The Houston Economy, O&G Activity and the
Implications for Commercial Real Estate
Harold Hunt, PhD
Real Estate Center at Texas A&M
College Station, Texas
hhunt@tamu.edu
A Brief Economic Overview
Texas Job Growth
• Texas versus the U.S.
3.4%
1.8%
Texas Job Growth
• Texas still capturing market share in private-sector jobs.
347,200 / 2,470,000 = 14.1% of private job growth
25 mil. / 300 mil. = 8% of pop.
Texas Employment Growth by Industry
• Mining (O&G) again the leader (by %).
Texas Employment Growth by Industry
• Prof. & Bus. Services the absolute leader.
Job Growth Past 12 Months
Ending August, 2014
Midland
Odessa
Houston
Austin
Dallas
Victoria
Longview
Bryan/CS
Fort Worth
5.6
4.6
3.9
3.7
3.4
3.3
3.3
3.1
2.9
0.0
1.0
2.0
3.0
4.0
Source: Texas Workforce Commission
5.0
6.0
Job Growth Past 12 Months
Ending August, 2014
San Antonio
Corpus Christi
San Angelo
Lubbock
Laredo
Brownsville
Beaumont
Killeen
Abilene
2.7
2.7
2.6
2.3
2.1
2.0
2.0
1.5
1.5
0.0
0.5
1.0
1.5
2.0
Source: Texas Workforce Commission
2.5
3.0
Job Growth Past 12 Months
Ending August, 2014
McAllen
El Paso
Waco
Texarkana
Sherman
Tyler
Amarillo
Wichita Falls
1.5
1.4
1.4
0.9
0.7
0.4
0.3
-0.5
-1.0
-0.5
0.0
0.5
1.0
Source: Texas Workforce Commission
1.5
2.0
Houston MSA Employment and
Annual Employment Growth by Category
( August, 2014)
Biggest absolute
increase in jobs
Biggest %
increase in jobs
Source: Texas Workforce Commission
How Large is the Energy Industry in Houston?
Recent estimates by the Bureau of Economic Analysis (BEA) say:
• The Mining & Logging (O&G) sector in Houston accounted for
19.8% of the region’s GDP.
• When you add in chemicals, refining, and oilfield equipment
manufacturing, energy accounts for 32.0% of the region’s GDP.
• When you add in fabricated metal products, P/L transportation,
and engineering services, energy accounts for 38.1% of the
region’s GDP.
Source: GHP: The Economy at a Glance Oct. 2014
So Where is the Energy Sector Headed?
The most critical question for real estate professionals
still seems to be:
• How long will the drilling activity in Texas last?
First, a Quick Overview
Active Drilling Rigs in Texas
(As of October 17th, 2014)
Source: Baker Hughes
Rig Counts
(Land Rigs: October 17th, 2014 vs October 18th, 2013)
Two Definitions
• Porosity - the percentage of void space in a
material.
• Permeability – The property of a porous material
to permit a liquid or gas to pass through it.
Permeability of Shale
Mid-East
Reservoirs
Shales
Source: SPE International
Conventional vs Unconventional Drilling
Low Permeability
Source rock
5,000 ft.
or more
Source: U.S. Energy Information Administration
Equipment to Fracture a Well
My Early Prediction of the Length of
Eagle Ford Drilling Activity
The Dallas Federal Reserve reported that 5 mil.
acres of the Eagle Ford are under lease.
So I assumed:
– 4 mil. acres/200 acres drained per well = 20k total wells
– 250 rigs x 5 wells drilled per yr. = 1,250 wells per yr.
– 20k wells needed/1,250 wells per yr. = 16 years to drill
Completed Wells in the Eagle Ford
As of Aug, 2011:
263 Producing Oil Wells
394 Producing Gas Wells
Source: Texas Railroad Commission
Completed Wells in the Eagle Ford
11 Months Later…
As of July, 2012:
1,690 Producing Oil Wells
710 Producing Gas Wells
An Increase of:
1,427 Producing Oil Wells
316 Producing Gas Wells
Total Increase: 1,743 wells
Source: Texas Railroad Commission
Completed Wells in the Eagle Ford
12 Months Later…
As of July, 2013:
3,868 Producing Oil Wells
1,681 Producing Gas Wells
An Increase of:
2,178 Producing Oil Wells
971 Producing Gas Wells
Total Increase: 3,149 wells
Source: Texas Railroad Commission
Completed Wells in the Eagle Ford
12 Months Later…
As of July, 2014:
6,414 Producing Oil Wells
3,214 Producing Gas Wells
An Increase of:
2,546 Producing Oil Wells
1,533 Producing Gas Wells
Total Increase: 4,079 wells
Source: Texas Railroad Commission
Several Factors Affect the Speed and
Number of Wells that Get Drilled
1) Drilling one well to “hold a field by production” giving way to
“pad drilling” where multiple wells are drilled from one drillsite,
saving time and money.
2) Drilling rigs that “walk” or move along rails will significantly
reduce the downtime between drilling a well.
3) The well spacing continues to tighten, leading to more producing
wells on a given amount of acreage.
4) Tapping other pay zones will extend the drilling activity in fields.
