Drill under pristine pines? At what price?

The article appearing on August 7, 2014 entitled “Oil Lease proposed under 400-year-old virgin pines,” set in motion the standard arguments of conservation versus free market capitalism.

There are concerns that the 49 acres of old-growth trees at Hartwick Pines State Park may be damaged or at least the pristine quietness of the area may be lost while drilling occurs. On the other side, the business folks roll their eyes in dismay about what the conservation folks don’t get about how the free market economy works! And so the debate goes. What ensues is good old fashioned organizing: each side gets their forces revved up to fight the battle.

My view is that we really need to change the question. Rather than ‘should we” or “should we not”, the real question should be “at what price?”

Over the past 10 years, the Michigan Department of Natural Resources reports, $750 million has been generated for the state from oil and gas leases, royalties and bonuses. Our state Constitution requires this money go to the Michigan State Parks Endowment Fund and the Game and Fish Protection Trust Fund. Nice to know we get a boost in perpetuity from this money.

But in reality the resources in the ground are an investment in our future and should be managed that way. We should not be so quick to sell it off. It is only going to get more valuable with time and my guess is we would be far better off to let its value grow while in the ground than selling it off now!

We could even decide to put a very high price on OUR oil. Why not charge $250 per barrel and wait for the oil companies to decide when they want it. There is plenty of private land with oil and gas under it to keep the oil companies busy for a very long time before they need to tap state land.

Kind of reminds me when I was a young man learning from my father about the value of money. My father taught me that investing for the long term was a good thing. Put some money in the bank and let it earn interest, and then when you really need it you will have it available.

Why can’t we do the same as a state with our natural resources that are in the ground? Keep them there, they are appreciating every day. But if someone wants them badly enough they can offer a higher price and we can decide. There needs to be a much stronger debate: leaving this decision to a simple “Yes”/“No” is simply too short sighted and too tempting for those in current office to decide if they want to pump up the short term or not.

As I have taught MBA students at my alma mater, business is about People, Planet AND Profit. Nearly every transaction in business is not simply one or the other, it is about all three. Drilling into the commonly owned assets of the state is a business transaction. In this case the DNR director is asked to protect the environment and make some money, but the decision to drill or not is being left up to the oil companies.

Instead there should be a mechanism that takes into account the long-term value for the state and prices the oil under it accordingly. It is too easy to simply count the royalties as “fair and sufficient” and be done with it. This outdated system would benefit from a little updating to maximize the long-term return to the people of the state and price properties differently.

Yes, we will allow drilling under 400 year old trees, but not until the world truly needs it: the price for now would be $250 per barrel. Do you still want it?

