Last One Out Turn Off The Lights
‘Some folks are born silver spoon in hand… but when the taxman come to the door… the house lookin' like a rummage sale.’ - Creedence Clearwater Revival Fortunate Son
Over the past 2 decades the Permian Basin has been riddled with cycles of boom and bust that have left a bad taste in the mouth of many in the region. While the majority of the United States has been in a perpetual bull market led by the infusion of cash through nearly free interest rates by the federal reserve and up and to the right mentality for all stocks, even during a pandemic, this hasn’t been the case for a region whose economy lives and dies based on the price of oil and natural gas. Yet taking a step back and looking at the full picture these cycles haven’t affected the overall population and need of the area but have put a damper on the quality of the workforce available when the ramp to produce comes roaring back. The Strauss–Howe generational theory describes a theorized recurring generation cycle in American history and Western history. According to the theory, historical events are associated with recurring generational personas (archetypes). Each generational persona unleashes a new era called a turning, lasting around 20–25 years, in which a new social, political, and economic climate (mood) exists.
The ‘mood’ of the Permian from the perspective of someone that lives and breathes Odessa/Midland TX culture is that of disparity and fear. You can find plenty of examples of this fear by local officials and politicians who constantly watch the price of oil in fear that their city will not have the tax revenue needed to promote the city for a prosperous future. For the Hogan Park project in Midland Texas , donors raised $28 million in private funding but the project was ultimately struck down with city councilman Corrales stating “When you talk about 65 years times two million 130 million dollars if a dollar today is a dollar tomorrow which everyone knows that it’s not plus the consumer price index increases that kind of expenditure my kids and my grandkids will still be paying for that,”. It seems odd for a city official to believe that the cost of ongoing expenses for a recreational park that benefits the whole community should be tied to the burden of inflation. In 2022 Odessa brought forth a school bond election for $398,255,000 which included a new comprehensive high school in one proposition and a new career and technical building(CTE) and maintenance/life-cycle program in the other proposition. The new high school proposal carried a lot of controversy and probably rightfully so, but the separate proposition for much needed maintenance and CTE would have been a direct benefit to the local economy and the huge growth of the population of Ector county. Since the last major school bond that passed in 2012 Ector County ISD(ECISD) has added 3,818 more students, a 12.87% increase. To put that into perspective the famous Permian Highschool from the book and movie/tv show adaptation Friday Night Lights had almost that exact amount of students at 3,855, ECISD basically added a PHS in enrollment in a decade. Considering the district has a current enrollment of 33,467 students it’s hard to imagine that anyone seeing those growth numbers of +10% and claiming that Odessa is on the verge of shriveling up and dying.
The Awakening
According to the Strauss–Howe generational theory, the Second Turning is an Awakening. This is an era when institutions are attacked in the name of personal and spiritual autonomy. Just when society is reaching its high tide of public progress, people suddenly tire of social discipline and want to recapture a sense of "self-awareness", "spirituality" and "personal authenticity". For many years now Just Stop Oil activists have rallied the troops towards pressuring governments to stop the use of oil immediately without considering the daunting effects it would have on the population as a whole. While many governments have pandered to the ideas of these special interest groups the world hasn’t seem to have lost its appetite for oil as OPEC’s August demand outlook sees the second half of 2023 at 103.21M barrels of oil per day.
That doesn’t stop a group driven by spirituality and individualism to take radical approaches like protesting in Germany by gluing their hands to airport runways with industrial-strength adhesive. The group have claimed they are expressing their rights, under the European convention, to freedom of expression and of assembly, but these were qualified rights rather than absolute ones when disrupting the lives of society or damaging property under the protests such as in the case where to activists glued their hands to a painting where the frame was from the 18th-century and permanently damaged.
With prosperity in the region of the Permian the opportunity for growth continued as seen below by satellite imagery of that region for West Odessa compared over 10 years.
