The Shaleman Cometh:

How the U.S. Energy

Culture Is Changing the
World

By
OCCASIONAL PAPER 53

J. C. Whorton, Jr.
with
Amanda Wynn Bidgood
and
John C. Whorton

2017
International Research Center
for Energy and Economic
Development

Occasional Papers:
Number Fifty Three

THE SHALEMAN COMETH:

HOW THE U.S. ENERGY CULTURE IS
CHANGING THE WORLD

by

J. C. Whorton, Jr.

with

Amanda Wynn Bidgood and John C. Whorton

 ISBN 0-918714-79-6

Copyright © 2017 by the International Research Center for

Energy and Economic Development

No part of this publication may be reproduced or transmitted,

except for brief excerpts in reviews, without written permission
from the publisher.

Cost of publication: U.S. $10.00

INTERNATIONAL RESEARCH CENTER FOR ENERGY

AND ECONOMIC DEVELOPMENT (ICEED)
850 Willowbrook Road
Boulder, Colorado 80302 U.S.A.
Telephone: (303) 442-4014
Fax: (303) 442-5042
Email: iceed@colorado.edu
Website: http://www.iceed.org
 The Shaleman Cometh:
How the U.S. Energy Culture Is
Changing the World

J. C. Whorton, Jr.
with Amanda Wynn Bidgood and John C. Whorton

“The meek shall inherit the Earth, but not its mineral rights.”
J. Paul Getty

D o foreign oil producers really get it? OPEC and their co-
horts, such as Russia and others, assess the meteoric rise in
U.S. oil and gas production over the last decade and immediately
credit oil shale and technological advances such as horizontal
drilling and fracking. Superficially, these would appear to be the
most obvious and logical explanations of this rapid expansion
and success of domestic oil and natural gas output.
Actually, one of the most crucial weapons in the U.S. oil ex-
ploration arsenal has been around since Colonel Drake drilled
the first commercial oil well in Titusville, Pennsylvania, in
1859—it is the kitchen table. That’s where landowners meet with
landmen—the fleet of representatives that oil and gas companies
use to persuade landowners to sign seismic permits, drilling leas-
es, and surface usage agreements.
Ironically, the front line of the controversial expansion of oil
and natural gas drilling isn’t on the plains and pastures of North
Dakota, Colorado, Wyoming, New Mexico, Oklahoma, Texas, or
the many other oil- and gas-producing states that receive the bulk
of the media’s attention. The starting point is, and always has
been, around the kitchen table obtaining the required oil and gas
leases from the millions of U.S. mineral owners possessing those
coveted rights to drill.
When land agents sit down with mineral owners over an oil
and gas lease, there can be a large sum of money at stake. Oil
and gas lease bonuses and royalty checks have made rich men
out of poor farmers and ranchers, turned their traditional kitchen
tables into financial trading desks, and transformed their small
towns into new “energy centers.”
Thanks to the common law evolution of fee simple absolute
and surface/mineral split-estate ownership, billions, if not tril-
lions, of dollars of oil and natural gas wealth have been created
through landmen negotiations with individual mineral owners.
The negotiations began in homes lit by lamps fueled by whale oil
years before the advent of electric power generation, which later
would be fueled as a result of these negotiations.
So, how did all of this come about? Unique to the United
States, a split estate is an estate where the property rights to the
surface and the underground are split between two parties. In the
49 United States practicing British common law (the 50th, Loui-
siana, derived its law from the French Napoleonic Code), a split
estate is created when the original fee simple owner sells or oth-
erwise loses ownership of the subsurface, often called the miner-
al estate. Executor rights transfer in whole, unless otherwise
reserved, and administration of the estate carries the same rights,
liabilities, and privileges the surface estate does.1
This individual ownership of these minerals, rather than own-
ership by the Crown or a sovereign government, is where the
energy culture of the United States began to charter its own dis-
tinctive path in the historical development of the global energy
industry.

J.R. Ewing – The Ghost’s Shadow

“Formula for success: rise early, work hard, strike oil.”

J. Paul Getty

Regarding Mr. Getty’s formula for success, most individuals

who have been involved in the oil and gas business for any
length of time would probably agree that the first two are

2
achievable through motivation and dogged determination; the
latter necessitates an uncanny amount of luck and timing. What-
ever formula is employed, the energy world of today seems far
more complex and complicated than that of yesteryear.
Rip Van Winkle, who awakens from a sleep lasting 20 years,
was author Washington Irving’s vehicle (published in 1819) for
conveying the lightning pace of early U.S. change, a period in
which Americans became the first people to expect and to prize
change, and during which business and working for profit be-
came more praised and honored than in any other country in the
Western world. When Rip awoke, he immediately felt lost and
bewildered with the acute sense that his native land was no long-
er the same place that it had been just a generation earlier. One
wonders what would Colonel Drake, J. Paul Getty, and other
long-past notable energy pioneers think of the oil and gas indus-
try today.
One way to better grasp the significance of the change that
has occurred since Colonel Drake’s first well would be to walk
through some of the industry transformations since then.
Since the beginning of commercial oil operations at Colonel
Drake’s well along Oil Creek in Pennsylvania 158 years ago, it
becomes a challenge to accurately and realistically describe the
ensuing chain of events leading to today’s energy industry lega-
cy—a legacy that can be difficult to be fully understood and appre-
ciated by those outside of oil- and gas-producing regions and much
less so outside of the United States. Many of the stories and charac-
ters are simply too colorful and eventful to be construed as non-
fiction. In most cases, you almost had to have been there to fully
comprehend what really took place and how it transformed an in-
dustry and its beneficiaries into today’s U.S. energy environment.
Agriculture, manufacturing, mining, and almost all other
forms of commerce were brought to the United States by immi-
grants incorporating skills and practices, be they good or bad,
from their homelands. The oil and gas industry is one of the few
major global enterprises developed by trial and error in the Unit-
ed States and, for the most part, taken abroad.

3
 When Colonel Drake drilled the first oil well on behalf of
Seneca Oil Company, the process flow was relatively simple—
lease, logistics, and luck. Rigid regulatory oversight and public
scrutiny would come much later. Things the early oil men never
had to worry about: injection well-induced tremors and earth-
quakes, completion/well stimulation bans, urban encroachment,
advocacy and environmental groups, regulatory commissions,
and oil cartels and commodity globalization, to name just a few.
The private ownership of minerals has historically provided
U.S. producers with a competitive advantage over other nations
and their nationally owned oil companies. The opportunity to deal
with individual mineral owners allows domestic producers to op-
erate in a substantially more cost-effective and expeditious manner
in terms of lease contract negotiations, acquisitions, and develop-
ment. These crucial benefits allow smaller independent producers
the ability to enjoy quick access to small tracts of land and private
capital, gain first-mover advantage, and maintain viability in to-
day’s increasingly volatile markets. The negotiation lead time in
the United States remains relatively short compared with all other
countries. Crown or state-owned minerals require concessions and
Purchase Sharing Agreements that can take months to negotiate
and finalize—whereas in the United States it only takes negotiat-
ing and signing the lease. These factors fashioned an environment
of easy entry and continued growth. Needless to say, it also creat-
ed a culture of free-wheeling and dealing. The oil business has
always involved money and opportunity, and money changes eve-
rything. Landmen, as representatives of oil and gas companies, as
well as independent opportunistic individuals that accompany eve-
ry boom, swarm the counties, clogging county courthouses with
their property record searches, fill all the local hotels and restau-
rants to pursue farmers and ranchers with diligence akin to that of
bounty hunters. The positive implications for a local economy and
the ensuing challenges for its elected officials are tremendous, but
so are the challenges for the beneficiary landowners, many of
them modest farmers and ranchers who must first sort through the
challenging and lucrative offers of oil companies, and then, for

