The sputtering energy economy: Can it be revved up?

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Rogelio V. Solis, AP

Contractors work on an oil drilling rig in Amite County in 2013.

Not that long ago, energy was forecast as a cornerstone of Mississippi’s economy.

In his first state-of-the-state speech, newly elected Gov. Phil Bryant called the state “a leader in the energy economy.”

“From nuclear plants to gas pipelines, our energy economy will drive Mississippi’s economic growth into the 21st century,” he said in January 2012.

Gov. Bryant continued: “To enhance and grow our energy economy, we should look no further than our own Gulf of Mexico. We are proceeding on a thoughtful, steady course for off-shore energy recovery in a limited area primarily southeast of Mississippi’s Barrier Islands. This recovery effort could produce 350 billion cubic feet of natural gas to help fuel America and Mississippi’s economy.”

Five years later, those plans have lost considerable steam. After a boom in natural gas drilling, oil and gas prices plummeted, grinding fossil fuel production in Mississippi and nationwide to considerably lower rates. Even though the energy sector represents a relatively small portion of the state’s overall economy, in these anemic fiscal times, this reduction in revenue has had far-reaching effects.

Lt. Gov. Tate Reeves

“I think the downturn in drilling and exploration has had more of an impact on our overall economy than some of us, particularly (the Revenue Estimating Group, the five top financial officials in the state who make budget recommendations to the Legislature), anticipated,” Lt. Gov. Tate Reeves Reeves told Mississippi Today in June.

There is some good news, though. Lisa Ivshin, executive director of the Mississippi Oil and Gas Board, in January said oil and gas prices could start improving by 2018.

State Economist Darrin Webb also foresees a slow uptick in oil prices. According to a recent economic briefing he gave the Joint Legislative Budget Committee, oil is not expected to reach $100 per barrel until 2024-2025, but the state’s rig count has surged 76 percent since May, suggesting a sharp rebound in energy sector investment.

As the governor and other state officials confront capital challenges during the 2017 legislative session, central questions arise: How did predictions of a robust energy economy go wrong, and are things finally looking up for the state’s energy plans?

Crunching the numbers

Before Mississippi’s energy economy went awry, the sector was valuable to the state’s overall well-being.

Oil and gas severance taxes, which produce revenues based on the value of oil, natural gas and other raw materials produced, normally make up a little more than one percent of general fund revenue the Mississippi Department of Revenue collects year after year. (A portion of oil and gas revenues also goes to Mississippi counties.)

In fiscal year 2016, oil and gas revenues from this tax totaled $26.5 million.

Energy production has additional benefits, such as revenue collected from employment-related taxes, income taxes, consumption taxes and sales taxes. (This excludes the wages of energy sector workers who live in Mississippi but work at plants and refineries in Louisiana, Texas and Oklahoma.)

In 2015, the energy sector accounted for $6.7 billion of the state’s $105.8 billion gross domestic product, according to a study by the National Strategic Planning and Analysis Research Center, a research unit of Mississippi State University.

The energy sector in 2015 also provided a total of 59,734 jobs in Mississippi, the study states.

However, in the past several years state officials have had difficulty forecasting exactly how much money oil and gas revenues would bring in, often guessing too high.

If officials estimate too high and oil and gas revenues don’t match those estimates, this could negatively impact services paid for with the state’s general fund.

Back in fiscal year 2011, oil revenues were doing well — coming in about 35 percent higher than expected at $67.4 million, even though gas revenues came up about 11 percent short at $13.3 million compared to the state’s $15 million estimate.

In fiscal year 2016, oil and gas revenues both produced significantly lower revenues than expected, resulting in a $45.3 million difference between estimated revenue and actual revenue. According to the Mississippi Department of Revenue, oil revenues were $23 million, more than 64 percent lower than the estimate. Gas revenues in fiscal year 2016 were $3.5 million, more than 50 percent lower than estimated.

Mississippi Energy Institute

Patrick Sullivan, president, Mississippi Energy Institute

Patrick Sullivan, president of the Mississippi Energy Institute, a nonprofit policy group focused on energy-related economic development in Mississippi, said the Legislature had to make mid-year budget cuts in fiscal year 2016 partly due to lagging estimates for the oil and gas severance taxes.

“They had accounted for a decline, but apparently they didn’t estimate one that was big enough,” Sullivan said.

For the first six months of fiscal year 2017, oil and gas revenues again are below estimated amounts.

Part of a national trend

The state’s energy economy reflects a broader trend taking place from the shale plays of Pennsylvania to the oil fields of Texas.

Advances in oil and natural gas production technologies such as horizontal drilling and hydraulic fracturing led to the so-called shale revolution that has significantly increased production of oil and natural gas in the United States.

