Texas Energy Sector Infrastructure Improvements Pave the Way for Good Business
Oil and gas production in Texas has increased in Texas in the past six years. According to the Texas Railroad Commission (the state agency that oversees oil and gas production), the amount of oil produced in Texas in 2015 was almost triple the 2010 production. By any standard, the increase is impressive. Almost all of that energy exploration and production occurred in rural areas of Texas associated with the Eagle Ford Shale, Permian Basin, Anadarko Basin, Barnett Shale, and Haynesville-Bossier Shale regions.
Recently, oil and gas production have slowed, no doubt as a result of depressed oil prices. But that trend will certainly change and production will pick up. In fact, increased production could happen sooner than later. OPEC's November 2016 announcement that it would reduce its production output will have a positive effect on oil and gas prices, causing production to increase.
The vast majority of oil and gas exploration and production occurs in the rural areas of Texas, such as the Eagle Ford Shale and Permian Basin regions. The use of horizontal drilling and hydraulic fracturing can mean that more than 700 loaded tractor-trailers per well will traverse the rural roads in those regions. These rural roads and bridges were not designed and constructed for high traffic volumes. The increased traffic volume damages roads and bridges at a rate faster than local and state officials can repair or maintain them. In some cases, previously paved roads have been all but destroyed.
The increased traffic volume is further detrimental in that it is linked to increased traffic fatalities in energy producing regions. Essentially, the roads were meant for use by pick-up trucks and for the residents to use for transit. With the addition of thousands of heavy duty tractor-trailers, traffic accident rates rose.
About six years ago, this problem started to become an issue on local and state levels. The solution to the problem was to build better roads, but that highlighted another problem - money. There was not enough money to take the steps necessary to build and maintain safe and useful roads. Individual counties could increase the property tax rate to increase revenue, and some did. However, that would not be enough to tackle the problem some of these counties were facing. The solution to the money problem was in the Texas Legislature. In 2013, the Texas Legislature passed two measures to address transportation funding for local and state roads in energy producing regions. In 2015, the Legislature again took steps to fund road construction and maintenance.
One Time Appropriation
The first was House Bill (HB) 1025, passed in 2013. HB 1025 allocated about $450 million to the Texas Department of Transportation (TxDOT) to be used to repair state and local roads in energy producing regions. TxDOT was to use $225 million for state roads in energy producing regions and $225 million for county roads in energy producing regions. The counties had access to their half of the funds under the County Transportation Infrastructure Fund Grant Program created by Senate Bill 1747 during the 83rd Legislature. All in all, about 60 percent of the $225 million was allocated to counties who applied for the grant. Advocates of the grant program intend to take steps during the 85th Legislature to unbridle the remaining 40 percent of the grant funds.
The second measure taken by the Texas Legislature in 2013 was the passage of Senate Joint Resolution (SJR) 1. SJR 1 was much more focused on the long term in comparison to HB 1025. It proposed an amendment to the Texas Constitution that would transfer general tax revenue from the Economic Stabilization Fund (ESF) to the State Highway Fund (SHF). When SJR 1 was presented to the voters of Texas in November 2014 as Proposition 1, it was approved by 80 percent of Texas voters and amended the Texas Constitution.
The ESF is a constitutionally created fund that is more commonly known as the Rainy Day Fund. It is a fund available for emergency use. Article III, Section 49-g of the Texas Constitution identifies the oil and natural gas severance taxes as the revenue that will be transferred to the ESF.
Here is how it works. Oil and natural gas severance taxes are the taxes collected by the state for oil and gas production. The tax rates are based on the price of the resource. So higher production and higher resource prices equates to more severance tax. The Texas Constitution requires that within 90 days of the beginning of each fiscal year, the Texas Comptroller determine how much general revenue the state has collected as oil and natural gas severance taxes in the previous fiscal year. Seventy five percent of the difference between severance taxes collected in fiscal year 1987 and the previous fiscal year are transferred to the ESF from the state's general revenue. Proposition 1 amended the ESF to require that half of the tax revenue transferred into the ESF has to be allocated to the SHF. And, all of the revenue transferred to the SHF from the ESF is constitutionally required to be used for the construction and maintenance of public, non-toll roads.