4
the more fortuitous, come to terms with the financial conse-
quences of sudden wealth.
In theory, an oil and gas lease is a very simple agreement be-
tween two parties; the Lessor, or mineral owner, and the Lessee,
the oil and gas entity. The agreement allows the Lessee access to
the property (surface estate) to explore, produce, and operate the
subsurface mineral estate (hydrocarbons) to produce oil and gas
from the property of the Lessor. Consideration for the agreement
is an up-front bonus payment to the Lessor and a percentage of
the future revenue stream in the form of a royalty, paid to the
Lessor free and clear of all drilling and operating costs. The Les-
see, who assumes all of the costs and risks of the venture, re-
ceives the remaining revenue stream. The agreement, unless it
violates the law of the realm, does not require approval from any
third party and can be negotiated as quickly as the parties agree
to the terms of the lease. The potential simplicity and rapidity of
this agreement allows anyone with the financial means to pay the
bonus and become a lease owner with the immediate rights to
initiate the steps necessary to drill and develop the leased prem-
ises. In the early years of U.S. oil and gas exploration, it was
pretty much just this simple to initiate the drilling process.
Six degrees of separation is the theory that anyone on the
planet can be connected to any other person on the planet
through a chain of acquaintances that has no more than five
intermediaries. For the oil and gas industry in most parts of the
United States, it is probably a one-off correlation that began with
the commercial success of the Drake well and has since grown
exponentially. Everyone knows a farmer or banker but ask
someone if they know someone associated with the oil and gas
industry and the story can become quite interesting. No doubt
that many of the stories stem from J.R. Ewing analogies. J.R., of
the well-known Dallas television series, quickly became an icon
for the oilman that people loved to hate because he portrayed the
perfect symbol of excesses flowing from wealth and power. J.R.,
the fictional television scoundrel, loved money and didn’t care
who he stepped on to get it. J.R., who lived the epitome of a

5
lavish life with beautiful women, fast cars, risky deals, and easy
money became one of the most identifiable characters of the
screen and the oil industry. Unfortunately, the industry and the
many independent oilmen that comprise it have become
associated with this characterization and have suffered from its
stigma. J.R. and Dallas have now passed on from primetime and
media attention but cable TV has resurrected the series to
achieve late night rerun immortality. While a few independent
producers have deserved J.R.’s greedy and flamboyant portrayal,
the majority has been unjustly maligned with this depiction and
should not be cast under his long shadow.

Independent’s Day: Time, Chance, and Circumstance

“A Fool with a Plan is better off than a Genius without a Plan”

T. Boone Pickens

Today’s independent oil producers are the antithesis of J.R.

They are less flamboyant, tend to have technical degrees in earth
science, engineering, or finance and, for the most part, are so-
phisticated risk managers as opposed to risk takers. The mid- to
large-size independents answer to sophisticated boards, private
equity managers, or public shareholders and face a great deal of
public scrutiny, investor accountability, and regulatory oversight.
For many, their business paradigm is working. Thanks in part to
new technologies such as horizontal drilling and fracking, the
United States has increased its oil production by 75 percent since
2008 and remains as one of the world’s largest oil producers.
Contrary to typical belief, most U.S. oil is produced by inde-
pendents, not by “Big Oil” majors.
Sun-Tzu, the Chinese general, military strategist, and philoso-
pher said that “In the midst of chaos, there is also opportunity.”
While there may very well be opportunity in chaos and confu-
sion, it is much easier to execute and operate in orderly and es-
tablished markets. All segments of the U.S. energy value

6
stream—upstream, midstream, and downstream—are some of
the most orderly, reliable, and established in the energy-
producing world. This establishment is emphasized by: infra-
structure (roads, bridges, railways, power grid, etc.), marketing
(price transparency accessible to all, liquid forward markets,
etc.), capital markets, banking (clearing), and judicial (competent
and professional jurisprudence system that allows for expedi-
tious and equitable dispute resolution).
Crude oil is a fungible commodity. Therefore, a barrel of oil
produced from anywhere in the world is capable of acceptable
substitution by a barrel of oil produced from the United States.
Today, due to the market globalization of the supply/demand
value chain, the pricing differentials are determined by refining
grades (gravity and sulfur content) and transportation between
points of origin and delivery locations. Thus, issues such as sup-
ply disruptions, shipping costs, weather, and geographical de-
mand can affect prices worldwide. These commoditization
factors have evolved to create a pricing, marketing, transporta-
tion, and processing value chain where the United States is sec-
ond to none. This value chain has greatly benefited operators,
large and small, by providing real-time price transparency, robust
liquid forward pricing, and hedging markets resulting in greater
access to capital markets.
Even with today’s established and liquid markets, the problem
that the oil industry has always faced is that there is always too
much or too little. Too little oil leads to rising prices and a frenzied
scramble to find new production leading to too much oil, falling
prices, layoffs, and idled equipment. This eventually begins the
next cycle of too little oil. During the last 150 years, oil and natu-
ral gas commodity price cycles have been the rule and not the ex-
ception, boom followed by bust. Globalization has compressed
these cycles and added to greater pricing volatility. Nonetheless,
2014–2016 will be remembered as one of the more disruptive
downturns of oil’s turbulent history and has severely tested every-
one’s resolve and crisis management skills. As in the past, the
shakeout was disheartening, leaving many casualties and survivors’

7
tales that will once again, hopefully, become legendary. The re-
covery from past bust cycles left the survivors benefiting from
rebounding commodity prices, fewer competitors, and facing
much more favorable energy economies. This time is far different
as the subsequent realities and ensuing energy landscape have
changed drastically. What will be noticeably distinct this particular
cyclical rebound will be the survivor’s dilemma and how compa-
ny’s strategies may evolve. Unique to all previous cycles, produc-
ers will now be faced with one of two very contrasting dilemmas.

The Disruption Dilemma: Technological advances have en-

abled improved efficiencies, slowed energy demand growth, and
continue to open-up new sources of energy. Supply will out-
weigh demand. This Saudi strategy assumes that oil’s heyday is
over and it is a global race to diversify out of oil. This theory is
to act aggressively now and produce while prices and demand
are favorable and use proceeds to strategically develop other sec-
tors of the future economy to avoid being left with a stranded
asset. New oil-sector developments simply will not have enough
time to play out, severely compromising capital expenditure out-
lay and stifling new projects. New and existing projects will un-
dergo intense scrutiny. Surviving energy producers will be
undertakers, producing the required amount to meet existing car-
bon energy demand. The exact timing of this scenario and how it
ultimately plays out will be the challenge.