A large group of oil field service companies have collectively built out their facilities near main service roads such as Interstate 20 including Haliburton(HAL). Luckily for Haliburton the city is willing to annex the small area their facility is at for business development to gain access to needed infrastructure like sewer and water but for many residents outside of city limits in West Odessa this isn’t an option afforded to them as population growth surpassed the rate of change by the municipals to keep up.
With the addition of a new middle school in far west Odessa as part of the school bond being brought to vote on November 7th in Ector County gives opportunity to add new infrastructure to the West Odessa where businesses can see themselves setting up home base. Though a strong workforce is important, sewer, water and high speed internet are the backbones to any facility when looking to expand business and large builds through the school districts help foster that initiative..
The Unraveling
Most believe they are the hero in their story but many lack the self awareness to realize that everyone has an inherent pre disposition to carry a bias to their special interest. Its a simple concept lost on many not through ignorance but lack of time and energy when fighting the economy and world for their piece of the pie. In respect to the oil and gas industry many workers have been laid off through the bust cycles that have lead to a distrust in the industry as a sunset venture and though it’s picturesque to watch the cowboy ride off into the sunset at the end of the western, it’s not ideal to have the industry that is your bread and butter have an expiry date of less than 10 years placed upon it. Oil and Gas industry has undoubtedly fostered a false sense of hope in the price of oil where billions of dollars where flared away as the fracing revolution caused a push for chasing growth over capital returns.
Bankruptcies piling up on the US Shale players grew to extreme heights of nearly 300 companies from 2016 on as shown by Haynes Boone who track these events. Between 2007-2018 roughly $700B was lost on chasing high growth wells in the US which led to a decade long abundance of cheap energy for the world. A mistake repeated over these short cycles that has finally come to a head where investors are demanding a return on capital instead of subsidizing the world. Emerging markets with high population continue to look towards energy as a way to bring their economic structure to the forefront of modern society and in the growth of these nations leads to more growth for all energy, but at what cost? China and India currently purchase two thirds of the crude seaborn from Russia and at a heavy discount thanks to the price caps implemented by Western countries for Russian oil in response to the conflict with Ukraine. J.P. Morgan estimated that a need of $600B more than previous decade just to maintain supply vs demand.
Being short the molecules and worries of environmental impact of the industry doesn’t negate the fact that fossil fuels will continue to be required at high volumes for decades. Luckily the Permian has some of the cleanest crude and strictest environmental standards in the world with its unique makeup. The quality of crude produced from a formation determines the final slate of refined products after processed through a refinery where an intermediate or true light barrel yields higher value middle distillates and less lower value naphtha and Liquefied Petroleum Gas(LPGs) than a condensate. According to the Energy Information Agency(EIA) the majority of the crude produced in the Lower 48 States have less dense oil with an API gravity of 40.1 or above.
A barrel of light sweet oil, such as tight shale oil found in the Permian, contains less carbon than a barrel of heavy oil such as bitumen oil sands from Canadian producers. The extra heavier oils have a higher impact on the environment due to a higher carbon residue while lighter crudes carry the advantage of containing a mixture of various lighter hydrocarbons such as natural gas that can be used in the refining process as feedstock. Additionally in Ector County where these bonds will hopefully be passed there is a push for renewable and carbon capture projects.
A new concept from Nacero is also being built in the Permian near Penwell, TX that will be fed light products with the same low carbon footprint producing 1 billion gallons of Sustainable Aviation Fuels(SAF) and Low Carbon Aviation Fuels(LCAF) using the same captured natural gas feedstock.
Occidental(OXY) broke ground on their carbon capture plant recently in West Ector County which is the first of five planned projects. OXY has a strong initiative in the Permian Basin to capture carbon directly from the air but have also implemented many technologies such as Closed-Loop Gas Capture to essentially eliminate unnecessary flaring of natural gases and utilize the excess hydrocarbons back into the pipeline. If all six builds were to be constructed, OXY would be capable of capturing and permanently sequestering approximately 26 million tonnes per annum (Mtpa) of atmospheric CO2 where 35 billion tonnes of CO2 is emitted per year by humanity.
