Iran deal tricky for the Texas energy industry

A quiet subtext to the deal with Iran is the role of the Texas oil industry as enabler and potential victim.

The Texas oil industry has for decades played a big role in the nation’s geopolitical strength. With a surge in oil activity in Texas from the shale revolution, the U.S. is on a remarkable trajectory of increasing oil production and decreasing imports.

While extraction of oil and gas from shale formations is not restricted to Texas, our state is where the technologies were first demonstrated and achieved maturity for adoption elsewhere.

Our technical know-how, can-do spirit, and significant shale resources were a fruitful combination that helped the production boom take off. And that oil revolution is just what got Iran to the negotiating table.

Decreasing imports of crude oil gave the U.S. the flexibility it needed to press for an agreement without worrying what would happen to global oil supplies and prices.

It feels like the geopolitical balance of oil power has shifted: The Middle East now needs us as an economic partner more than we need them for their oil. That lets us negotiate with confidence.

But what will happen to the oil markets? We haven’t imported oil from Iran in many years, so does the Iranian deal mean Mideast imports — and in particular imports from Iran — will rise? If so, what’s a Texas oilman to do?

Rather than supply cutoffs and price spikes, which is what often comes to mind with Iran, we might have the opposite: supply abundance and lower prices. It is expected that Iran will pump 1 million or more barrels a day. Oil prices are already lower in anticipation of Iranian oil flooding the world markets.

That means the era of low oil prices, already nine months old, might last much longer. That smells like bad news for the Texas oil industry, which has already seen a dramatic drop in drilling, squeezed profit margins and thousands of layoffs.

Texas shale producers are also in competition directly with Saudi Arabia, which has some of the easiest-to-extract hydrocarbons in the world. Saudi Arabia openly admits it is more interested in protecting market share than propping up oil prices.

That means they are going to keep the oil spigots on. Adding Iran, which has some of the world’s largest reserves of conventional petroleum that is similarly easy to pull out of the ground, makes the cage match that much tougher.

There aren’t many cheap hydrocarbons around anymore. Iran could be a game-changer.

But no need to worry — yet.

Even with a signed agreement, it will take many years to get the investment, infrastructure, personnel and systems in place to ramp up Iranian production in a meaningful way. That gives the Texas oil industry time to figure out how to make money in a low-price environment.

So far, oil industry ingenuity has increased the barrels of output per well by integrating more advanced technologies and focusing on productive sweet spots within the shale formations. That approach has prevented companies from going belly-up and needs to continue.

In addition, government policymakers should invest in water treatment technology development and infrastructure to help industry reduce the costs of water management while avoiding wastewater injection linked to earthquakes and protecting water supplies.

If we do it the right way, we’ll have wells that are cleaner, cheaper and safer. And, surprisingly, the prospects of continued low oil prices have a silver lining.

First, consumers love low prices. Second, the oil industry has coveted a large policy prize for years: permission to export our light, sweet crude to the global markets.

The question will inevitably be raised, “If Iran can export oil, why can’t Texas?” It might just be that the Iranian agreement, while inflicting short-term pain because of low oil prices, paves the way for the long-term gain of oil exports. Not a bad salve that can be used to heal some deep wounds.

Michael Webber is deputy director of the Energy Institute at the University of Texas at Austin.

This story was originally published July 24, 2015 at 6:39 PM with the headline "Iran deal tricky for the Texas energy industry."