Business Opportunities

I got an email from a lady wanting to know my opinion on, amongst other things, business opportunities in the communities around the Cline.  I thought since I haven't really written on that topic, why not just turn my response into a blog post.  So here is her original email to me, and my response:

  Hi Matt,

I'm trying to find some info on shale expectations around San Angelo, Sterling City, Colorado City, etc.  What resources could you point me to around drilling expectations, etc.  My husband and I are exploring housing opportunities in these areas (building camps, RV parks, etc), so if you have any info/resources on housing for these areas, that would be much appreciated.

As someone with a closer eye on all this, where do you see the immediate business opportunities for an area that is just taking off?  Are you seeing clear analysis done on what was done right and wrong with eagle ford?

Thanks|Anita

Anita,

Sorry it's taken me a while to get to your email. I hope the quality of this response merits the delay.  I'm going to try to address all of the questions and issues you raised, but probably not in any particular order, and I'll also inject a few of my own.  Also, I want to preface everything I say here with this disclaimer: take what I say for a grain of salt.  Right now I am just a graduate student, by no means a business or oil and gas expert.  I live in Lubbock, which is about 100 miles to the north of the Cline formation and Permian Basin so I get very little information from sources other than Abilene and Lubbock's newspaper.  I'm not exactly in the know.  I can count on my fingers the number of serious conversations I've had where the Cline has come up.  In sum, what follows is just the opinion of a hobbyist.

On the subject of running an RV park or other housing businesses...

Are you aware that an RV park may be subject to some state regulations?  The Texas Commission on Environmental Quality just put out this handy document to help people like yourself understand the regs and whether or not they apply to you.  Also, on the subject of real estate data see paragraph #6.  

Where do I see the immediate business opportunities in an area soon to take off from oil development?  Honestly, I lie awake at night and wonder this myself.  The following 6 paragraphs are my conclusions and advice on this subject.  It’s definitely more than you wanted to know, but I thought I’d offer it anyway.  My short answer to this question is any business that was good in regular times should be great when an oil boom hits.  Lost in paragraph #4 is my favorite business idea.  My long answer to this question is...well just read.

1. First, I think you have to check yourself and make sure your mindset isn't entirely "How can I move into this bustling town and get rich?"  That mentality will get you into trouble. I think business, especially a start-up, has to be about more than making money.  By that I mean you need to find some sort of enjoyment from the business in addition to the profits.  Maybe you just like helping people and that's your source of enjoyment, or maybe you have close friends or family in the town that you're looking to move into, or maybe the business lets you do certain activities that you enjoy doing.  There are a million reasons to start a business. Making money can't be the only reason.  If it is, it will never be enough.  So let your "likes" inform your choice of business, not just the money.  The great thing about an oil town that will be economically hot for several years is that it almost doesn't matter what kind of business you're in.  If you operate efficiently and treat people right, you’ll do well.

2. Also, in addition to letting your "likes" inform your choice of business, consider your skills and expertise as well.  I am almost certain that early in the development of a field like the Cline, the most lucrative business is buying and selling mineral interests.  For the right person, there are minimal overhead costs and the margins are astronomical - like 100-500%.  But, you have to have a certain expertise to be able to do that - in this case real estate law - or else you could get in big trouble.  It's extremely risky to start a business that you aren't already familiar with, so you should start with something you know.  And maybe that means you have to wait for the town’s economy to heat up before starting the type of business that's right for you.

3. I think the best way to go about starting a business from scratch in one of these boom towns is to move there first and get a job working for someone else for 6 months to a year.  That way you can talk to people, network, and experience first hand what the current and future needs of the town are so that you can make a better choice of business.  It may cost you a little bit of time, but it may be the difference between starting a business that does so-so for a while, and one that takes off immediately and becomes hugely successful.  Also, when the drilling gets going real hot and heavy there are some terrific jobs around.  I'm sure you've heard of the McDonald's in Midland that pays $15/hour and gives a signing bonus of $500.  Now I'm not sure I'd want to work at McDonald's, but you can imagine what someone with some skills is able to earn if unskilled labor is commanding that much pay.

