At Center of Oil Boom, Electricity Costs Soar

July 23, 2013
The Wall Street Journal
The Wall Street Journal

Heavy Energy Use From Drilling in West Texas Strains Power Grid, Leading to Surcharges

An oil-production boom is delivering prosperity to pockets of the U.S., but in West Texas, the epicenter of activity, it is also bringing trouble in the form of surging electricity prices.

Many municipalities and businesses are bracing for big surcharges this year, after having been hit hard last summer, as energy use by oil drilling and production equipment outpaces the capacity of the region's power grid. State regulations largely shield residential customers from the added power costs.

YMCA kids at the museum last month. Frontier Texas, in Abilene, canceled a festival this fall as it struggles with higher electricity bills.

In Midland, a city of about 112,000 residents where the unemployment rate was just 3.3% in May, electricity costs for offices and facilities operated by the city climbed more than 20% in 2012, to $4 million, despite using about the same amount of power as in the previous year. "Last year, the surprise charges were quite shocking, actually," said Robert Patrick, director of general services for the city.

Frontier Texas, a history museum in Abilene, about 150 miles east of Midland, had almost $4,000 of unexpected power charges on its July 2012 bill alone, the equivalent of admissions from 620 additional visitors, Executive Director Jeff Salmon said. Those additional costs were a big factor in the museum's decision to cancel an annual festival this fall where dozens of live actors would have portrayed Texans from the 1700s and 1800s.

"We're already a pretty lean operation, open seven days a week with just five full-time staff and a lot of volunteers," Mr. Salmon said. "All of the sudden, we were getting thousands of dollars over budget, even though we thought we had a locked-in rate."

Oil production in the Permian Basin in West Texas—driven by higher prices and advances in drilling and production technology—has grown about 35% since 2008, from 260 million barrels to 353 million in 2012, according to data from Bentek Energy, an analysis firm. Drilling for and pumping all that oil requires a lot of machinery—and a lot of electricity. Energy use in the region has risen almost 23% since 2009, to about 13 million megawatt-hours, according to the operator of the electric grid, although the rate of growth has slowed in the past year.

While the largely rural region has enough power plants to supply the growing demand for electricity, the high-voltage transmission network hasn't kept pace. Beginning last summer, a shortage of transmission lines in some areas meant that grid operators couldn't automatically send the cheapest power to customers, but had to turn to more expensive power plants elsewhere in the state, where there was enough transmission capacity. Those higher costs were passed on as surcharges to many large customers.

In the past, such surcharges were spread throughout the state, said John Bick, an electricity broker with Priority Power Management, which buys power for many West Texas towns and businesses. But beginning in 2010, Texas started limiting the charges to the regions where they were incurred. That means the so-called congestion-related costs in the Permian Basin are passed on only to customers in this part of the state.

Oncor Electric Delivery Co., a unit of Dallas-based Energy Future Holdings Corp., which owns much of the power transmission system in the region, said it was upgrading in response to the growing demand, but changes aren't likely to come fast enough to head off more price surges this summer.

That isn't good news for executives at Tower Extrusions Ltd., which makes aluminum products like stadium seats and storm gutters in Olney, Texas, about 100 miles west of Fort Worth. The company says its power bills climbed 40$ last year.

"The congestion charges are putting me at a huge disadvantage, compared to my competitors near Dallas or in other parts of the state," said Mark McClelland, Tower's general manager.

Even oil and gas companies are being hit by the charges. Kinder Morgan Inc., which produces oil in the Permian Basin, said it had to pay as much as $400,000 in congestion costs on a single day in 2012.

Apache Corp., one of the Permian Basin's top oil producers, said its average costs in the area this year are running about 15% higher, largely due to the power-line congestion costs.

John Christmann, Apache's regional vice president for Permian operations, said the company can't wait for power-line upgrades. It has tried to cut costs by running pumps during times of the day when power demand is lower and surcharges are less likely.

Apache is also looking at deploying natural-gas-fired power turbines to generate electricity for its pumps and motors, essentially allowing it to disconnect from the grid.

"Power is our third-largest expense," after labor and drilling costs, Mr. Christmann said, topping $50 million in the Permian Basin in 2012. "So we're trying to find any way we can to minimize those costs."

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