The New Age Survivor Dilemma: Oil discoveries are at a

70-year low. In 2015, exploration and production (E&P) compa-
nies discovered only about a tenth as much oil as they have an-
nually on average since 1960. In 2016, they probably found even
less, provoking new concerns about pending supply shortfalls
and the inability to meet future demand.2
With oil prices down by more than half since the price col-
lapse two years ago, drillers have cut their exploration budgets to
the bone. The result: just 2.7 billion barrels of new supply was
discovered in 2015, the smallest amount since 1947.3

8
 That is a concern for the industry at a time when the U.S. En-
ergy Information Administration (EIA) estimates that global oil
demand will grow from 94.8 million barrels per day (b/d) this
year to 105.3 million barrels in 2026. While the U.S. shale boom
could potentially make up the difference, the opportunity for any
substantial growth will be largely undercut if prices remain at or
near $50 a barrel. Approximately 5 million barrels per day of
new oil is required annually to replace naturally declining pro-
duction, therefore the shelving of hundreds of billions of dollars
of investments since December 2014 points to a looming supply
shortfall within the next few years.
New discoveries from conventional drilling, meanwhile, are
“at rock bottom.” There will definitely be a strong impact on oil
and gas supply, and especially oil. Global inventories have been
buoyed by full-throttle output from Russia and OPEC, which
have flooded the world with oil despite depressed prices as they
defend market share. But years of under-investment will be felt
as soon as 2025. In 2016, producers replaced slightly more than
one in 20 of the barrels consumed.4
Global spending on exploration, from seismic studies to actual
drilling, has been cut to $40 billion in 2016 from about $100 bil-
lion in 2014. Moving ahead, spending is likely to remain at the
same level through 2018. Exploration is easier to scratch than
development investments because of shorter supplier-contract
commitments. In 2016, it made up about 13 percent of the indus-
try’s spending, down from as much as 18 percent historically.
The result is less drilling, even as the market downturn has driv-
en down the cost of operations. There were 209 wells drilled
through August 2016, down from 680 in 2015 and 1,167 in 2014.
That compares with an annual average of 1,500 in data going
back to 1960.5
In December 2014, U.S. shale producers needed oil prices to
be at $69 a barrel on average in order to break even on a newly
drilled well, according to Rystad Energy, a consulting firm. What
has happened since then has been a wonder to most everyone.
Even as oil prices fell to less than $30 a barrel by January 2016

9
and have since rebounded to the mid $50s—shale-oil companies
have kept on pumping. Their average break-even price has fallen
by more than 40 percent, to about $40 a barrel. In some parts of
the country, where the economics of fracking are particularly
favorable, that figure is much lower and in some basins it is as
low as $29 a barrel.
Fracking, as it has turned out, is a remarkably nimble indus-
try—which perhaps, in retrospect, should not have been such a
surprise. In the early years of the fracking boom, a Harvard Ph.D.
student, Thomas Covert, studied records related to wells fracked
in the Bakken shale formation.6 He found that wells that were
newly tapped in 2005 captured on average only 21 percent of the
profits they could have produced if they had been fracked in the
most optimal way—that is, with the best mix of water and sand.
By 2012, though, newly fracked wells were capturing 60 percent
of maximal profits.
When oil prices fell, frackers responded by continuing to in-
novate. Oil companies invested in technology to become more
efficient and productive at fracking. Their techniques varied: us-
ing different combinations of water, proppant, and chemicals;
applying the cocktail with greater pressure; drilling several wells
simultaneously in a single area; and using drones and sensors,
instead of humans, to detect when equipment needed to be fixed
or replaced. Operators reduced the average time it took to drill a
new well from about 25 days to as low as 15 days.
One major advantage for shale producers has to do with the
time and money it takes to drill a new well for fracking relative
to starting an offshore project. Before the fracking boom, the
United States—while extracting plenty of oil through conven-
tional drilling on land—depended largely on offshore projects for
alternative sources of oil. But fracking wells can be developed
much more quickly and cheaply than drilling offshore. As soon
as prices rise to a favorable level, producers can drill a well and
bring it online within a matter of weeks
The producers that have survived have proved startlingly adept
through implementing innovative practices. They focused on the

10
best fields, rather than the marginal ones, and capitalized on re-
duced rates that were essentially forced upon outside contractors
(drillers, service companies, etc.) in the competitive market.
Also in play are 5,000 drilled but uncompleted wells (DUCs),
an amount that is two and a half times the average in leaner years.
These DUCs can potentially be brought online within weeks, as
opposed to the typical six months’ completion timeframe for
such wells. Still, completion rates are likely to be constrained by
the availability of workers, as the industry has lost a quarter of a
million jobs, leading many to move away from the oil patch for
gainful employment in other industries. Companies cut head-
count too quickly and too deeply and must now bear the burden
of labor scarcity, which will hamper their ability to take ad-
vantage of the impending bonanza. Under such conditions, the
EIA is still predicting that about 0.4 million b/d will be added to
U.S. production in 2017.
Thanks to all of these factors, it has become clear that the
shale-oil business is going to survive, at least for now. As such,
presumably major implications for the global oil market will re-
sult. Saudi Arabia and the other OPEC member countries have
long worked together to cap supply so prices don’t tumble. How-
ever, with sustained competition from shale companies, it may
be unlikely for OPEC to keep prices as high as it once could.
The consequences of cheap oil are widespread. Transportation,
manufacturing, and other industry sectors will benefit but the
budgets of most oil companies and oil-exporting countries are
strained to the limits. The geopolitical ramifications have already
been significant. In Venezuela, low oil prices along with other fac-
tors have led to critical food shortages. In Nigeria, they are among
the causes of an ongoing recession. Saudi Arabia, as well as other
Gulf states, has struggled to balance its budget and cut back on a
number of public services, such as subsidies for water and electric-
ity. In April 2016 the Saudi government released an unprecedented
plan to dramatically reduce the country’s economic dependence on
oil by encouraging other industries, such as mining, technology,
and tourism.

11
 After pulling off the biggest oil-market deal in a decade,
OPEC faces a new balancing act in 2017: boosting prices with-
out igniting shale. The first shale boom spurred a global supply
glut that started prices sliding in mid-2014 and was further am-
plified that November by a pump-at-will OPEC strategy aimed at
market dominance. During the ensuing rout, prices in New York
fell from more than $100 a barrel to $26.05 in February 2016,
straining the budgets of companies and countries alike.
At 8.8 million b/d, the United States is already pumping al-
most as much crude as two years ago, with just a third of the rigs
it operated at the peak, according to data from Baker Hughes Inc.
and the EIA (figure 1). Since May 2016, drillers have added
about 200 rigs, taking advantage of rising prices as talk of an
OPEC supply cut circulated.

Figure 1
U.S. PRODUCTIVITY PUSH: PUMPING MAINTAINED AS RIG COUNT
SLUMPED, 2007–2016
Millions of Barrels per Day U.S. Rig Count (R1)
12 2500

10 2000
8
1500
6
1000
4

2 500

0 0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

U.S. Oil Production U.S. Rig Count

Source: U.S. Energy Information Administration and Baker Hughes Inc.

12
 With OPEC’s oil revenues slumping to $518 billion in 2016
from $956 billion in 2014, the group may have had little choice
on the cutbacks. Even Saudi Arabia, the group’s biggest producer,
has found itself burning through billions in cash reserves, slash-
ing public-sector wages, and tapping bond markets to plug a
budget deficit.
Even $58 oil would not eliminate budget deficits for eight
OPEC members assessed recently by the International Monetary
Fund (IMF). To erase their shortfalls, crude would need to aver-
age at least $62 in 2017, according to the IMF. Challenges re-
main. For one thing, compliance with the output agreement as
the group’s members tends to cheat. Nor for that matter have
agreements with non-OPEC members worked as, in the past,
Russia has not honored its commitments to limit output either.
OPEC once again is faced with an all too familiar dilemma: sac-
rifice market share to protect prices or defend market share and
allow prices to find their own level in global markets.
After three years of turmoil, there are already signs of a re-
birth in U.S. shale fields as prices have risen and stabilized at
around $50 a barrel and U.S. drillers that survived the rout have
become leaner and more efficient. If prices jump by another $10
a barrel, shale output that is now at 4.5 million barrels a day
could quickly rise by as much as 500,000 barrels. A bigger boost
in prices could mean a million-barrel shale surge from the United
States and that would all but obliterate the cuts OPEC and other
non-OPEC members, including Russia, agreed to in November
2016.7 While OPEC and the other supporting nations appear to
be honoring their production cuts, U.S. shale oil drilling permits
and rig counts continue to rise weekly. As a result of the econom-
ic concept of fungibility, one less OPEC barrel plus one more
U.S. barrel equates to a net zero change in supply. These offset-
ting moves in effect have created a collar for prices with OPEC
and its supporters creating a floor while increasing shale oil pro-
duction has created a ceiling or cap. Imagine the spectrum of
results should these two divergent competitors ever choose to
more closely align goals.