1) Evolution to Pad Drilling
Pad Drilling Example
Karnes Co. Drilling Pads
Gonzales Co. Drilling Pads
2 Wells On One Pad in Gonzales Co.
3 Wells On One Pad in Gonzales Co.
4 Wells Just Drilled by EOG in Gonzales Co.
(using FracFocus.org)
22 Wells On One Pad
2) Moving the Rigs Gets Faster
Walking Rigs
Rigs Moving on Rails
Rigs Moving on Rails
Piping Moves With Rig Movement
Increasing Efficiency Begins to Show Up
2012 Q1
Started 1 well every 24 days
2014 Q3
Started 1 well every 16 days
Source: Baker Hughes Quarterly Well Count Report
Well Costs Dropped from $14 mil. to $6 mil.
Sept. 2010
Sept. 2013
Source: UTSA Economic Impact of the Eagle Ford Shale Study
3) Well Spacing Gets Tighter
Rosetta Resources Map of Its Well Spacing Plan
Source: Rosetta Resources
EOG Pushed Downspacing, Dramatically Increasing
the Well Count
Factors to Consider With Increased
Downspacing
1) When laterals get close enough, they start to rob production
from each other.
2) A Marathon test showed two wells on 40-acre spacing each had
about 80% of the recovery as one well on 80-acre spacing.
Ex. 1 well @ 80 acres produces 1,000 bbls of oil (Total = 1,000 bbls)
vs
2 wells @ 40 acres produce 800 bbls of oil each (Total = 1,600 bbls)
3) So increased production from downspacing must be weighed
against increased well cost.
4) Tapping Other Pay Zones in the Future
Multiple Payzones Could Extend the
Drilling Activity in a Play
Austin Chalk
Eagle Ford
Buda
Pearsall
Multiple Payzones Could Extend the
Drilling Activity in a Play
The Permian
13 Payzones
identified so far
by Pioneer
Pearsall
Vertical Wells versus Horizontal Wells Using
Pad Drilling
Horizontal Wells Using Pad Drilling in
Multiple Stacked Plays
Also Experimenting With
“Stacked Lateral” Development
Stacked Laterals Being Tested by Rosetta
Resources in the Gates Ranch Field
Source: SeekingAlpha Article Nov. 18, 2013
Stacked Laterals Being Tested by Rosetta
Resources in the Gates Ranch Field
Source: SeekingAlpha Article Nov. 18, 2013
Finally, there may also be “secondary
recovery” (ex. re-fracking) activity on
early wells now in decline
My Revised Guess of Future Eagle Ford
Drilling Activity
The Dallas Federal Reserve reported that 5 mil.
acres of the Eagle Ford are under lease.
So my latest guess is:
– 4 mil. acres/80 acres drained per well = 50k total wells
– 200 rigs x 20 wells drilled per yr. = 4,000 wells per yr.
– 50k wells needed/4,000 wells per yr. = 12.5 years to drill
* Without considering: 1) multiple payzones or 2) secondary recovery.
What Could Derail This O&G “Boom”
• A major breakthrough in renewables (wind, solar,
etc.)
• Water availability or contamination endangering
aquifers or surface
Surface Reservoir Conditions in Texas
(As of October 1st, 2014 are 63.8% full Statewide)
Source: www.waterdatafortexas.org
Top 32 Highest Water Use Counties for
Hydraulic Fracking Operations in the U.S.
Can include
water
sourced
outside the
county.
Texas had 16
of top 32 U.S.
counties from
Jan. 2011 to
May 2013
May be nonfresh water as
well.
4 bil. Gallons
in Dimmit Co.
Source: www.ceres.org
“Freshwater” Use for Fracking is a
Significant % in a Few Texas Counties
Montague Co: 34%
San Augustine Co: 39%
McMullen Co: 55%
Karnes Co: 31%
Dimmit Co: 24%
Source: TWDB and Bureau of Economic Geology
What Could Derail This O&G “Boom”
• A major breakthrough in renewables (wind, solar, etc.)
• Water availability or contamination endangering
aquifers or surface
• Govt. involvement becomes too onerous
– (ex. EPA severely regulates: water disposal, air quality, frack fluids
– (ex. 2. U.S. Fish & Wildlife: finds endangered species in area, such as
the Dunes Sagebrush Lizard or the Spot-tailed Earless Lizard)
• The big one: A severe drop in price
Estimates of Breakeven Prices
U.S. Shale Gas Resources by Breakeven Cost
$4.00/mcf
Red Dots Show Active Gas Rigs
(As of October 17th, 2014)
Source: Baker Hughes
U.S. Tight Oil Resources by Breakeven Cost
$50/bbl
80% of resources breakeven w/i $50 to $80
$80/bbl
Blue Dots Show Active Oil Rigs
(As of October 17th, 2014)
Source: Baker Hughes
Unknowns that Could Affect Price
1) How fast will technology improve?
o Miscellaneous Possible Gamechangers (Glori Energy: microbes in
conventional wells; Siluria: dry natural gas to diesel/gasoline)
o Drilling costs (faster drilling times, cheaper completion techniques, etc.)
o Recovery rates of O&G in place improve
o Well decline rates improve
Pct. Of U.S. Unconventional Gas Wells Grow Over Time
Increasing % of faster-declining gas wells
Pct. Of U.S. Unconventional Oil Wells Grow Over Time
Increasing % of faster-declining oil wells
Unconventional vs Conventional O&G Well
Lifetime Production Curves
3000
2750
2500
Production Rate
2250
2000
1750
Conventional
1500
1250
1000
Unconventional
750
500
250
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Years
Companies are Increasing “Initial” Production
EOG’s Eagle Ford Wells
EOG had a 20%
improvement in
initial production
rates over just 2
quarters.