4. Remember, your business doesn't have to have a direct connection to oil and gas to be extremely successful.  Apparently in Midland making burgers is a great business to be in.  A rising tide lifts all boats – you just need to make sure you have a good seaworthy boat.  Also, consider a business that makes a good or service that may have oil field application, but which is also needed by other industries; for instance: an accounting service or office/house cleaning service.  One of the ideas I've been playing with for the last week (and this ties into my next point below) is to buy a coin machine laundromat.  Everybody has to wash clothes no matter what industry they work in.  The laundromat could be open to "walk in" patrons but you could also market a "pick up and delivery wash and fold" service to all the oil field workers.  My intuition is that those men would be glad to pay some of their exorbitant salary to not have to worry about that chore during their time off.

5. Consider buying a business.  You'll need the council of someone with technical expertise in buying businesses (because there are several methods to value a business) and it could be very expensive, but buying a business is an excellent idea.  It lets you shop around and gives you options.  You can still be creative and entrepreneurial and change the nature of the business once you buy it, but this is a way of cutting out all the ambiguity that someone who starts from scratch has to face.  Also, you can take advantage of the previous owners expertise and add value where you see fit.

6.  The point I want to make here ties into what I was saying in #3.  You can't just start a business willy-nilly without an understanding of the location and industry you'll be competing in.  You need some information, preferably hard data, about the commercial activity of the area you plan to operate in.  To that end, there are special offices funded by Texas Tech University that can give you data and even council you on starting a business.  Check these guys out: http://www.ttusbdc.org/abilene/ They have several locations.  I used to have a friend that worked in the Abilene office.  My understand from conversations with him is that the staff there can bring you all kinds of useful statistics like population growth, density, real estate sales data, etc.  I've never used them, but my friend was real high on the services they provide.  And guess what, its all free!!

Also, another good free source of real estate information is the central appraisal district for whatever county you're looking in.  I use LCAD (Lubbock Central Appraisal District) all the time for my work.  I'm sure with google you can find the same information in other counties.

Am I seeing clear analysis on what was done right and wrong on the Eagle Ford?

1.  I'm not sure what you were going for on this question; whether you are asking what private businesses have done right or wrong, or what state agencies have done right or wrong?  I guess my answer is simple though: not really.  I don't know much about the Eagle Ford.  I haven't been to that part of Texas since the shale drilling took off down there.  I have sat in a seminar where state regulators talked vaguely about some of the lessons they learned; for instance: there isn't enough funding to maintain roads so they try to make the oil companies pay for their upkeep, and that towns shouldn't disallow man-camps from being in their townships because then they can't police the men there very well.  Little anecdotes like that, but no real analysis. 

On the subject of drilling expectations...

I know next to nothing about this.  With a google search I could probably tell you how many wells Devon, Apache, and Laredo (the three biggest players in the region) plan on completing this year, but I’m not exactly sure what that means for the economics of the region.  Also, I don’t know how many other drillers there are and what their schedules look like.  I basically just rely on regular news media for this kind of info. The Tech Small Business Development center linked to in paragraph 6 might have better info on drilling than regular news, but I kind of doubt it. 

Well, actually you could go to the Texas Railroad Commission website and see their reports on drilling permits issued and wells completed.  It may be worth it to track the month-to-month trends, but you’re still wandering into uncharted waters there.  The best thing is to find an industry analyst that publishes a report.  These are rare, but they're out there and google will lead you to them.  Another good way to stumble upon them is to follow as many Cline-interest accounts on twitter as you can.  Here are some of my favorites: @eaglefordshaleP, @eaglelandinc, @tynerland, @theclineshale, @drillinginfo, @pv_energy

Thanks for the inquiry, Anita.  Feel free to send more questions or info any time.

-Matt

Spring Break by the Cline

For spring break I volunteered to go with a group of law students from Texas Tech to work with an organization that serves the indigent people around the Abilene area.  The organization is called Legal Aid of Northwest Texas, and I count the week as time well spent.  I got to appear in court for the first time, I got to meet several judges in Taylor, Tom Green, and Runnels County, and I also got to collect more information about the happenings of the Cline Shale.

Pictured above is Judge Eddie Howard.  He's a justice of the peace (an elected position for which no legal training is required) in the city of San Angelo located in Tom Green County which sits on the edge of the Cline.  With a population of just under 100,000, San Angelo is one of three major hub cities that service the Cline (Midland and Abilene are the other two)  Our group found Judge Howard in the basement of the courthouse presiding over a small wedding in his modest 30' X 30' courtroom.  He graciously took the time to answer some of our general questions about his office and the legal profession in general.  