The Crisis
This is an era of destruction, often involving war or revolution, in which institutional life is destroyed and rebuilt in response to a perceived threat to the nation's survival. After the crisis, civic authority revives, cultural expression redirects toward community purpose, and people begin to locate themselves as members of a larger group. A Fourth Turning in the US began with the Wall Street Crash of 1929 and climaxed with the end of World War II. The G.I. Generation referred to as hero archetype(born 1901 to 1924) came of age during this era and confidence, optimism, and collective outlook epitomized their mood. The Millennial Generation which is also described as a hero archetype(born 1982 to 2004) shows many similar traits to those of the G.I. youth described as including rising civic engagement, improving behavior, and collective confidence.
In private, I hear a lot of 'I wish we would have' when it comes to taking advantage of the past project costs in the Permian Basin and that holds true through recent years with the cost of capital and oil field service costs at historic lows prior to the Federal Reserve rate hikes and Ukraine War that changed the dynamic temporarily in 2022. If the industry and communities surrounding the Oil and Gas sector continue to push these projects out that same sentiment of what should have been done will be echoed. Since the great boom of the 1980’s the area of Midland and Odessa has grown 43% according to the census but an undercounted population, especially in West Odessa, is much higher.
Two new bonds for both Odessa and Midland are being brought to election this November to give opportunity for the expansion and growth of the region to continue meeting the needs of the energy sector. Part of the Odessa bond is a new Career and Technical facility(CTE) that will house 400 permanent students and nearly 2,000 explorer CTE students will participate in classes bussed back and forth between classes. Recently the program had to turn away 400 welding students because the facilities span across 7 different locations and are not adequately sized for the demand. While some in the area have pushed to oppose these projects through unfounded discourse, a group of like minded oil and gas businesses have formed the Permian Strategic Partnership(PSP) and have committed to a sizable donation towards the CTE facility if passed. Though the current contribution amount has not been disclosed it has been committed to be at least the size of a similar arrangement made with Hobbs, NM for their CTE building of $10 million. The dropout rate in the region accelerates at grade 9 where many students opt out of education to pursue a career without adequate education.
Since 2020, ECISD has made early payments of $37.3 million in existing bonds, and by prepayment and refinancing, eliminated $26.9 million in future interest payments. Based upon the district’s existing tax base, the district would not need to increase the total Voter Approved Tax Rate of $1.17792 to pay the $436,109,000 of bond projects. Since 2019/2020 ECISD has decreased the debt by 16.7% where the prior 4 years they hardly paid anything down and were mostly paying on interest. ECISD was able to gain an A+ financial rating for four straight years by paying down debt faster but the state also requires a minimum reserve of cash on hand to meet expenditures and ECISD was struggling with this in the past. Not only did they pay down debt at an expedited rate since 2019 but they increased their cash reserves by $21.3 million or 23.9%, required by guidelines, in that time. A pretty impressive job for an area relying so heavily on the sales of oil and gas where COVID and continued lockdowns put a damper on pricing for a period of this time.
There has been a coordinated effort to sandbag these projects where individuals have established social media centric news outlets that garnish titles such as Odessa Headlines and Odessa Accountability Project in hopes of lending credibility based on the name alone. Unfortunately, even when shown the inaccuracy in some of the articles put out, such as making false accusations of theft by the school district through the latest state legislation on tax compression, no retraction is given and in many cases the writer doubles down in their stance showing a lack of ethical journalism. Unfortunately, this is one of those issues where misinformation travels to Pecos and back before the truth even has a chance to put on its shoes and people tend to run with it because there is a belief that it affected their pocket book directly and they may be owed a refund. Putting out falsehoods against the education system of the Permian for an area so vital to literally keeping the lights on and commerce moving needs better explanation on how they got this wrong in their attacks.