13
 Aside from the current pricing band impasse, the United
States still possesses a major trump card in that it now holds the
world’s largest recoverable oil reserve base—more than Saudi
Arabia or Russia—thanks to the development of unconventional
resource plays.
Ranking nations by the most likely estimate for existing fields,
discoveries, and as-of-yet undiscovered fields (proved, probable,
possible, and undiscovered), the United States is at the top of the
list with 264 billion barrels of recoverable oil reserves, followed
by Russia with 256 billion, Saudi Arabia with 212 billion, Cana-
da with 167 billion, Iran with 143 billion, and Brazil with 120
billion.8
Importantly, unconventional plays account for more than 50
percent of remaining U.S. oil reserves, with Texas alone holding
more than 60 billion barrels of recoverable oil in shale plays.
The reserves data distinguish between those reserves in exist-
ing fields and new projects versus potential reserves in recent
discoveries versus fields that remain undiscovered. All estimates
include crude oil plus condensate.
Total global oil reserves are estimated at 2,092 billion barrels,
or 70 times the current production rate of about 30 billion barrels
of oil a year. For comparison, cumulatively produced oil through
2015 amounted to 1,300 billion barrels.9
Unconventional oil recovery accounts for 30 percent of the
global recoverable oil reserves, while offshore fields account for
33 percent of the total. The seven major oil companies hold less
than 10 percent of the total recoverable reserve base.10
U.S. field production of crude oil increased in 2015 for the
seventh consecutive year, reaching 9.42 million b/d. This was the
highest crude oil output level since 1972, based on final produc-
tion numbers in EIA’s Petroleum Supply Annual.11 In 2015, pro-
duction gains were highest in Texas, the Gulf of Mexico, and
North Dakota, as these three regions accounted for 77 percent of
the U.S. total increase. Although annual production for 2015
grew, monthly U.S. crude oil production has declined since April
2015. Lower oil prices led to slower development activity, and

14
production fell to 8.74 million b/d in August 2016, the latest
month for which survey data are available.
States or areas with the highest volumes of production also
saw the largest gains in 2015. According to EIA data, Texas is by
far the largest crude oil-producing state, providing 3.46 million
b/d in 2015, the highest level since at least 1981, when EIA’s
state-level production series began.12 Production in Texas grew
by 289,000 b/d in 2015, the largest increase of any state. The
Federal offshore region of the Gulf of Mexico was second in
both absolute level and in 2015 increase, growing by 118,000 b/d
to reach 1.52 million b/d, the highest production in that area
since 2010. Production in North Dakota was third in both abso-
lute level and in 2015 increase, growing by 96,000 b/d to reach
1.18 million b/d, the highest on record for the state.13
It becomes very easy to appreciate the significance of the
kitchen table when one considers that the bulk of the recoverable
oil and gas reserve base in the United States is owned by approx-
imately 12,000,000 private property mineral owners that repre-
sent an estimated 70 percent of the total fee mineral estate in the
lower 48 states.14 Also of note, there are roughly 30,000 landmen
in the United States eagerly awaiting work orders from oil com-
panies to acquire oil and gas leases for these mineral rights. The
current U.S. administration has indicated strong support for the
domestic oil and gas industry and a policy to bolster energy in-
dependence—a very clear message to foreign oil producers that
the Shaleman Cometh.
The Ringling Bros. and Barnum & Bailey Circus, an Ameri-
can icon that was proudly known as the “Greatest Show on
Earth,” recently announced that it is closing after 146 years in
business, nostalgically going the way of buggy whips, cable tool
rigs, and political civility. That loss now leaves U.S. politics and
the independent oil and gas producers to vigorously compete for
the new “Greatest Show on Earth” title. Given the Trump Ad-
ministration’s pro-energy stance and the ongoing shale oil com-
petition with OPEC, a new and exciting circus show undoubtedly
will be coming to a kitchen table near you.

15
It’s the Economy, Stupid (and, Energy Runs It!)

“It takes two to make an accident.”

F. Scott Fitzgerald, The Great Gatsby

The future of the fossil-fuel world will not be history by

2030 as some believe—it just will be very different. Today
there are still 1.2 billion people in the world without electricity
and more than 2.7 billion people who still burn solid fuels,
such as wood, crop residue, and dung to cook their food. That
is nearly 40 percent of the world’s population who are without
basic access to energy that we take for granted. In fact, our
entire lifestyle would not be possible without the abundant
availability of energy that has defined the past 100 years. If
any possibility exists to provide the 40 percent of the global
population that are without this basic necessity, a growing
supply to meet or exceed the demand for oil and gas will al-
ways be required. At the United Nations Millennium Summit
in 2000, the world’s countries met with the goal of halving the
1990 incidence of extreme poverty by 2015. This was met five
years ahead of the deadline. And, even though the world’s
population grew by more than two billion people between
1990 and 2015, the number of people who live in extreme
poverty was reduced by more than 1.25 billion people. 15
Achievements such as this can only be accomplished with con-
tinuous access to energy and the accoutrements that it provides.
Average electricity use per household will rise about 30 per-
cent between 2015 and 2040.
So, contrary to what many are willing to accept, one could
assert this country was built on oil. The United States was the
first country to fully convert to petroleum which has driven its
industrial progress. Commercial energy provides the founda-
tion for modern society. Oil possesses the critical natural at-
tributes as a fluid that is widely available, affordable, easy to
transport and store, and relatively clean burning. A barrel of oil
contains about the same amount of energy as a human would

16
expend in calories in 11 years of manual labor. Crude oil con-
tains more than twice as much energy as coal and two-and-a-
half times more than wood but it has also contributed to air pol-
lution and climate change. Would a world without oil be better
or worse? One thing is certain—it would be vastly different.
How would alternative fuel sources be built without fossil fuels
used for components, transportation, or labor. To get where we
are today would have taken countless decades or even centuries.
Energy is probably one of the most under-appreciated aspects
of modern existence even though virtually all of our daily rou-
tines and personal comforts are connected to huge, complex
systems of industrial conversion and distribution. In developed
countries, energy is regarded as an entitlement. In lesser devel-
oped countries, it is considered a luxury. A disruption of power
anywhere for an extended period of time is met with mutinous
public outcry.
The Age of Energy created a golden age of innovation and
growth. It would be difficult to overstate how the advent of
electric light was revolutionary. In the 1870s, a kerosene lamp
could produce 5,050 candle hours worth of light a year at a cost
of $20. That same $20 in 1920 bought 4.4 million candle hours
a year from bulbs. For food consumption in the United States,
the calories in each piece of food, on average, have been ob-
tained by using 10 times as many calories from fossil fuels not
including distribution, which is conveyed on average 1,500
miles from farm to dinner table courtesy again of hydrocarbon-
sourced energy. Regarding transportation, cars, trains, and air-
planes all contributed to the death of distance and brought the
world much closer, and now miles travelled in cars are meas-
ured in trillions of miles.16 With the global middle class more
than doubling to about 5 billion, the number of cars, sport-
utility vehicles, and pickups is expected to increase by about 80
percent to 1.8 billion vehicles by 2040.17
When the first oil well was drilled in the United States, peo-
ple lit their houses with candles and whale oil and heated them
with wood or coal-burning stoves that kept homes unevenly