My ears perked up when Judge Howard started to talk about the effect of the nearby oil exploration on the types of claims that recently entered his court.  He said he had seen a big rise in landlord/tenant claims because landlords noticed that the market price of their units went up significantly almost overnight, and to get these higher prices for their units they sought to evict their current tenants that might be in or near default.  In Texas and in most states, however, the tenant can't just be discarded.  Even in cases where there is only an oral agreement the tenant is entitled to 30 days written notice before he can be forced to vacate.  Judge Howard said he has had to be vigilant in these cases to make sure that landlords have their ducks in a row before they are allowed to chase higher rents, which may be double the previous occupant's rent payments in some cases.  He also said his friends in real estate reported an average time on the market of between 1 and 7 days for a residential sale right now. Information like this makes me think the oil boom is a reality right now in San Angelo.  I can't wait to see data and hear anecdotes about the economy in San Angelo a year from now.

However, one of Judge Howard's main concerns, one everyone in West Texas shares, is the communities' need for water.  Water will be the focus of some later blog posts.

Here's an article that ran in the AJ about our spring break trip http://lubbockonline.com/crime-and-courts/courts/2013-03-19/texas-tech-law-students-provide-free-legal-services-underserved#.UUnFzI6rVUQ I'm quoted at the end of the article.

And here's a news segment on the trip that ran in the Abilene market.  Look for me loitering in the conference room in a lime green jacket. http://bigcountryhomepage.com/fulltext?nxd_id=578762

Perspective on Peak Oil Theory

Think back to where you were at the beginning of 2008.  What was your outlook on fossil fuels?  Did you subscribe to the "peak oil theory?"  The peak oil theory is an idea published in the middle of the 20th century that, similar to the lifespan of an oil well, the world's production of oil will experience exponential growth until peak oil production (thought to be near the turn of the 21st century), and then, in apacolyptic horror, production will decelerate almost as quickly.  A graph of estimated production figures, according to this theory, looks like a standard normal curve with a more elongated (taller) peak.  Does this theory still have validity to you today?  Maybe you need to reconsider your outlook.

If you're like me, back in 2008 you didn't know anything about the oil and gas industry except for what you gleaned from popular media.  Well, back then peak oil theory had serious traction.  People everywhere, even the experts, were sure we were going to deplete the worlds fossil fuel reserves in the next 25 years.  That fear permeated American society.  It likely played an major role in the election of Barack Obama, and is perhaps the reason the American media never made a big deal of him sinking billions of taxpayer dollars into "green companies."  http://tinyurl.com/greenfails 
 That is not the case today.  There has been a near 180 degree change in attitude about oil.  Part of that is due to the fact that American consumption of oil peaked about 5 years ago, but most of the attitude adjustment is due to the innovations in well completion technology.

I was reminded of this change by my oil and gas law casebook.  Our class uses this book http://tinyurl.com/oilcasebook The foreward is dated November 2007.  The author states at the beginning of Chapter 6: 

"Discoveries of new major oil and gas reserves on privately owned lands in the United States are becoming less and less likely.  The last frontiers for major domestic discoveries are generally believed to be on public lands..."

The discovery of the Cline Shale and formations like the Bakken in the last five years render this statement absurd today.  Consider that the Cline was discovered in West Texas not far from Midland, a city that has more oil and gas experts per capita than probably any other city in the world.  Drilling operations have been ongoing in that region for at least 100 years.  How could a formation like that go unnoticed for so long, especially considering its vast size?  It's as big as the state of Vermont for crying out loud!  The answer is pretty simple.  We likely knew of the Cline formation for years; heck, the Bakken was discovered in the 1950s.  But with the technology available in the 20th century these shale formations were considered "dry."  Nothing came out of your well-head at those depths.  But now with fracking we are able to unlock the oil trapped in these formations. 

Experts now say there is located in North America enough recoverable hydrocarbons to meet American energy demands for the next 200 years. http://www.businessinsider.com/us-200-year-supply-oil-2012-3

Peak oil theory is on its heals today, but like any idea with a political taint it will likely refuse to die.  All you have to do is google "peak oil theory" and you can find blogs and articles written by "peak truthers" (or "peakers") declaring the theory is still very much in tact.  If you choose to read their stuff pay attention to the ways they try to "move the goal-post" by modifying the theory ever so slightly. 

In Cline Shale Country Again

For the second weekend in a row I found myself driving through Cline Shale country.  Last weekend I went to Colorado City for the Cline Shale Summit.  To get there I took major highways, so I didn't really notice any drilling action as I drove through.  This weekend, however, I had to get off the main thoroughfares to go to a ranch about a half hour northwest of Abilene.  I saw this rig about 20 miles east of Snyder in Fisher County.  The name on it is Ringo Drilling.