House Bill 3(HB3) by the Texas Legislature is an attempt to increase funding and equity for districts with less resources and higher poverty rate such as ECISD where more than 60% of the students live in a home below the poverty line. HB3 1.040 amends the statute for previous years property values by redirecting funding to the basic allotment and now a $100k homestead exemption is applied for Texas ISD rate so the first $100k of value on your home is exempt from the property tax rate. Recapture calculations were amended to ensure that no district has funds recaptured below their entitlement based on the state formula(1.041, 1.018, 1.049). There are some other changes that help protect property owners from tax increases such as the Board of Trustees is now required to do an efficiency audit before bringing a Tax Ratification Election(TRE)(1.001) and add language to the bond ballot stating 'This is a property tax increase'(1.008) to make it more clear for the voters. There are also provisions that make the reinforcement of Maintenance and Operations funds(M&O) swapping with Interest and Sinking(I&S your bond debt) illegal(1.006, 1.007). This part is very important as this is what is being claimed in reference to ‘theft’ on the tax compression. The claim is that the boards of these districts across Texas did this in a deceitful way by not telling the public what they were doing but in reality a meeting was held, the public was notified, a presentation was done and live streamed, and the community had the opportunity to present public comment. This video here is from June 21, 2022 where item 13B was discussed to request approval of a resolution to calculate the property tax rate, the same process done every year. The cool thing about government entities requesting you to fund them through your taxpayer money is their budgets are usually available online and there is a large sense of transparency. In the example of Ector County where a large portion of oil and gas workers reside, this PDF shows the slides presented in the budget presentation outlining how the district calculates the Voter Approved Tax Rate of $1.17792 that has been the same for now 5 years.
The compression of M&O is made on the basis of a predetermined equation that can sound complex but TEA has given us an excel sheet of every districts calculations with a drop down to verify what certain districts did. There's a lot of definitions in there that can be a bit confusing such as the Voter Approval Tax Rate so here is a link that defines what these below.
The State Comptroller also helps define how the M&O and I&S should be handled by the school district where they state 'The school district’s current debt rate is then ADDED to equal the school district’s VOTER-APPROVAL RATE' after using their equations for calculating the new M&O. When asked how this is theft the situation is downplayed but the school district utilized the funds correctly and in a manner that if they were a public company shareholders would be rewarded them for their efforts to pay down debt at an expedited rate. These school districts took the guidelines provided by the Texas Legislature and the Texas Comptroller utilizing their formulas and worksheets to find the current tax rate that was voted on by citizens of the county.
It’s hard to fathom how accusations of theft can be associated with this when following guidelines by the governing bodies but landlords with multiple properties may be looking for more relief to help with their bottom line. Luckily we can see through historical data how this works out for the average income compared to rent.
With the addition of the new CTE building in South Odessa there will be a new curriculum developed around the oil and gas sector in partnership with PSP. This course will help fuel the demand and needs of the area’s workforce that has struggled for the better part of the last decade sourcing quality workers. Top level education typically leads to better communities and workforce but starts with the need for quality facilities and access to state of the art training. The opportunity to shift away from a crisis and move into a new era of energy abundance and transition from a community that understands technology along with a sense of urgency to deliver to the masses. The area of the Permian will need better educated individuals with learned processes through educational programs like the CTE.
The High
The high according to the Strauss–Howe generational theory, which occurs after a crisis is where institutions are strong and individualism is weak. Society is confident about where it wants to go collectively, though those outside the majoritarian center often feel stifled by conformity. Many in the Permian have all heard for the past 40 years that these towns will eventually shrivel up and blow away but by every metric the opposite is true. Whether it’s a community park, the much needed school bonds of Ector and Midland county, or an addition of new energy businesses to the area and growing competitive advantages; anyone against these much needed support systems for the local economies and communities that fuel the ever hungry world with oil and gas are betting against their neighbors, future generations, and the stability of the world. The opportunity to enter the high is at present for both Midland and Odessa, where education of the next generation should be at the forefront including facilities that put our future energy workers and other career paths at an even and sometimes higher position than competing districts.
Learn how to volunteer and get updates on upcoming events through Odessans for a Bright Future here.