17
heated and smelling of smoke. While this seems like folklore
from fabricated tales, the community of North Pole, Alaska,
located just southeast of Fairbanks, is currently engrossed over
a heated (no pun intended) debate over the wood stove smoke
pollution at dangerous small-particle levels according to the
U.S. Environmental Protection Agency (EPA). Local officials
state that residents are trapped by economics. Natural gas, a
much cleaner fuel source, is not widely available in this part of
Alaska and fuel oil can be very expensive. Hydrocarbons also
produce particulate pollution, although much less than wood.
Because this part of Alaska is one of the coldest in the state,
residents there already spend, on average, four times the na-
tional average in annual heating costs.18
Energy is the economy. Energy resources are the reserve ac-
count behind currency. The economy can grow as long as there
is surplus affordable energy in that account. The economy stops
growing when the cost of energy production becomes unafford-
able.
There is a clear correlation between oil price and U.S. gross
domestic product (GDP) when both are normalized in real cur-
rent dollar values (see figure 2). Periods of low or falling oil
prices correspond to periods of increasing GDP and periods of
high or rising prices coincide with periods of flat GDP.
Energy underlies and connects everything. We need energy
to make things, transport and sell products, and to transport
ourselves so that we can work, consume, and be productive. We
need energy to run our computers, our homes, and our busi-
nesses. It takes energy to heat, cool, cook, and communicate. In
fact, it is impossible to think of anything in our lives that does
not rely on energy.
When energy costs are lower, the costs of doing business are
correspondingly lower. When energy prices are higher, it is dif-
ficult to make a profit because the underlying costs of manufac-
turing and distribution are higher. This is particularly true in a
global economy that requires substantial transport of raw mate-
rials, goods, and services.

18
 Figure 2
U.S. GDP AND WTI OIL PRICE, 1960–2014a

19
a
CPI-Adjusted GPD = consumer price index-adjusted gross domestic product; CPI-Adjusted WTI = consumer
price index-adjusted West Texas Intermediate annual average oil price.
Source: U.S. Bureau of Labor Statistics and EIA, World Bank, and Labyrinth Consulting Services, Inc.
 This is precisely the problem with the almost universally held
belief that technology will make all things possible, including
making a finite resource like oil infinite. Technology has a cost.
The reality is that technology allows us to extract tight oil from
non-reservoir rock at almost three times the cost of high-quality
reservoirs in the past. The truth is that we have no high-quality
reservoirs left with sufficient reserves to move the needle on the
high global appetite for oil. The consequence is that to keep con-
suming and producing as we always have will inevitably cost a
lot more money.
In 2015, renewables accounted for only 3 percent of U.S. pri-
mary energy consumption. No matter the cost or determination
to convert from fossil to renewable energy, a transition of this
magnitude is unlikely, if at all, to be accomplished in less than
decades.
Solar photovoltaic and wind provide much lower net energy
than fossil fuels and have limited application for transport—the
primary use of energy—without lengthy and costly equipment
replacement. The daunting investment cost becomes critically
problematic in a deteriorating economy. Although proponents of
renewable energy point to falling costs, more than half of all so-
lar panels used in the United States are from China where cheap
manufacturing is financed by unsustainable debt.
The London School of Economics and Political Science (LSE)
has published a paper showing that the proliferation of hydraulic
fracturing (fracking) has made U.S. manufacturers more compet-
itive.19 The study focused on the indirect effects of unconven-
tional shale development and low natural gas prices on industrial
activity in the United States.
The costs and barriers associated with exporting natural gas
compared to other commodities contributed to a commodity
price gap between the United States and Europe that began to
develop in the early 2000s as U.S. production increased, the
study found. By 2012, the end of the study’s review period, this
price gap had grown to around $10/million cubic feet and that
average manufacturing exports expanded by roughly 10 percent

20
due to the shale gas boom. The results suggest that the cost ad-
vantage due to the shale gas boom may have helped the U.S.
economy recover significantly faster after the financial crisis of
2007–2008 and that energy-intensive industries saw the greatest
benefit from the price advantages of cheaper U.S. gas.
The shale revolution also provided an indirect boost to U.S.
manufacturing employment overall, the study discovered. The
economists found that “for every two jobs created in direct rela-
tion to fracking, this indirect effect adds more than one addition-
al job elsewhere in the economy.”20
Energy has done remarkable things for the betterment of man-
kind. Technology and innovation will only continue to do more.

America Needs More Energy, Not Less

“Things fall apart; the centre cannot hold.”

W.B. Yeats, The Second Coming

Ever since the invention of the internal combustion engine, oil

has been one of the most crucial and strategic commodities on
earth. Without it, modern transportation as we know it would not
be possible. Industries such as aviation, aerospace, automobiles,
shipping, and the military would look nothing like they do today.
Figure 3 highlights the influence that oil has on countries and
markets by using a very simple perspective: the size of the crude
oil market vs. all metal markets combined. In 2015, the oil mar-
ket was bigger than all major metal and mineral markets com-
bined ($660 billion) with annual oil production at 34 billion
barrels, including liquids, totaling $1.7 trillion dollars a year.21
Of course, this has all come with some extreme drawbacks
from an environmental perspective. While new technology will
aid in eventually reducing the role of oil in transportation, the
fact remains that we still use 94 million b/d of crude worldwide.
As a result, the energy industry continues to have huge
amounts of influence on our lives. Special interest groups with a

21
 Figure 3
OIL MARKET DOMINANCE: THE SIZE OF THE OIL MARKET IS
LARGER THAN ALL RAW METALS’ MARKETS COMBINED, 2015
(Market value in billions of dollars)

Aluminum
($90)
Copper
($91)

Iron
($115)

Gold
($170)

Oil ($1,720)

Oil ($1,720) Gold ($170)

Iron ($115) Copper ($91)
Aluminum ($90) Zinc ($34)
Manganese ($30) Lead ($22)
Nickel ($21) Silver ($20)
Graphite ($15) Titanium ($14)
Platium ($8) Tin ($7)
Palladium ($6) Rare earth metals ($5)
Molybdenum ($5) Uranium ($4)
Lithium ($3)

Source: Visualcapitalist.com, Infomine, EIA, World Gold Council, Johnson

Matthey, Cameco, and Benchmark Minerals.

22
focus on energy have influence on a domestic level. Meanwhile,
from a foreign policy angle, countries like Saudi Arabia and
Russia wield additional geopolitical and economic power be-
cause of their natural resources. It is arguable that conflicts, in-
cluding the Gulf War and the more recent Middle East
interventions in Libya, Syria, and Iraq, have been at least partial-
ly related to oil.
While the amount of uses in one barrel of oil is quite incredi-
ble, we still need a mind-boggling amount of the natural resource
each year to sustain consumption.
The United States is years and many obstacles away from be-
ing able to get 100 percent of its energy demand from solar. To-
day, U.S. energy consumption represents 22 percent of the global
energy demand. The country has the highest energy use per capi-
ta in the world but a relatively low population density. In order to
generate the solar energy to supply the U.S. population’s annual
appetite, more than 35 percent of all U.S. urban areas would
need to be covered by solar panels assuming today’s current pan-
el efficiencies. That would amount to a tremendous amount of
the nation being covered by solar panels.
Unfortunately, many of the energy-deprived countries in the
world will not be able to catch-up or surpass the U.S. solar capa-
bilities. What solar has going for it in the United States is the low
population density at 85 people per square mile. As such, there is
much more space in existing urban areas to generate energy from
solar panels. Other nations by contrast, such as India, have more
than 10 times the people per square mile. That is more than 10
times the people in urban areas, which means 10 times less area
per energy-hungry person available for solar panels. Even at 100
percent capture efficiency, India would not have enough urban
area to provide for the energy needs of their nation to achieve the
same standard of living as the United States. Population density
considerations weigh significantly when considering the viability
of solar panel efficiency for most of the developing world if their
population density is too high for solar to be the sole provider.