I also noticed several pits like the one to the left of the rig.  They were lined with black plastic and all of them sitting adjacent to flattened, hardpacked, dirt pads.  I'm guessing the surface owners in this area are not too keen on drillers using a caliche floor for their drilling site like they usually do.  I must have seen four or five pits next to pads.  I wonder if those pads are all waiting for this rig.

Cline Shale Summit

I went to the "Cline Shale Summit" in Colorado City, Texas last Friday.  Here's a local news segment about it http://tinyurl.com/bzz2srj . Below are my thoughts on the event.  I would summarize this meeting as "interesting and exciting, but something less than what I was hoping for."

1: I think most people didn't really know what to expect at this thing.  Information about the meeting was hard to come by.  I learned about the existence of the meeting in a local newspaper article, but it seemed like no other information was available, not even online.  I only learned of the location of the meeting after I made a phone call to the Colorado City Chamber of Commerce.  So I'm sure there were a handful of people in the audience of about 250 who felt like the lady sitting next to me who asked rhetorically under her breath "Where are all the oil companies?" She was under the impression that some of the operators in the area would be present and taking resumes or looking to "talk shop."  Honestly I was hoping for something like that too, and in fact, that is the main reason for my less than stellar summation of the meeting mentioned above.

2: Though there was no theme or slogan, the speakers all shared the same general message: "Get ready."  Also I heard several variations on the statement "We have learned so much from the Barnett and Eagle Ford plays, let's all try to not repeat our mistakes there."  Most of the speakers were there representing state agencies (Texas Worforce Commission, Texas Commission on Environmental Quality, Texas RailRoad Commission, just to name a few).  To me they seemed to be targeting the city council members and other government leaders in the room with the information they shared.  Some advice that stood out to me: 1) don't prevent the man-camps from locating inside city limits because you need to have some control over them so they don't get out of hand; 2) get a hotel occupancy tax because you will need the funding for a bigger police force and other services, 3) watch the state legislature because there have already been bills introduced this session that affect the hotel occupancy tax; 4) cities need to get ready to exorcize their extra-territorial jurisdiction regarding roads because counties wont have the budget to maintain them well enough.

3:  They fed the whole audience a good lunch of chicken fried steak, green beans and mash potatoes.  I particularly enjoyed the lunch break because it afforded me a chance to be in conversation with other audience members.  One guy I met said he was from Lufkin (East Texas).  He was a commercial real estate developer who learned he could do well following the major oil and gas plays building hotels early in the development and shopping centers later as the location matured.  The question he sought to answer at the Cline Shale Summit: "As a country and as a state, do we have room for more growth?"  His point being that there are several hot oil and gas plays right now.  Locally, there is the Barnett, and Eagle Ford and various formations west of Midland; nationally there is the Bakken, Marcellus, and Utica shale plays.  It may make no difference that there could be 3 times the amount of recoverable oil in the Cline Shale formation as the Bakken (the largest oil shale formation discovered in the U.S.).  If drillers have more on their plate right now than they can handle, the Cline may have to sit for a few years so drillers can get caught up.  Also the skills of the workforce in the U.S. may be an issue too.  Kids for the last 30 years have been taught to go to a 4 year college and get a degree so you can work a high paying job in an office somewhere, but what we really need to develop our national resources right now are "skilled laborers" - welders, roustabouts, roughnecks, etc.  The workforce may delay the development of the Cline as well.  I look forward to comparing the activity in the Cline Shale a year and two years from now.  My guess is there will be delays, but make no doubt about it for at least the next 10 years the area between Midland and Abilene will see crazy growth.  

As we were finishing our lunch a tall, older, goateed man in pressed jeans, boots, and cowboy hat came to our table and heartily greeted my friend the real estate developer.  The man said he was the mayor of Big Spring, Texas, and he and his friends on the city council see room for growth in their town.  They excitedly traded business cards.  Interested in Cline Shale, or Oil and Gas issues?  

TxDOT: in some places we can't get roads repaired fast enough. We've learned to tear the pavement up and reduce the speed limit #clineshale
— Matthew Zimmerman (@PnutBrother) February 8, 2013

Fracking In Lubbock

Well, my intention with this blog is to focus on the rising oil boom 150 miles to the south of my current locale, Lubbock, but I can't pass up the opportunity to write a post on an oil and gas issue in my own backyard.