According to a report by the Robert S. Strauss Center for International Security and Law, a research center at the University of Texas at Austin, this correlated with a rise in employment, with the oil and gas industry adding 169,000 jobs between 2010 and 2012.

In 2013, Gov. Bryant approved legislation that reduced the state’s tax rate for oil and natural gas companies that use horizontal drilling as part of his Energy Works: Mississippi’s Energy Roadmap plan aimed at strengthening the state’s pro-business environment.

While this method of drilling boosted jobs across the country, it was also steeped in controversy surrounding health and safety risks.

Hydraulic fracturing, or fracking, uses huge amounts of water that must be transported to fracking sites. Environmentalists say potentially carcinogenic chemicals used in the process may escape and contaminate groundwater around the fracking site. The industry suggests pollution incidents are the results of bad practice, rather than an inherently risky technique. The Environmental Protection Agency released a report in December that suggests that hydraulic fracturing does have the potential to affect drinking water resources in the U.S.

Then, in 2014, crude oil prices fell sharply from around $112 per barrel to about $62 per barrel as global production exceeded demand , according to the U.S. Energy Information Administration.

The downturn in the price of oil, and consequently oil production, hurt states that depend heavily on oil and gas revenues, such as Wyoming, Oklahoma, Louisiana and Texas.

Although Mississippi isn’t a major player in oil and gas, the budget felt the pinch of the price drop, nonetheless.

“Mississippi is seeing a decline of revenues in this area, and it hurt when we saw they had to cut budgets last year,” Sullivan said. “But in comparison, it’s not as bad as states that are larger producing states far more dependent on those revenue sources.”

State economist Darrin Webb

Webb said the state always strives to be as accurate as possible with its estimates, but large swings in energy prices over the past few years have contributed to the volatility in tax collections.

“We have been very conservative in our sales tax estimate and yet revenues have been below our estimate,” Webb said.  “I believe the layoffs and pay cuts in the oil industry have limited sales tax collections.”

But Webb said he sees oil prices are gradually rising.

“I think oil prices dropped below $30 per barrel sometime early last year, and they are now over $50,” Webb said. “The gains are coming from both reduced supply and increased demand.”

This is partly due to the Organization of Petroleum Exporting Countries, or OPEC, in November announcing that the cartel would reduce oil production.

Webb said oil prices will rise as the world economy strengthens, but likely with a gradual increase rather than a sharp spike. The state can expect to dole out more accurate forecasts for oil and gas severance as prices stabilize, Webb said.

Then, as oil prices see more improvement, Webb said, surely some energy projects being developed for Mississippi should kick into gear again.

Energy’s future frontiers

Though oil and natural gas prices are gradually ticking upward, some experts are looking to new and emerging technologies to shore up the sagging energy economy.

The Kemper County Energy Facility is currently scheduled for completion by Feb. 28. Mississippi Power officials have said the facility, once it is operating on nearby lignite, would protect its customers from price spikes in fuel sources such as coal or natural gas.

Plus, electricity will pump from the Grand Gulf Nuclear Station for at least two more decades, since the plant in December had its operating license renewed through Nov. 1, 2044.

The future of renewables in the state is good, some industry experts say.

Mississippi is getting closer to producing hydropower for the first time. Four dams on Arkabutla, Sardis, Enid and Grenada Lakes will be retrofitted in the next two to three years to produce enough power for more than 15,000 homes annually. Project construction is expected to kick off between 2017 and 2018, while the hydropower portion of the dams is expected to come on line between 2018 and 2019.

Then there’s the proposed electricity transmission line called the Southern Cross Transmission Project. If approved by Mississippi regulators, construction is expected to start in 2018, with plans of delivering power to the Deep South in 2021.

Louie Miller, state director of the Sierra Club’s Mississippi Chapter, said he expects to see more promotion of the Mississippi Public Service Commission’s net metering rule, a system that allows ratepayers to offset the cost of power by using solar panels, then selling any surplus power generated back to the power grid.

“This is groundbreaking-type stuff that we’ve been working on for a number of years,” Miller said.

PSC

Public Service Commissioner Brandon Presley

Chairman Brandon Presley said the Mississippi Public Service Commission is working on requiring annual resource-planning reports from utility companies that he hopes will kick off this year.

This annual requirement would encourage utilities to examine which resources would best fit their customers’ needs, rather than a piecemeal approach, Presley said.

“I’ve been arguing for this for years, so I hope by the spring of 2017 we can roll out true, annual resource planning by each electric company that has commission and staff input so that we can be doing appropriate planning to keep rates low and to take advantage of resources that are out there,” Presley said.