Houston: where energy is king
The Petroleum Club in downtown Houston is a remnant of a bygone age. Crudely carved relief panels depict the ammonites that come up when drilling oil and gas; a gold fringe borders the ceiling; and the smoking lounge displays framed newspaper clippings of decades-old industry advances. Like the decor, the nostalgia harks back to the 1960s – the golden age of oil in the United States – when Houston was the centre of the oil world.
By the 1970s, US crude output was in decline. Much of what is left in the ground today is uneconomic to access, and the world’s major oil companies have spent the decades since then seeking new supplies overseas. Now even economically accessible global assets are hard to find, leading to talk of peak oil and the need to find alternatives to fossil fuels. With billions of dollars in investments being poured into wind and solar energy as well as biofuels, many outsiders predict Houston’s central place in the world’s energy industry could be lost. But that could not be further from the truth.
“It’s a myth that we’re getting off fossil fuel,” says Amy Myers Jaffe, energy expert at the James A. Baker III Institute for Public Policy.
“Someday, renewables will reach critical mass. But we are not there yet.”
The proof is in the numbers: there are 3,468 energy-related firms in the Houston metropolitan area, of which only roughly 400 are involved in alternative energy. Wind or solar energy and biofuels depend on government subsidies and are a long way from reaching critical mass.
According to most credible estimates, the world will remain dependent on fossil fuels for decades to come. Given how new advances in technology in recent years have enabled companies to extract oil from 10,000 feet below the ocean floor and led to a US onshore natural-gas boom, the industry is optimistic more resources will be found.
“It’s the most exciting time I have had in the business in my entire career,” says T. Boone Pickens, the 81-year-old billionaire oilman, surrounded in his Dallas office by photographs of himself with US presidents, his luxury ranch in west Texas and his family amid the trappings of years of success in the oil patch. He is especially astounded at the increase in US onshore natural-gas supplies, from estimates of 30 years’ worth, at current usage rates, to more than 10 decades’ worth, with new technology enabling the industry to extract it from shale rock.
“It’s like divine intervention, for this to happen to the US,” he says. “We never believed anybody would figure out a way to get the gas out economically.”
Nonetheless, Pickens notes both oil and gas are finite resources, and predicts the “hydrocarbon era” will end near 2100. “You know you’re going to have to move to other energy sources. I’d love to be able to come back in 2100 and see what this will look like. This change is monumental.”
That is why the Greater Houston Partnership, a business advocacy organisation, established the Energy Collaborative in 2005 to build on its oil and gas core by attracting companies involved in alternative energy.
“Here’s what makes Houston unique. It is the intellectual capital that exists here across the entire range of energy producers, with the exception of, maybe, nuclear,” says John Hofmeister, former president of Shell Oil and chairman of the collaborative. “There is a natural interest in extending the reach beyond hydrocarbons. Houston intends to be the energy capital of the future.”
In the years since the collaborative was formed, Houston has established its green credentials, buying more alternative power than any other city in the US and building the country’s third-largest hybrid fleet. Texas produces more wind power than any other state. And the collaborative is working to make the city – already a centre of energy banking, law and trading – into a carbon-trading hub, facilitating financing of carbon offset programmes and helping put buyers and sellers together.
“There is a real opportunity for Houston here,” says Ben Cowan, a member of the collaborative’s carbon trading task force.
That Houston sees opportunity in the evolution of the energy sector is one of its strengths. Since the oil shocks of the 1980s, the city has sought diversification, with aggressive lobbying and flexible funding for relocating businesses. It has one of the lowest income tax burdens per family in the US – 30 per cent less than the national average, with no personal income tax and no state tax on property used for pollution control, on goods in transit or on machinery and equipment used in manufacturing.
This has helped Houston become home to the Texas Medical Centre, the world’s largest concentration of healthcare and research institutions, as well as Nasa’s Johnson Space Centre. It also has strong biotechnology, high-tech and aviation industries. Dell is based in Texas, as are Continental, American Airlines and Southwest. The city is number two in the US in the number of Fortune 500 headquarters based here.