23
 One thing that the oil industry skeptics may have accurate is
that the industry’s market share of global energy supply will likely
decrease. It almost has to. Why? Because the world’s bottom 40
percent want to catch up with higher standards of living and to do
this, they will need energy and lots of it. In fact, this will probably
necessitate far more than the energy industry can supply. If other
forms of energy cannot fill this gap, then large-scale conflict may
be unavoidable as nations compete for the energy necessary to
drive their economies and standards of living. History has seen
this scenario too many times in the past and no one wants it re-
peated. A total market share reduction will be more than offset by
tremendous growth in total global energy demand. What is very
difficult to predict is how much demand, its timing, and what op-
tions will be available to meet that demand.
During the 2016 U.S. election, both presidential candidates
promised to bring manufacturing back to the United States. Be-
cause many of the lost jobs are due to automation and technolog-
ical improvements—which have enabled more production from
fewer workers—there is skepticism on both sides of the aisle as
to whether these lost jobs can actually come back. However,
most Americans probably do not want to see more jobs disappear.
It is estimated that balancing the trade deficit will increase U.S.
manufacturing by about four million jobs at current levels of
productivity.
According to MarketWatch.com, the percentage of people who
work in manufacturing is at a record low of 8.5 percent—which
compares to “20% in 1980, 30% in 1960 and a record 39% during
World War Two.”22
While there are many factors driving offshoring, lower wages
give countries like China and Mexico a competitive advantage.
Energy costs, however, give the United States an advantage as
manufacturers need a lot of energy to make their processes work.
Electricity frequently represents one of the top operating costs for
energy-intensive industries such as plastics, metals, chemicals, and
pharmaceuticals and, according to a recent study comparing costs

24
in the United States and China, electricity is about 50 percent
higher in China.
Since manufacturing is energy intensive, bringing industry back
to the United States and/or attracting businesses to relocate here
will increase U.S. energy consumption as industry needs energy.
President Obama decried the level of U.S. energy use, stating
that “the U.S. uses far more electricity than its North American
neighbors combined,” but the United States also does more with
its energy. Comparing the GDP and energy consumption numbers
for the United States and Canada, for example, both use a similar
volume of energy but the United States has substantially higher
GDP. A study of global energy consumption versus GDP found
that: “energy is so intrinsically linked to GDP that energy policy
more or less dictates how our economy performs” (see figure 4).23
Mike Haseler, the study’s author, explains: “rising GDP is an
indication of a prosperous economy.”24 Yet, propelled by concerns
of climate change, through government policy many countries are
trying to discourage energy use by forcing costs up. Haseler states,

They are cutting energy use as the economy of Europe collapses because
European industry can no longer compete with countries where energy
prices are not artificially raised by senseless ‘green’ policies.25

The energy advantage is not just an issue between countries; it

is a factor in where companies determine their location within the
United States. High electricity bills are a strong deterrent to creat-
ing new jobs associated with a new or expanded product line.
Harry Moser, founder and president of the Reshoring Initiative,
which aims to bring more manufacturing back to the United States,
suggests that

Manufacturing has the highest multiplier effect among the major sectors.
Every job created in manufacturing creates additional jobs in other sectors
that supply, support and service manufacturers.26

If the United States can bring back manufacturing jobs—or at

least stem the flow—the country needs to be encouraging low-cost

25
energy and making it more available. The United States would be
losing one of the best competitive advantages if its energy costs
continue to rise and make doing business simply uneconomical. If
U.S. goals are to balance the trade deficit, boost GDP, and have a
prosperous economy, abundant, available, and affordable energy is
the key.

Figure 4
WORLD GROSS DOMESTIC PRODUCT (GDP) VERSUS ENERGY USE
IN EXAJOULES (MILLION MILLION MILLION JOULES), 1800–2000
Exajoules

Summary – Money Never Sleeps!

“The true paradises are the paradises that we have lost.”

Marcel Proust

Every industry has a life expectancy, whether it is defined or

not, and change is simply inevitable. The United States has gone

26
from an agrarian economy to a manufacturing economy to a ser-
vices-based economy, each time leaving behind a segment of the
workforce. Houston, Texas, was once the “Oil Capital of the
World” but it had almost turned into a ghost town in the 1980s
due to the downturn in the industry created by the collapse in oil
prices. Numerous downturns in the oil and gas industry have re-
sulted in thousands of jobs lost and surviving companies have
been forced to navigate ways to operate more efficiently during
and in preparation for future shocks or busts. Anger, denial, and
disbelief are common defenses for economic tsunamis, but the
reality is, every industry has a useful purpose before it becomes
extinct or transforms into another existence. People want to be-
lieve that all things keep getting better and that they won’t have
to change their behavior—even if these beliefs defy common
sense and the laws of nature. Along with technological evolution,
intellectual renewal is also an essential precondition for an in-
dustry’s economic revival.
The history of the oil and gas industry has seen the best of
times and the worst of times. It is far from perfect and it is not
without blame or various degrees of environmental accountability.
And yes, it is a non-renewable commodity with a finite supply
remaining. Such is its reality. Nonetheless, we owe our very mod-
ern existence to the freedom conferred upon us by this industry.
Millions of jobs support national wealth, often by the largest
recurring capital investment programs. No other industry spends
as much on large-scale, mega projects (be they capital expendi-
tures or operational expenditures) year in, year out. Governments
everywhere trip over themselves to attract foreign investments in
infrastructure programs for the very same reason: to create high-
paying jobs and inject their economies with jolts of cash infu-
sions. Few other industries can compete with the energy sector in
terms of annual capital spending and job creation. Perhaps, the
sector deserves adoration in this respect, not vilification.
Through boom-and-bust cycles, one factor remains constant:
society needs energy and the money to generate it never sleeps.

27
 Unfortunately, the halcyon days of exploration are probably
behind for the hydrocarbon world. The rise of renewable forces
is underway and will not be stopped nor should they be. Inci-
dentally, the energy sector is already playing a seminal part in
the growth of green energies, through a generational paradigm
shift in energy considerations. The sector sits on the cusp of a
rare opportunity to transform itself while it propitiates the green
transformation. This is an opportunity that requires leadership,
vision, and patience, one for which the sector is uniquely quali-
fied to take on. It’s a role that might just be what the doctor or-
dered to change the public discourse toward a recognition of the
inestimable gift that the energy sector has been to humanity. 27
However, notwithstanding all of the advances being made
through technological transformation, none would have ever
have become a determining factor had it not been for the split-
estate private ownership of minerals resulting in the petroleum
industry being built around the ubiquitous kitchen table.
In the long term, the gathering storm of climate change will
forever cast an ominous shadow on the industry. Consequently,
the world is beginning to take the threat of climate change seri-
ously. Increasingly, oil companies are sitting up to take notice of
this changing energy landscape, as the risk of continuing with
business-as-usual is the increasing likelihood that they end up
with stranded assets. The industry’s dual challenge will be to
meet growing energy demand while managing the risk of climate
change and/or managing those that exclusively blame the oil and
gas out of its existence.
One of the most significant long-term challenges to oil and
other fossil fuels is the action of capital markets. In a report
recently released, BlackRock, the world’s largest private asset
manager with $4.9 trillion in assets, said that it would begin to
price the risks of climate change in its investment portfolio.
However, the crux of the matter is that capital markets are
beginning to take significant steps that would negatively impact
the bottom-line of the oil industry in the long run. Still, the oil
industry has a trump card to play: the fact that about half of oil

