“Color me confused…. Henry Groppe Jr. missed badly with natural gas in the crucial 1980s. I thus invite anyone to challenge my account.”
Last month I visited the Permian Basin Petroleum Museum (highly recommended!) located in Midland, Texas. The exhibits and educational features–in room after room–were exemplary. I learned much and will continue to learn with each visit.
To my surprise, I saw a wall-size tribute to energy consultant Henry Groppe Jr., describing him as a successful, unique seer into the future of oil and gas. This surprised me. In my book Edison to Enron: Energy Markets and Political Strategies (2011), I covered the history of Transco Energy Company, of which Groppe was a board director and consultant with the ear of Transco CEO Jack Bowen. My story was quite different.
Transco vs. the ‘Gas Bubble’
Bowen started off well at his new natural gas interstate gas transmission firm, riding the oil and gas boom in the 1970s (he joined in 1974). But with the “gas bubble” emerging by the early 1980s, and after some early attention to handling its ‘take-or-pay’ problems under his new president, Ken Lay, he bet wrong–repeatedly. (Lay left for the company that became Enron in 1984.)
Under the spell of Groppe, and with the oil price plunge taking natural gas with it in 1986, Transco chose to litigate rather than negotiate its out-of-the-money contracts with wellhead suppliers. The belief was that natural gas prices would not stay low for long; it was a depleting asset in the face of growing demand at that low price. Higher gas prices would resolve things and avoid much of the write-offs that would otherwise occur from hurried producer settlements.
Other companies settled, took write-offs, and were rewarded by the stock market. But Transco floundered with litigation, losing cases and facing ever larger charges to earnings. This and other problems led to a failed ending for Jack Bowen and then Transco’s distress merger with Williams Companies in 1994. [1]
Transco also bet on Peak Gas with its failed venture in coal gasification. The Great Plains Coal Gasification project, announced in 1978 and propelled with a $2 billion federal loan guarantee, all under Groppe’s watch and approval, went bust. Transco and other partners defaulted on the loan, and “Great Pains” was taken over by the government in 1985.
An engineer (as was Jack Bowen), Groppe could not grasp human ingenuity as the ultimate resource. Free market incentives, open-ended knowledge, and expanding capital (for mining) turn so-called depletable resources into the opposite. This is explained in depth by the concept of resourceship, pioneered by a University of Texas economist, Erich Zimmermann, and advanced by others. In business and economic terms, ‘low’ prices could sustain themselves because of advances in production technology and capital.
Sanitized History?
At the Groppe, Long & Littell website, a different story emerges. “During the past 40 years,” the company states, “the firm has earned a reputation for accurate forecasts of major changes in oil and natural gas prices.
Here is their example from 1986:
The “gas bubble”–an excess of deliverability over market demand–resulted in lower prices and massive problems with take-or-pay [producer] contracts.”
What everyone else said: The gas bubble will end in 12 to 18 months.
What GL&L said: The gas bubble will persist until 1993.
What happened: Market demand finally matched deliverability in late 1992. The average wellhead price was $1.93 per MMBTU in 1993 versus $1.35 per MMBTU in 1991.
The firm also touts Groppe as seeing the crash of oil prices of the mid-1980s, a narrative written up in the Houston Chronicle in 2006, “Stormy World of Energy Has a Clear Forecaster.” (The bust came a few months into 1986.)
This is peculiar because oil and gas prices were linked with powerplants from California to Florida to the Northeast burning either natural gas or fuel oil. How did Groppe predict oil but not natural gas? Or did he think that a quick turnaround with natural gas was imminent?
Museum Tribute
Groppe was a founder of the Energy Institute at the University of Texas. That organization’s press release noted:
The Midland-based Permian Basin Petroleum Museum has celebrated legendary oilman Henry Groppe with a special exhibit honoring his long and storied career in energy. Groppe, vice chair of UT’s Energy Institute advisory board, is a partner and founder in Groppe, Long & Littell, a Houston based consulting firm internationally recognized for its long-term guidance to corporate, government and private energy industry clients… [and] for its accurate forecasts of major changes in oil and natural gas supply, consumption and price.
Conclusion
Color me confused. I have documentation as well as recorded interviews with involved people. I also have my story from my late father, Robert L. Bradley, who handled the Transco account at the company’s lead outside law firm, Andrews & Kurth. Henry Groppe Jr. missed badly with natural gas in the crucial 1980s. I thus invite anyone to challenge my account–and my concern about this particular exhibit/tribute at the Permian Basin Petroleum Museum.
Appendix: My Quotations on Groppe
Here is what I wrote about Groppe in a Transco chapter from Edison to Enron: Energy Markets and Political Strategies (p. 360):
[Transco CEO Jack] Bowen had made most of the big bets on the future strength of commodity prices. Transco Director Henry Groppe, the founding principal of Groppe, Long & Littell, industry consultants, had provided the forecasts that the gas glut was going away and that energy prices would firm.
And in Enron Ascending: The Forgotten Years, 1984–1996:
Enron disagreed with the analysis of consultant Henry Groppe, a Transco Energy director and Lay confidant, who predicted that the gas bubble would burst with falling production and higher prices. Enron Corp.’s Outlook for Natural Gas, first released in 1989, was bullish on production and bearish on prices. (p. 52n57).
Led by economist Bruce Stram, Enron challenged the pessimistic ‘hard landing’ studies of private consultants predicting that then low gas prices would result in declining natural gas production, higher prices, and physical shortages. The first Enron Outlook for Natural Natural Gas (1989) forecast year-2000 demand of 18.5 million cubic feet at a time when Groppe, Long & Littell (1987) and McKinsey (1988) predicted a much smaller market.” (p. 57)
Low gas prices led to warmings of expensive gas to come–a so-called hard landing between supply and demand. McKinsey & Company’s John Sawhill, a former energy regulator, pumped this scenario. So did Groppe, Long & Littell’s Henry Groppe, a Transco Energy Company board member whom Ken Lay knew, liked, and retained as a consultant at Enron. The National Coal Association’s Richard Lawson self-interestedly spread this message as well…. (p. 179)
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[1] For an in-depth description of the Transco story during the Groppe years, see Edison to Enron, chapter 9, pp. 327–68.
The 80’s gas predictions were indeed quite wrong as you report. Both Groppe and Mckinsey made the same methological mistake.
Both estimated the trend in gas found per foot drilled which had declined significantly in the years prior to their study. McKinley, driven geographically disaggregated the data with the same result.
They both took this trend to be fundamental or exogenous, as it would be termed by statisticians or ecometricians. But in fact its endogenous to the system driven by other factors, most notably price expectations which were very high for the period of their studies. The higher price expectations the smaller the gas reserve target that was economically viable and the lower gas found per foot drilled. Since prices were highly correlated geographically, McKinsey’s disaggregation didn’t help.
I went over this with both the Goppe’s and McKinsey’s people, but they couldn’t or wouldn’t see the point, having already reported I guess.
EIA reported similar bottom line results. They made a more subtle strategic error over a sound methodological approach. In fact I simply tweaked the model built for them by an excellent consulting company. Pretty convenient.
Our prediction was still uncertain … until it turned out to be right. My critique of their methods stands correct, regardless of how things might have turned out.