Source: SeekingAlpha
But What About Production Over the
Total Life of a Well?
3000
2750
The long-term scenario that turns out to be
correct will have a major impact.
2500
Production Rate
Increase
in I.P.
2250
2000
1750
Conventional
1500
1250
1000
750
Unconventional
#1
#2
#3
500
250
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Years
Eagle Ford Numbers Show Increased Initial Production
Increased production from:
about 25 BPD in ‘09
to
about 375 BPD in ‘14
Source: Energy Information Administration
Numbers Also Show Increased Decline Rates
Increased production from:
about 25 BPD in ‘09
to
about 375 BPD in ‘14
Source: Energy Information Administration
Unknowns that Could Affect Price
2) Will restrictions on exporting crude be lifted?
o Pits (midsize) Refiners against (independent) Producers
o Recent reports say crude exports would actually benefit U.S. economy
(ex. lower the price of gasoline)
o Federal political fear may override economic considerations
 (gasoline price for Congress and environmentalists for Obama)
U.S. Diesel Exports Have Increased Dramatically
The Same With U.S. Gasoline Exports
Brent/WTI Spread Widened With Cushing
Bottleneck in 2011
Sept. 2011: $27 WTI Discount
Brent Price: $112/bbl
WTI Price: $ 85/bbl
Source: Energy Information Administration
New Pipelines Pushed the Crude Glut
South to the Gulf Coast
Now Gulf Coast Light Crude Inventories are
Much Higher than Average
2014
Source: RBN Energy Blog
Some Predicting: Lower Domestic Prices Will
Lead to Increased Crude Imports Again
(But Could Rapid Unconventional Well Decline Rates Make A Difference?)
3000
2750
2500
Production Rate
2250
2000
1750
Conventional
1500
1250
1000
Unconventional
750
500
250
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Years
Unknowns that Could Affect Price
3) Will refiners retool to handle massive amounts
of light crude?
The short answer is: NO
(political risk)
Unknowns that Could Affect Price
4) How much LNG will be exported from the US?
o Pits Petrochems, Manufacturing, Elect. power against Producers
o Some Petrochems showing more flexibility lately (dry gas vs NGLs)
o Discussion over whether the Feds should control export levels thru
permitting process or let the market do it.
DOE Has Approved LNG Export Terminals
Totaling 9.5 BCF/day in Export Capacity
Source: SeekingAlpha and Veresen
Other Proposed LNG Export Terminals Could
Add Another 16 BCF/day in Exports
Unknowns that Could Affect Price
5) Will shale O&G from other countries take off
and flood the global market?
Hurdles Affecting Production of Shale
Resources in Other Countries
• Lack of O&G Infrastructure
• Lack of O&G Technology & Equipment
• Lack of Qualified Labor
• Lack of sufficient Water
• Uncertain Tax Regimes, Legal Environment
• Lack of Regulatory Expertise
• Worker Security
• Lack of Private Mineral Ownership increases the odds of
Anti-drilling Activism by Citizens
Finally,
How is this O&G boom different from the 80’s?
Saudis Cut Production in Early 1980’s, Then
Increased It in 1985
10 mil./bpd
6 mil./bpd
2 mil./bpd
Source: Haver Analytics
Saudis Now Think “Developing” Countries Will
Drive Future Oil Consumption
U.S.
Developing
Countries
Other
Developed
EU
Source: Oil & Gas Investor Magazine
But Most OPEC Countries Now Rely on Oil
for Their Budgets (a lot)
Russia Also Needs High Oil Price for Budgets
Saudi Arabia
Russia
$101.70
Iran
China
Kuwait
Mexico
Breakeven Oil Price Source: April 11, 2014 Bloomberg article: “Venezuela Needs 2014 Brent Oil Price of $121”
The Big Question is : Who Cuts Production
First? (and how will that affect us?)
• Russia and most OPEC countries besides the Saudis can’t.
• Saudis think the U.S. and Canada can be made to cut
before they do.
o
(Shale production should be the “global stabilizer” against high or low prices.)
• U.S. producers think Saudis will cut first.
o (Does it benefit the Saudis if we get thrown into recession?)
• Saudis seem to be in the “driver’s seat.”
o
o
Have staying power; They can drive the price lower
Are they bluffing to get other OPEC members to cut as well?
• If price drops significantly, we will see what actual
“breakeven” is for various producers. (Investors will be important)
REAL ESTATE CENTER
at TEXAS A&M UNIVERSITY
Mays School of Business
http://recenter.tamu.edu