28
consumption goes to uses other than energy. Therefore, until man
is able to reliably harness biological sources as a substitute for
petrochemicals and chemical feedstocks, oil will still be required,
albeit at greatly reduced quantities.
Today the oil industry is facing a delicate balance between a
supply shortfall borne out of deferred investments and declining
demand fueled, to a large degree, by accelerated electric vehicle
penetration. The supply shortfall will eventually win out, leading
to one last boom for the industry that will be followed by a slow
and inescapable decline. Carbon capture technologies hold the
promise of continued consumption of fossil fuels while also lim-
iting carbon emissions. Yet, this is increasingly looking to be of
secondary importance as, apart from its petrochemical uses, oil
will need to compete directly with other sources of energy. One
area that is ripe for investment is energy storage to more effi-
ciently equalize supply and demand in the electricity markets.
On grids that are taking on more solar and wind capacity, energy
storage will be required to provide energy at night and when the
wind is not blowing. The world as we know it is mostly built on
the trapped sunshine that is oil. The oil industry was the most
consequential of the 20th century and, therefore, should and
must step up to the challenges of this century.28
In the oil and gas sector, companies are always looking for
years of experience before they trust somebody to work on a pro-
ject. Maybe what are needed are fresh ideas. While tolerating an
outward image of reckless wildcatting, the industry has always
been traditionally conservative. The adoption time for new ideas
and change can be very long. Conversely, in the tech industry
things tend to happen quickly and disruption is prevalent. One of
the oil and gas industry’s greatest icons, J. Paul Getty, recognized
the value of innovative thinking over a hundred years ago when
he stated, “In times of rapid change, experience could be your
worst enemy.”
Oil and gas, at its heart, has always been a technical industry.
The continued feats of science and engineering that combine
regularly in the field, or at sea, are remarkable. Geologists,

29
engineers, geophysicists, chemists, and others each have a part in
this incredible technological symphony—and approximately
every decade the industry breaks through and finds some new
way to harvest a resource often thought out of reach financially
or scientifically. The once unthinkable or unobtainable has now
become the new normal. Therefore, it is no surprise that these
same technical people have and continue to dominate the
management of most companies, both large and small, as these
sub-surface experts focus on the components that generate the
current revenue and future growth. However, today the sub-
surface is only half of the picture. Wherever the industry
operates, and especially near urban areas, all human conduct and
the resulting environmental landscape comes into focus, and
with it comes any and all risks. In some cases, these risks
become focal targets in the form of local moratoria and statewide
ballot initiatives resulting in environmental and public
convenience concerns, such as noise, dust, and traffic, versus
unintended consequences, such as jobs, income, tax revenue, and
GDP. 29 In times of commodity surplus, these risks are greatly
magnified by public outcry. In times of commodity shortage,
public necessity and national security mute public scrutiny. The
global energy environment is a very complex sociopolitical,
economic system. In the long term markets are driven by
fundamentals, but in the short term, they are driven by fear, ego,
and greed. People rationalize events to their satisfaction and repeat
them until they acquire the characteristics of truth, even if the facts
do not necessarily back them up. Buy the rumor, sell the fact.
Continuing to make certain that the social license to operate
extends beyond pending election cycles will require a cultural
shift and commitment to advocacy, building trust, and develop-
ing relationships with stakeholders, elected officials, and regula-
tors alike. Nonetheless, the mounting problems of surface
political risks versus sub-surface economic risks will only con-
tinue to evolve and magnify. Better does not mean perfect. As
Winston Churchill so eloquently stated, “However beautiful the
strategy, you should occasionally look at the results.”

30
NOTES

* J. C. Whorton serves as Managing Director of StratCom

Advisors, LLC. His experience and leadership positions with six
Fortune 500 companies have provided him the opportunity to
work with many of the world’s leading energy firms at the ex-
ecutive and board level. He currently serves as a director on sev-
eral corporate boards. The author has extensive upstream E&P
operational experience and was a member of the National Energy
Consulting Practices at PA Consulting, PricewaterhouseCoopers,
Andersen, and Caminus (now SunGard) where he was recog-
nized as an international Subject Matter Expert on strategy and
risk management. He is a registered Commodity Trading Advisor
with the National Futures Association and has held all major
trading and principal licenses with the Securities and Exchange
Commission and Commodities Futures Trading Commission. Mr.
Whorton managed institutional energy trading desks at Pruden-
tial Securities and Morgan Stanley Dean Witter. He has provided
strategic insight and market commentary for such business and
financial news and wire services as Dow Jones, Wall Street Jour-
nal, New York Times, Bloomberg, and McGraw-Hill. He coau-
thored Power Play –Who’s in Control of the Energy Revolution?
(PennWell, 1998) and has contributed over 40 articles and papers
for publication in addition to being a frequent speaker on energy
and financial topics. The author holds a M.A. in public admin-
istration from Oklahoma City University and a B.A. in political
science from the University of Oklahoma.
Amanda Wynn Bidgood holds a B.S. from the University of
Colorado and a certification from the University of Houston in
Professional Land Management. After beginning her career in
retail banking and lending, she received the opportunity to apply
her financial and analytical skills toward a career in commercial
and residential real estate management. For the next 10 years she
managed the accounting processes for a tenant base of over 150
office, flex, and industrial businesses, and oversaw expense and
payroll functions for staff. She administered GAAP and

31
Sarbanes-Oxley regulations in her Portfolio Accounting Manager
and Assistant Controller roles. Her accounting foundation served
as a strong platform that allowed exposure, participation and
later (primarily financial) management of asset valuations and
acquisitions for leading firms in the Southern California Region.
Upon returning to Colorado in 2010, she transitioned her
financial and managerial skills to the oil and gas sector. This
proved a smooth transition given the fundamental similarities in
land management and acquisition processes both in real estate
and in oil and gas. She utilized her foundational accounting
background and acquisition and analysis techniques to specialize
in merger, acquisition, and divestiture due diligence. She has
represented and managed engagements for numerous operators
primarily located in the Rocky Mountain region. Her exposure
and experience have proven her abilities in complex title
examination and extensive due diligence evaluations. This,
combined with her management and organizational skills, has
allowed her the opportunity to represent and lead various teams
(performing title research, lease acquisition, or due diligence
evaluations) in a project manager capacity while performing as
client liaison.
John C. Whorton serves as the Managing Director of Stratcom
Advisors, LLC, an energy consulting firm specializing in A&D
Due Diligence advisory services. Since assuming a leadership
role in 2011, he has transformed the firm’s business model from
a traditional land/lease brokerage firm into an industry leader in
energy due diligence practices. Mr. Whorton is widely
recognized for his extensive experience in managing due
diligence engagements for merger, acquisition, and divestiture
projects totaling several billion dollars. He also has deep
experience in originating and managing large oil and gas
exploration and exploitation projects throughout the
Midcontinent and Rocky Mountain regions. His experience and
expertise in complex title examination and due diligence led him
to develop TractMaster™ Energy Management System, a
methodology designed to more efficiently manage the workflow

32
from the field to the land department. Mr. Whorton holds a B.S.
from Oklahoma State University and a Certificate of Petroleum
Land Management from the University of Houston.

Acknowledgments
We are extremely grateful for the time, comments, and vision
that Chance Snook extended in assisting us to identify the myri-
ad of issues, challenges, and possibilities presented in this paper.
Chance is an Energy Investment Advisor and an esteemed former
StratCom Advisors Partner.

1
Excerpt from Katherine Toan, “Split Estates” from the Intermountain Oil
and Gas BMP (Best Management Practices) Project Website, available at
www.oilandgasbmps.org/docs/GEN324_split%20estates.pdf, explaining split
estates in the United States. Katherine Toan, Esq., practices law at Colorado
Environmental Law, Ltd., Boulder, Colorado.