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Comments

fred
Thu, 08/14/2014 - 9:46am
Interesting slant on the subject. Yet, it's still time to drill. No environmental expense and put your money in other investments rather than hoping dirt and other materials will be more valuable in the future. Drill under the pines of Hartwick.
Thu, 08/14/2014 - 9:46am
Mr. Keller, "Thanks" for framing the discussion in a straight-forward manner!
Marvin
Thu, 08/14/2014 - 9:59am
No, there are some things the free market doesn't cover - not everything has a monetary price, some places are too special to drill, and some damage cannot be rectified. That's kinda why we allow "public input". BTW, the money from oil & gas leases goes into the Natural Resources Trust Fund. Only spillover after the NRTF is full foes into the Parks fund, and not at all into the Fish & Game fund.
Matt
Thu, 08/14/2014 - 10:31am
As a service to your readers I'd suggest you get a real expert on oil leasing, the entire petroleum extraction process and geology to explain how this works and what is really happening under ground with the reservoir in the drilling and pumping process. I get the sense that neither Mr. Keller, Bridge writers, readers and admittedly myself don't have a clue as to what really happens in this process.
Nancy Shiffler
Thu, 08/14/2014 - 11:12am
The assumption here seems to be that anything is for sale as long as the price is right. On that basis, we could ship off all the water in the Great Lakes as long as we get a good price. There are other values besides dollar values.
Adrienne
Thu, 08/14/2014 - 7:08pm
Well said. Level well balanced article. I am for long term thought, not immediate here and now gratification.
william werhane
Thu, 08/14/2014 - 8:28pm
There are some 100 year old houses being lived in. assume that houses being built today some will be using gas 100 years from now. Will. we have to import it.?
Duane
Thu, 08/14/2014 - 8:40pm
I appreciate Mr. Keller’s courage to present his views to the public for comment. I believe there is great value in people offering their views especially when it can stimulate a conversation, it can engage people so they may think about the issue at hand, and it may lead to a better ideas being developed. I read Bridge for ideas both in the articles and from commenters to think about. I have found some very interesting ones and many with potential for addressing problems. I have learned that when people have a conversation about an idea is when it is most likely to grow to its potential and create opportunities for changing the problem at hand. Sadly my experience on Bridge is that conversations (talk of the whys and how’s of ideas) are rare at best and even those are too brief to fully develop an issue/idea. This time may be different, but I have no experience to suggest it will. I have yet to read where any article writer engages in a conversation on the topic of their article, rather the articles seem to be accepted and not discussed. It maybe a Bridge policy or personal preference, but the lack of engagement by the writers does put a damper on the impact of the articles. I don’t expect Mr. Keller (as other writers) to be part of a conversation, I think that will prevent a better understanding of what he would like to the article do. Mr. Keller has open a new perspective on the issue. He talks about debate and yet is he willing to participate in the debate help people better understand his perspective?
Thu, 08/14/2014 - 11:00pm
Many of us are more concerned about the use and waste of fresh water used to flush these wells than the taking of the natural gas. How will this deplete out aquifers?
Carl Peters
Fri, 08/15/2014 - 3:50pm
Yes, Monica, you're right to be concerned about aquifers. It isn't just that they get depleted by fracking, but also they're likely to be contaminated by fracking chemicals and methane. Also the water used in fracking, once contaminated, is likely to be put on roads as "dust control", where it runs off into ground water. Fracking is also likely to cause earthquakes, as it's done in some states. And leakage from the well also contaminates the air with methane and fracking chemicals (which the oil companies will not reveal). The sight and hearing of fracking wells is only the tip of the iceberg.
Tom
Fri, 08/15/2014 - 4:09pm
Reading a lot of the "knee Jerk" just drill comments is very upsetting. First this is not a matter of just protecting dirt it is a matter of protecting water and the revenue of north Central Michigan. This is not just drilling, it is Fracking. This process requires thousands upon thousands of gallons of water and chemicals. The water for this comes from ground water that feeds into all the lakes and rivers that we all love to boat and fish on. The water used is pumped into evaporation pits where the chemicals used are supposed to settle out and the water evaporates out leaving the toxic sludge to be hauled away to a toxic waste landfill. The water will return as contaminated rain somewhere east of Michigan. The gas from these wells as well as the oil below those wells is very dirty compared to other sources of natural gas and oil. Most of the refineries do not have the technology required to maintain the emissions caused by refining those dirtier petroleum sources. As far as jobs go that is just political whitewash as none of those jobs are long term. Once the leases are purchased and the well heads are in place those people are back in the unemployment lines. If you don't believe this check with the people in eastern Ohio and western Pennsylvania. Those jobs just don't last very long. What makes this even worse is that the petroleum companies will not do anything with the wells after drilling them until the prices of that gas and oil climbs way above the current levels. That is why the US is now exporting so much natural gas, the prices drawn in Europe are higher than they are here.
Duane
Fri, 08/15/2014 - 9:05pm