In addition, in 2015, the Legislature passed SJR 5. SJR 5 was on the ballot in November 2015 as Proposition 7 and was approved by the voters just as readily as Proposition 1 the year before. Proposition 7 added Article VIII, Section 7-c to the Texas Constitution. That section states that beginning September 1, 2017, if Texas collects more than $28 billion dollars in sales and use tax in one fiscal year, the next $2.5 billion collected must be added to the SHF. This allocation to the SHF will expire in 2032. In addition, beginning September 1, 2019, if Texas collects more than $5 billion in motor vehicle sales and rental tax in one fiscal year, 35 percent of the remaining revenue must be added to the SHF. This allocation will expire in 2029.
Proposition 7 funds must be used in the same manner as Proposition 1 funds, or to repay transportation-related debt. Therefore, the use of Proposition 7 funds is less restrained. However, Proposition 7 adds more revenue to the SHF that can be utilized for constructing and maintaining roads in energy sectors. It also provides an alternate source of funds that could prove useful in a future downturn in oil and gas production like the one Texas has recently experienced.
In 2015, the Texas State Legislature further defined how the money in the SHF could be utilized. The General Appropriations Act of 2015 authorized Proposition 1 funds to be allocated by the following percentages:
· 45 percent for mobility and added capacity projects in urban areas to decrease congestion and increase the safe and efficient movement of traffic
· 25 percent for projects that improve regional connectivity along strategic corridors in rural areas
· 20 percent for statewide maintenance and preservation projects
· 10 percent for roadway safety and maintenance projects in areas of the state impacted by increased oil and gas production activity
SHF funds are replenished every year by the state's severance taxes. Beginning in 2017 and 2019, the SHF will potentially draw more funds from sales and motor vehicle taxes. The Comptroller allocated approximately $1.13 billion to the SHF for fiscal year 2016 based on severance taxes received in fiscal year 2015. Oil production was depressed in 2016, so it is likely that the allocation to the SHF will be much lower for fiscal year 2017. In late 2015, the Comptroller estimated that the fiscal year 2017 allocation to the SHF could be a low as $594 million.
It is worth mentioning that the Texas Legislature's division of Proposition 1 funds in the General Appropriations Act of 2015 is not permanent. The division only applies to fiscal years 2016 and 2017. The Texas Legislature will have to agree on the same or a revised division of the funds in each legislative session in order for an allocation to apply during the subsequent biennium. In the absence of an allocation by the Legislature, the Texas Constitution controls how TxDOT invests the funds.
The simplicity of Proposition 1 funding is notable. Increased oil and gas production creates increased strain on Texas' infrastructure, and increases the pot of money available to TxDOT to construct and maintain roads in the affected areas. Increased funding relief could be realized in 2017 and 2019 when funding from Proposition 7 takes affect. Regardless, TxDOT is far behind the infrastructure needs in the main energy regions. Research has found that infrastructure needed in the major energy corridors amounts to about $3 billion in maintenance and repairs. So how is TxDOT going to close the gap in this area?
TxDOT's Energy Sector Corridor Improvements Program is intended to improve roads in major energy sector corridors.