The oldest, most simply understood, and complete form of real proper-
ty (land) ownership is the “fee simple absolute,” giving a landowner ex-
clusive possession and enjoyment of the land, among other rights. It is
the maximum quantum of land ownership that can be possessed by an
individual. The property rights extend “from the center of the earth to
the heavens” (although more recent doctrines impose limits, such as to
limit ownership of the sky). This principle is probably Roman in origin
(“Cuius est solum, eius est usque ad coelom et ad inferos” or he who
owns the soil also owns from the heavens down to hell), but it was first
stated in English common law by Edward Coke in Bury v. Pope (1587).
If fee simple absolute is the entire bundle, there are an almost infinite
number of ways the bundle may be divided—with different “sticks” be-
longing to different persons or entities. One way the sticks can be divided
is by severing the ownership of the mineral rights, or “mineral estate,”
from the “surface estate”—the aboveground portion of the land. This is
known as a “split estate.” This doctrine is ancient and possibly dates back
at least as far as Roman times. Since then it has been common for govern-
ments to claim ownership of all valuable minerals or all sub-surface rights
and the U.S. is somewhat of an anomaly in allowing private ownership of
mineral rights.

33
 The mineral estate is “dominant” over the surface estate. The conse-
quence of the dominance of the mineral estate is that surface owners must
allow “reasonable use” of as much use the surface property as necessary to
access the minerals. Many states have subsequently developed common
law or statutes requiring mineral owners to “accommodate” surface own-
ers and their uses.
A split estate can be formed when an original sovereign makes a land
grant, but reserves the mineral estate. This occurred in the United States
under several land grant or homesteading acts, when the federal govern-
ment sold or gave away vast quantities of land to encourage western mi-
gration. In particular, the Stock Raising Homestead Act of 1916 devised
over 70 million acres in the west, reserving the minerals for the federal
government. A split estate may also be created when a landowner sells her
mineral rights, or sells the surface estate while retaining the minerals.
There are many forms of split estate, where the surface/mineral split may
be private/federal, private/state, private/private (different owners),
state/federal, state/private, federal/state, or federal/federal (where different
federal agencies control).
Private Lands and the Split Estate: The history of western land grants,
settlement, and other factors has led to the current patchwork of land and
mineral ownership. The split estate has ramifications for private landown-
ers whose rights to exclude others does not include the right to exclude
owners (or their lessees) of the mineral estate. The dominance of the min-
eral estate means that landowners must allow “reasonable” use of the sur-
face property to allow the mineral owners to access their property interests.
For landowners not in a split estate situation, the question of selling or
leasing mineral rights is one that should be discussed with a competent at-
torney.
For landowners who are in a split estate situation, in some cases it may
be possible to purchase those mineral rights from the current owner. In the
case of the federal government, there is a process to reunite the estates un-
der the Federal Land Management Policy Act, § 209, but only in some sit-
uations, including where there is no currently known mineral interest, there
is a more beneficial use (such as residential use) than mineral development,
and the landowner pays the fair market value for the estate. Unless facing
imminent mineral development many private surface owners have not
bothered to worry about federal mineral ownership. However, because
technology is advancing all the time, land that might be considered value-
less for mineral development might later become valuable and ineligible
for repurchase of the mineral estate. Finally, there can be no adverse pos-
session of the mineral estate by merely occupying the surface estate. How-
ever, the language used by the courts suggests that it may be possible to

34
 adversely possess the mineral estate by an actual intrusion on the mineral
interest such as physical removal of minerals.

2
Mikael Holter, “Oil Discoveries are at a 70-Year Low Signaling Supply
Shortfall Ahead,” Bloomberg, August 30, 2016.

3
Ibid., according to Wood Mackenzie Ltd.

4
Ibid., according to Nils-Henrik Bjurstroem, Senior Project Manager,
Rystad Energy.

5
Ibid., according to Andrew Latham, Vice President Global Exploration,
Wood Mackenzie Ltd.

6
Thomas R. Covert, “Experiential and Social Learning in Firms: The Case
of Hydraulic Fracturing in the Bakken Shale,” February 22, 2015, available at
home.uchicago.edu/~tcovert/webfiles/fracking.pdf.

7
Vauhini Vara, “How Frackers Beat OPEC,” The Atlantic, Janu-
ary/February 2017.

8
Per Magnus Nysveen, “United States Now Holds More Oil Reserves than
Saudi Arabia,” Rystad Energy Report, July 4, 2016.

9
Ibid.

10
Ibid.

11
U.S. Energy Information Administration, Petroleum Supply Annual 2015
(Washington, D.C.: EIA, 2016).
12
Ibid.

13
Ibid. Data from the Petroleum Supply Annual can be downloaded at the
EIA’s website: https://www.eia.gov/petroleum/supply/annual/volume2/.

14
Testimony of Jackie Root, National Association of Royalty Owners, U.S.
House of Representatives Committee on Agriculture, April 13, 2016 (selected
excerpts), available at agriculture.house.gov/ uploadedfiles/root_testimony.pdf.

15
Johan Norberg, “And the Poor Shall Rise,” Spiked Review, December
2016.

35
 16
Jan Lundberg, “Understanding Energy and Dropping the Ego,” Culture
Change, November 24, 2012.

17
ExxonMobil, ExxonMobil World Energy Outlook to 2040 (Irving, Texas:
ExxonMobil, 2016).

18
Kirk Johnson, “Alaskans’ Cost of Staying Warm: A Thick Coat of Dirty
Air,” New York Times, December 25, 2016.

19
Rabah Arezki, Thiemo Fetzer, and Frank Pisch, “On the Comparative
Advantage of US Manufacturing: Evidence from Shale Gas Revolution, Centre
for Economic Performance,” Discussion Paper No. 1454, London School of
Economics and Political Science, London, 2016.

20
Rabah Arezki, Thiemo Fetzer, and Frank Pisch, “Fracking Has Made US
Manufacturing More Competitive,” LSE Business Review, December 2016.

21
Tyler Durden, “‘Big Oil’ - The Crude Market Is Larger Than All Metals
Markets Combined,” Zero Hedge, October 17, 2016, available at
http://www.zerohedge.com/news/2016-10-16/big-oil-crude-market-larger-all-
metals-markets-combined.

22
Jeffry Bartash, “Why Trump and Clinton Vows to Bring Back Manufac-
turing Jobs are a Pipe Dream,” MarketWatch.com, July 20, 2016.

23
Commentary by Marita Noon, “America Needs to Use More Energy, Not
Less,” Monoblogue, November 8, 2016

24
Ibid.

25
Ibid.

26
Ibid.

27
Steven Keays, “All Hail the Energy Sector,” OILPRO, January 14, 2017.

28
Chet Biliyok, “The Future of Oil – The View from December 2016,”
OILPRO, December 21, 2016, available at http://oilpro.com/post/ 29257/future-
oil-view-december-2016.

29
A 2016 Colorado ballot initiative to increase setback requirements (2,500
feet from any occupied structures or “areas of special concern,” which would

36
have included permanent and temporary waterways, public parks, and other
public spaces for oil and gas activity could have cost the state 54,000 jobs and
reduced its GDP by $7.1 billion over the first five years, according to a study
from the University of Colorado’s Business Research Division. Over a 15-year
period through 2031, the proposed 2,500-foot setback requirement would have
cost the state as many as 104,000 jobs and reduced GDP by $14.5 billion, ac-
cording to the study. Personal income would have declined by $10.9 billion
from 2017 to 2031, while real disposable income would have declined by $8.3
billion, the study found. It was estimated that it would have eliminated 90 per-
cent of Colorado’s land from future oil and gas development.

37