Mr. Keller brings different experiences and a different perspective, and that can broaden the discussion. What I have seen and learned seem to offer a difference approach. I learned from a former employer a business view on conservation and those that make it a personal focus. That company had sustainability as a priority (decades ago), it included(s) conservationists and others outside the business to be part (locally and internationally) of their planning and review process of company activities. We learned that diversity of perspective helped us to do our business better (no eye rolling). Mr. Keller’s business view seems look only at price, I was taught to look at value for both what we provided and what we received. Mr. Keller’s seems to feel the oil/gas should be left in the ground until the price is right ($250). I would like to know why Mr. Keller doesn’t consider what value we could create with the revenues from that oil/gas leases. If value were considered then we could ask if that money could be invested in wind farmers or other recurring energy sources, if it could be invested with our universities to research and develop new and innovative means for generating energy, if research could develop alternative building blocks for chemical manufacturing, or if we could invest in other concepts that would provide value to Michigan and the local area for 20, for 50 or more years. Mr. Keller looks at investing differently than I have been taught, where he sees it only as putting it in the bank and collecting interest (currently near zero). I see investing as providing for long-term returns beyond money, creating sustainable returns. It seems Mr. Keller only sees oil/gas as energy sources, I see it as building blocks and energy. Where Mr. Keller seems to narrow his view to personal needs and wants in the here and now, I learned that businesses which last for more than 100 years and spans the globe think beyond the immediate dollars and look to the long-term generation of value with those dollars, they invest for the future beyond individual employee’s tenure. I learned investing also involves identifying the risks so they can be balanced with the long-term value that can be gained, that should be part of the discussion. Since I have learned my approach over many years I would be interested in more detail about whys behind Mr. Keller’s approach and his thoughts on mine so I could better address his perspective and concerns and modify my views
Fred Keller
Sat, 08/16/2014 - 2:18pm
Thanks Duane for your perspectives. As you have pointed out there are rarely dialogues on these issues and that is indeed sad. I believe The Bridge rather likes dialogue and having a civil one is indeed important. Many times these kinds of articles result in only uncaring epithets, so I appreciate your attempt to raise it to the level of a dialogue. It is also interesting that in these situations, the article writer is known while those who comment are not. Seems a bit one sided, and actually has a chilling effect on commentary. Perhaps that is why people simply don't respond to the comments. It is interesting to me that you have made assumptions about how I feel that don't line up with what I inteneded, so let me elaborate a bit. Using the example of putting money in the bank was a metaphor for keeping assets invested, once they are spent they are gone. Of course I believe in many diverse forms of investment. And yes when setting a price on an asset one needs to always consider the alternative of selling it and using the proceeds for some other purpose. This does seem to make common sense to me as well. In my view inherent in the "price" concept is the idea that all of the additional costs should be included in arriving at the price. The cost of not having resources like pristine pines, what is that? The cost of a spill or contamination due to drilling, what is that? If we change the question from "which place shall we drill and get some 'commission' on what the extractors get" to "what should the price be for this particular assett", the conversation would shift and the value would be calculated differently. It gets changed from what is it worth in today's marketplace, to what is the value to future generations. We should sell our future generations' assets only after considerable deliiberation and with great care. We don't do that now. We price it at todays prices. I am proposing we set the price based on its future value. A wise Native American once said "We didn't inherit the earth from our forebears, we are borrowing it from our children". Seems like the right way to view the world.
Duane
Sun, 08/17/2014 - 2:17pm
Fred, I truly appreciate your responding, you raise good points that would make for other conversations. As for the people providing their full names, that is a personal choice, for me it simply reduces from a dozen clicks and the risk of typing errors to two mouse clicks. I have provided Bridge with name, address, phone etc. I really don’t care who is speaking, what their credentials are, or any other personal information. I am more interested in the thoughts they offer. How people speak can undermine what they say, but I doubt it will change what they think simply by adding their name. With regard to my misinterpretation of your intent, I am not surprised, that’s why I feel conversations are so important. Conversations allow people to better understand how people hear what they are saying so the speaker has an opportunity to clarify what was meant to be heard. I can appreciate that price can be a metric for all that is involved, but it seems without discussing what is being consider and how those considerations may change with time and technology I feel price over simplifies and risks distorting the reality of events and the situations and the evaluation. I agree we should have a discussion before deciding how to utilize the resources under Hartwick Pines, I wonder what all the concerns are, I wonder what all the benefits might be. What is a major risk that you are concerned with? “We should sell our future generations’ assets only after considerable deliiberation and with great care.” I am afraid I misinterpret this statement. You seem to be saying that the resources in question belong to future generations, but does that mean they will never belong to a current generation? It seems that when the Pines were set aside you would have been consider a future generation and by your remark the pines belonged to your generation but now you are the current generation so does that mean simply by becoming current your generation lost ownership of those pines? That suggests that you expect the resources under the pines to be left undisturbed in perpetuity. If that is the case then there is little or no reason to have a discussion.
Vince
Sun, 08/17/2014 - 12:43am
In the 1960 & 70s there was a lot of dispute and court battles about drilling in the Pigeon River State Forest. The dispute took years to settle. It finally did and the drilling happened. All of the things that the so called ecology experts said were going to happen (it will deplete the elk and deer habitat, polute the water, etc) NEVER HAPPENED! in fact The animals have actually thrived from the grass planted on pipelines and old well sites. These sites were actually located within the forest itself, unlike the Hartwick pines drilling proposal which will drill in from properties outside of the forest! Don't get me started on all the false rumor spreaders concerning fracking! There has never been any proven water polution in Michigan and they have been doing it for years! People should be more concerned about the use of of the royalty and lease funds and what the state is using them for! This money should be going towards tax relief and the schools like Alaska! Instead this money is being used to purchase lands that are currently on the tax rolls to increase the size of state forests etc! In Northern Michigan they are purchasing large pieces of private properties and resorts, removing all the buildings and closing the roads so all people can't get to the lakes and streams! Funds like the Kammer land Trust fund ( where royalties go) are being spent by a selected group of people to purchase these lands. This puts a hardship on a lot of local townships and schools by reducing their tax base. We need better roads and schools, NOT MORE PROPERTY!!!