Before TxDOT initiated the Program, it had already made strides towards addressing damaged infrastructure in energy sectors. Since 2013, TxDOT has invested roughly $1.5 billion in energy sectors. That money has come from HB 1025, Proposition 1, and other supplemental funds from TxDOT. Since 2013, TxDOT's investment has rendered the following progress:
· Miles of pavement repaired: 899
· Miles of shoulders added or repaired: 221
· Miles of pavement rehabilitated: 955
· Miles of narrow lanes widened: 928
· Intersections improved: 8
The Texas A&M Transportation Institute (TTI) found that strengthening pavements would reduce overall repair and maintenance costs by 700 percent. Strengthening/Reinforcing pavements includes:
· Strengthening pavement structures
· Adding shoulders
· Adding turning lanes at key intersections
· Constructing passing lanes on Super 2 corridors
TTI's estimate on the savings associated with repairing and maintaining roads as opposed to replacing roads that are too far gone is evidence that TxDOT's prior efforts and initiation of the Program are steps in the right direction. For example, Super 2 corridors is a way to improve roads without building a completely new road. A Super 2 Highway is a rural, two-lane highway with a periodic passing lane to allow passing of slower vehicles. A Super 2 corridor is two or more connected Super 2 Highways.
Prior to initiating the Program, each TxDOT district identified preliminary project scopes based on needed repairs and maintenance and provided preliminary project estimates to accomplish the goal. Some energy sectors have experienced more degradation than others, but all are familiar with the toll on their infrastructure.
TxDOT divided the energy sectors into five different regions. The identified projects in those regions were prioritized by TxDOT by identifying energy corridors that cross multiple districts in the region, directly connect energy sector activity nodes, or have high frequencies of injury or fatal crashes. TxDOT categorized these corridors into Priority 1 and Priority 2 groups based on improvements needed.
The TxDOT districts, TTI, and TxDOT's Maintenance Division developed methodologies to determine how to prioritize the corridor projects. A corridor project is given its priority status in the Program based on locally available material, industry standards, traffic projections and loading, number of well sites, and anticipated traffic for each well. Every six months, TxDOT will also take into account the updated number of well permits issued by the Railroad Commission.
Priority 1 Corridor Funding Needs
Energy Sector Estimate
Eagle Ford Shale $569M
Permian Basin $676M
Barnett Shale $271M
Anadarko Basin $97M
Based on the data it has digested thus far, TxDOT has identified several corridor projects in each energy sector. TxDOT is also taking into account local feedback. On June 7, 2016 (Victoria), June 8, 2016 (Midland), and July 21, 2016 (Carthage), TxDOT held regional meetings to present the Program to the public, as well as discuss it and get feedback. In the picture, Tryon Lewis, chair of the Texas Transportation Commission, addresses stakeholders at the Midland meeting.
Based on all the information collected by TxDOT, the following Priority 1 and Priority 2 projects have been designated in each energy sector.
TxDOT has estimated approximately how much the Program Priority 1 projects will cost per energy sector and the improvements that will be completed. Additionally, Priority 2 energy sector corridor projects are estimated to require an additional $1.25 billion.
Energy Sector Corridor Improvements
Miles of pavement strengthening/reinforcement 1,125
Miles of shoulders added 50
Miles of passing lanes added (Super 2 Highways) 521
Miles of lanes added or widened for safety 20
Total miles to improve 1,716
Based on the continuing need for infrastructure improvements, and in some cases, replacement, the Program is just a start. Sooner or later, oil and gas prices will rise and provide incentives for producers to complete wells and drill new wells. That, in addition to the constant maintenance needs to keep the current status quo, or to improve upon it, will require further investment by TxDOT to maintain infrastructure in the energy sectors to ensure safe travel for drivers and passengers and to allow the energy industry to continue boosting Texas' economy.
All that translates into one thing - more infrastructure construction contracts for contractors in Texas. The constitutionally required disbursements to the SHF in Propositions 1 and 7 will refill TxDOT's coffers for that purpose on an annual basis. And the more oil and gas production, the more revenue TxDOT has to invest in road construction.
Construction Attorney J.D. Holzheauser is an associate in the Austin office of the national construction law firm of Peckar & Abramson, P.C. He represents contractors, subcontractors, owners, developers, and suppliers on a diverse range of construction matters, including dispute resolution. He may be reached at: firstname.lastname@example.org.