Much of that credit goes to the energy companies, which spend large sums to make Houston attractive to the talent needed to drive their industry. The city has a $626m arts community, boasts a world-class symphony and ranks second only to New York in the number of live theatres.
As is the case for most, if not all, of Houston’s charities, museums and arts bodies, the oil and gas industry is represented on the board of the Tony Award-winning Alley Theatre. Roger Plank, president of Apache, an oil and gas producer, is the chairman.
“If we’re going to have our headquarters here, we want to support organisations that make Houston a better place to live,” Plank says. It is that attitude that has made talent intent on staying in Houston.
Mike Linn, executive chairman of Linn Energy, knows that first-hand. He decided in 2006 to move his Pennsylvania-based oil and gas company to Houston. “I couldn’t attract engineers and geologists to move to Pittsburgh. If you want to attract the most talented people to grow a company, Houston is the place to be,” he says.
His staff like running into others from the industry at soccer games, or while shopping or walking to meetings in Houston’s underground tunnel system. “It spurs conversations and deals,” he adds.
Linn, clearly at home in an expensive suit as he walks past paintings, sculptures and other treasures at the Museum of Fine Arts, felt welcome here. Despite being a newcomer, his involvement in the energy sector meant he was invited to serve on various boards that serve the local community, such as that of the museum – something, he said, that in places such as New York or Boston is reserved for sixth-generation residents.
“Energy is king here,” says Jeff Moseley, president and chief executive of the Greater Houston Partnership. Indeed, the Petroleum Club may look archaic, but it still has more than 1,400 members and its glass-panelled walls overlook one of the most economically vibrant US cities.
As California struggled last year with a deficit of roughly $30bn, Texas had $8bn in its “Rainy Day Fund”, fed by oil and gas production taxes, which can be used to fill gaps in the budget. Houston is the fourth most populous city in the US, and the greater Houston area remains a $404bn diversified regional economy, with the energy industry contributing 50 per cent of its economic base employment.
Deals may no longer be the purview of the Petroleum Club, but they are still being done – on private ranches and golf courses or at tables in the Coronado Club, which draws its membership from the banking, legal, brokerage, insurance, accounting and energy industries. It is named after Francisco Vásquez Coronado, a 16th-century Spanish explorer whose willingness to search for new opportunities fits the spirit of the energy entrepreneurs looking for the fuels of tomorrow.
Among them is Jimmy Glotfelty’s Clean Line Energy Partners, a company formed in April to build transmission lines from renewable resources to load centres. “There are many people you can lean on and get information from,” says Glotfelty, the company’s executive vice-president. “Houston has a tremendously strong base of technical know-how.”
Texas has more than a dozen top-notch universities, each of which features energy courses. The city is also attracting youth into the industry. Four public high-school learning centres focus on the petroleum industry.
In March, Houston hosted the world’s premier energy conference, IHS Cambridge Energy Research Associates’ 29th Ceraweek, despite tighter travel budgets across the sector. This year’s conference was, fittingly, titled “Building a New Future”.
One year the annual conference was held in Washington, DC, but it did not have the same pull. “Then we hightailed it back to Houston,” says Daniel Yergin, chairman of IHS Cera. “Energy is to Houston as show business is to Hollywood. You have a deeply entrenched and growing energy ecosystem around Houston.”
That may be true, but there is no denying the seismic shift rumbling through. As members filtered into the Petroleum Club on a recent Saturday night, they illustrated this point with their gray hair, slow gait, love of the foxtrot and a desire to linger at the table reminiscing over days of old in the oil patch.
“The Petroleum Club is about Big Oil,” says Robin West, chairman of PFC Energy, a consultancy. “Houston isn’t about Big Oil any more; it’s about Big Energy.”