailed or shut down at the loss of jobs and opportunity. On a macro scale, and looking at the industry as a whole, periods of price instability (repeated, significant price fluctuations in either direction) can result in both a hesitancy to invest over concerns of coming demand destruction and an inability to continue to produce and support supply at the necessary levels. It is difficult at a corporate level and almost impossible at a national level to adapt quickly in such situations or to predict investment and expected returns more than a few years out. Add to this the global nature of the oil and natural gas markets and the reality that foreign actors and events can have a significant effect on domestic prices (and therefore domestic production as well).  These realities make it difficult to properly utilize this abundant national resource to its maximum extent.

Nuclear power, as always, presents a wonderful tale of what might be possible assuming the various functions of regulatory and market forces could each be made to operate in an optimal fashion.  Nuclear generating stations produce a tremendous amount of power and can outcompete almost any competitor in terms of return on investment when looking at the amount of national resources and land required to site, construct, and operate such a facility. There was a time, many decades ago, when it was thought that nuclear generating plants would provide the majority of electric power needed by the United States of America. Over time, however, security, logistical, and regulatory hurdles have prevented the construction of entirely new nuclear generating stations at any point in the last four decades. Only new units have been brought online within existing generating plants with no entirely new plant having been brought online during that period. Recently, Dan Sumner, the CEO of Westinghouse has stated their intention to design and build ten (10) new nuclear facilities within the United States. Their hope is to start construction on the first of these new plants as early as 2030.  While this would seem to be a step in the right direction one must be cognizant of the reality that it is inherently difficult to design, construct, and operate a relatively few complex systems, each of which must be designed and built on an individual basis with very little follow over to subsequent similar endeavors. For all its good and profitable intentions, it would be very difficult for Westinghouse, or any company for that matter, to make good on its stated intentions when the lessons learned designing and constructing the first site would not be entirely or even mostly transferable to subsequent sites.  This reality makes it far more likely that the vast majority of these locations will never see a life beyond the whiteboard.

Coal, as always, is the cheapest and most efficient way to produce power in this nation. The United States has ample reserves of coal and a rail network that can easily bring it from the point of mining to the point of usage. Unfortunately, the environmental effects of this fuel type are such that most nations in the world are trying to limit its use to the greatest extent possible. Regardless, and for the foreseeable future, it will still serve a place in the nation’s energy portfolio as a necessary supplier of demand at a price point palatable to governments, utilities, and consumers.

Renewable energy, here primarily concerned with electricity produced by solar and wind sources, along with the battery support infrastructure that necessarily goes along with them, has started to produce a significant percentage of the electricity utilized on a daily basis in the United States. While only a boutique notion a few decades ago, this industry now provides nearly a quarter of the nation’s electricity.  In some states that percentage is much higher. In Texas, the admitted heart of the nation’s oil and gas industry, approximately forty-two percent (42%) of the state’s electricity needs are provided by wind and solar generating plants. This is no longer a theoretical endeavor but a maturing industry now responsible for providing a significant portion of this nation’s electricity needs. This industry has been on a growth trajectory for several decades now and while the recent reversal of many of the policies and programs put in place by the previous administration’s ironically titled Inflation Reduction Act will no doubt cause short term headwinds and negatively affect (to some extent) the long term growth projections of this industry, there can be little doubt that it will persist and grow in share in the coming decades.  Further, a decent argument can be made that the overly generous financial support provided by the IRA caused just as much harm as it did good. There is indeed such a thing as too much of a good thing in business as well as in life. This influx of money caused a gold rush of sorts into which well-meaning but unsophisticated actors, profiteers, and misaligned investment strategies all created such confusion and overcrowding that it was next to impossible to accomplish anything meaningful in nature.  Add to this the natural reaction of communities, individuals, and activist groups, which for various reasons sought to defend themselves against the at times overwhelming advances of this incredibly well funded endeavor and you have a recipe for disaster.

Beyond these, there are a handful of sources that could someday provide a significant share of the nation’s energy needs but are currently hampered either by the limits of nascent technologies or geographical impediments.  Geothermal works exceptionally well in certain parts of the world that have a long-standing history of reliance on that technology and while there are certainly areas of the United States that could benefit from this source, we’re a long way away from having the infrastructure and competency to readily employ it. Hydro is another source of electricity generation that can and does provide a tremendous quantity of electricity but only works in areas of the country that are geologically suitable and only after a significant expenditure of infrastructure spending.  Suffice it to say that at least for the time being the United States sources of energy will predominantly be oil & natural gas, nuclear, coal, and renewables.

So how do we proceed in a reality where each of these sources of power are both necessary to the national and common good as well as restricted in development by financial, competitive, regulatory, and in some cases political pressures? How do we pick a “winner” from these diverse sources of energy and power? How do we as a nation, as community leaders, and as members of an industry tasked with acquiring the land used to develop these resources decide which option to support? In fact, this is where it gets tough. This is why it now gets hard.

First, we as a nation accept that we are in the enviable position of having options to choose from. Many nations in this world are not so fortunate. We recognize that this is a good situation to be in and rather than working towards some zero-sum solution whereby there is one winner and several losers, we instead find a way to maximize the benefit to our communities and to our nation (and our corporations and their investors) from having access to these several sources of power. We change our mindset from being one of picking winners and losers to one instead seeking to benefit from their combined strength.

Second, we do not separate the consideration and development of energy sources along political or ideological lines.  The Left needs to understand that oil & gas does more than efficiently and reliably power our planes, trains, and automobiles, but they provide the very basis for modern society.  Remove everything made from or derived from oil & gas and most of the material goods that we surround ourselves with (at least those we can afford) disappear.  And the Right, for its part, needs to understand that we need every electron of power that we can get our hands on if we are going to drag this nation into a future in which those who control the computing power required to manage the most information wins.  It is possible (and preferable) that the next great conflict will be settled by who has the most bytes and not the most bullets.  We should avoid the arrogance of assuming that because we currently occupy the predominant place in the economic and technological pecking order that we are destined to inevitably remain there.

Finally, we find a way to rise above ourselves and work together.  We have to recognize that all resources are in fact limited in nature. There is only a certain amount of investment capital, human talent, and land available on which to site and operate the projects necessary to supply the ever-increasing energy demanded by this nation. Cutthroat competition and a zero-sum attitude might win out in the short term, likely only for a relatively small minority, but it will only cost the nation security and progress in the long run.

The next several blog posts will focus on an individual energy sector and explore the limitations, requirements, and possibilities of each.  As this is a blog focused primarily on land acquisition it will be through that lens that these various questions will be considered and studied.