Sun, 08/17/2014 - 11:22am
We have 8 wells, maybe more, within 2 miles of our home in Adrian, Mi. So far no incidents, and many of the wells are surrounded by crops. My take is that alarmists will always sound the alarm, no matter what topic. Better they sound the alarm on the shrinking liberty in our great country.
Tue, 08/19/2014 - 2:06pm
Mr. Keller states, "...the decision to drill (is) being left up to the oil companies." Why? These are state lands, belonging to the citizens of Michigan. There seems to be a plethora of personal opinions. So, inform yourselves, then write, text, communicate your ideas to the appropriate forum. That is paticipatory democracy; a truly needed commodity these days.
Joseph Lenard @...
Thu, 08/21/2014 - 1:08pm
Where can I volunteer to have drilling done in my Wyandotte's Home Backyard... and I won't request a dime for it!!!!
Paul
Sun, 08/24/2014 - 11:30am
The whole idea of promoting U.S. energy independence is a short term view. Google energy independence and Charlie Munger (Warren Buffet’s partner at Berkshire Hathaway) for an additional perspective. Among the Munger quotes you’ll find; “The oil in the ground you’re not producing is a national treasure; … running out of hydrocarbons is like running out of civilization. All this trade, all these drugs, fertilizers, fungicides, etc. …they all come from hydrocarbons.” He is in favor of conserving and subsidizing new forms of energy.
Duane
Sun, 08/24/2014 - 9:01pm
Paul, Is the idea of energy independence any different then the idea then leaving it in the ground. They are both seem to be catch phrases to promote political positions. As an example, the 'energy independence' is simply a way of suggesting a justification without ever explaining how that will benefit the state residence. Similarly saying leave it in the ground is a way of avoiding a discussion of how best use the resource for long term sustainable benefits to state residence. If ones views gas/oil as a hydrocarbon, isn't the algae bloom in Lake Erie made up of hydrocarbons? If the moneys from the drilling leases were invested in harvesting the alge as a hydrocarbon then might that have a long-term benefit and provide a renewal hydrocarbon source? The reality is that either one liner is for those who what to hear them not for those who want to discuss the potential risks and benefits. For how many decades have we been hearing about how we are running out of hydrocarbons, how many years have we been hearing how we must become energry independent? It seems neither answer has yet to be proven. What is a major reason why you think the potential oil/gas under the pines should not be used?
Paul
Mon, 08/25/2014 - 7:29pm
My point was to give an example of a very shrewd businessman/investor who believes that we should leave the majority of the natural gas/oil in the ground for future use. Munger believes that we should maintain the technology to get some of it out, but leave most of it in the ground, because there will come a time when we really need it for things that can’t be derived from energy sources like say solar or wind power. Sure, we could try to get hydrocarbons from algae, and should explore that further. As a thought experiment, let’s say 25 years down the road that algae production was expanded as a really viable thing, and was generating a significant amount of our supply. Then, for some unforeseen event like weather/disease/contamination, the harvest to be severely limited for several years, even though we were really dependent upon production. If we haven’t used up all our sources (like Hartwick), there would still be hydrocarbons in the ground that we could use to make up the difference. One of Munger's points is that if we had today’s current technology back in the 1930s to get all the oil/gas out of the ground, then there would be nothing left today. We would be dependent on other countries which could put us in a vulnerable place with regard to using hydrocarbons for really important things like drugs, fertilizers and fungicides. If we can’t grow our own food without outside help (using hydrocarbons), and for geopolitical reasons those supplies have been cut off and we can’t import enough food, then we either have to go to war or starve. It would be nice to have a another option. I don’t know about you, but I’d rather wait to use the energy from Hartwick (along with thousands of other U.S. sources), if it would delay a WWIII that would kill off a significant amount of future generations of U.S citizens.
Duane
Tue, 08/26/2014 - 11:58am
Paul, I would call Mr. Munger a smart investor, that being different than a smart business man or energy/chemical smart. I can see how as an investor he can use the supply/demand curve to return greater financial returns now and over time. However, to judge what technology will deliver seems a little less likely as he does seem to steer away from investing in high tech industries. If we (as residence of the state) should benefit from technology such as alternative hydrocarbon sources why shouldn't we also invest in that research throughour state universities using money's from oil/gas leases? As for the technology of harvesting the algae, if the investment in research were to be developed why not license it so if something did happen to the algae there would be alternate sources that could see us through that period much as farmers do across the world? The potential for algae or other sustainable hydrocarbon resources may not have an immediate potential then it may not be time for that investment, but without the consideration of leasing the oil/gas drilling rights there will be no discussion of the potenital benefits and without discussion there is less likelihood of developing sustainable sources such as the algae. Mr. Munger may want to play the what if back in the 30's but he seems to fail to include how that shift of technology in that day would change the technology we would be living with today. It is simply we could extract the oil/gas it is all that goes into to that including the computers of today, the science of today, the manaufacturing technology of today. He also seems to ignore that the oil/gas in that day was so easy and cheap to access it could not have supported the technology of today. Why would they drill in several thousand feet of ocean when they only had to drill a thousand feet. There are too many variations on Mr. Munger's 'what if' that I feel there should be a discussion and a weighing of the potential risks and benefits. One of my paramont ones is how the revenues from the leases would be managed and people/programs held accountable.