Friday, the Lubbock Avalanche Journal ran this article http://lubbockonline.com/local-news/2013-01-30/council-consider-hydraulic-fracturing-city-lease .  The gist of it is that the City of Lubbock owns some land that contains a producing oil well.  The well operator has informed the city that it can increase the wells productivity by about 40 percent (from about $1 million/year production to $1.4 million/year) if the well is fracked, and the city council is going to vote to authorize the use of hydroclic fracturing. 

Here's a primer on hydrolic fracturing for the uninitiated http://fracfocus.org/hydraulic-fracturing-how-it-works/hydraulic-fracturing-process

I want to point out some things I noticed about this article.  I'm not sure the article shows bias, but I think the author could have done a better job to dispell the spectre of validity given the opponents of the proposed well fracking.

The author gives ear to several interested parties - it's a long article - but at the top of the list is David Hayes, director of the East Lubbock Community Development Corp. and resident of the neighborhood nearest the well.  David is against the proposed fracking.  He mentions earthquake danger and noise pollution as the main "cons" of the procedure.  But hey, he's not a party pooper, he's just concerned for the "growth in the neighborhood." 

First of all I'm not sure what the East Lubbock Community Development Corp does, but from the comments of its director I'm inclined to think it's a lefty political organization.  Secondly, earthquakes?  He thinks a little pressure created in a single oil well could cause earthquakes?  It's almost as if he found out about the ultra-conservative pipe casing job the operator has planned to quiet objections over ground water contamination, and he's just raising the next best fear-mongering argument in the anti-fracking playbook.  If earthquakes were a real possibility, I think we would have experienced them in Texas by now in some of the areas that have the maximum allowable wells drilled according to well spacing regulations.  Here's an unofficial map of well locations in several sections (that's 640 acres squared) in Howard County, Texas, a place I'm familiar with after doing land research there during an internship after my first year of law school.
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They're not afraid of fracking in that area, in fact they appreciate it for the good jobs and revenue streams it creates.  Despite the high density of wells in Howard County, no unusual tectonic activity has been reported from there.  I am aware that there is speculation that well activity may have caused mild tremors in the Barnett Shale area, but the fears those speculations have raised have not gained much traction, leading me to believe they're likely unfounded.  Plus the activity those speculators point to in the Barnett Shale is waste-water disposal wells, not fracking.  It's my belief that the origins of the earthquake fears originated when a company in Britain accepted partial responsibility for tremors in the Blackpool region a couple of years ago.  This caused Britain to implement a moratorium on fracking, which they recently lifted. http://edition.cnn.com/2012/12/13/business/uk-fracking

As for the noise, yes hydrolic fracturing does create a good bit of noise from the diesel engines pumping fluids, not unlike the engines on 18 wheelers.  But that doesn't stop people from buying houses along major highways.  And how close is the well to the neighborhood anyway?  The article doesn't say, just that it is on the other side of a road.  And the article quotes another man as being concerned for the students at Estacado High School, but it doesn't say how close the campus is to the well either.  It also doesn't mention that it almost always takes less than a week's time to complete a frack job, and that it is not an ongoing process as the two concerned Lubbockites imply.  With these considerations in mind, I highly doubt "noise pollution" is a reasonable objection to the proposeed frack job.

Nonetheless, despite the absurdity of the objections raised in the article, the comments section is an anti-fracking frenzie.  I did, however, notice one commenter strike back at the doom-sayers and make some excellent points with his first hand experience of geology and fracking.  That was refreshing.

Anyway, the "debate" (the quotation marks signify sarcasm) over fracking in Lubbock is likely to carry on for weeks.  The city council here is prone to raising issues and allowing more time for citizen feedback than is needed.  I anticipate the well will be fracked before summer, so I will probably only update the blog on this issue if something unusual happens, or maybe if there is a good concerned citizen rant at a city council meeting.  Which wouldn't be all that unusual, but enjoyable.  If you like that sort of thing.  And I do.

Who am I? What am I doing?

I'm starting a blog.  I declare: this is a blog!  I'm not really sure how you begin a blog, but this will do.  Moving along.

Let me tell you a little about myself and my intentions with this blog.  I am a twenty-something law and business student (JD/MBA, Dec 2013) with a passion for creating value.  I go to Texas Tech University, located in Lubbock, Texas which sits at the precipice of the "big country" and the "high plains" of the panhandle.  Cotton is still a big deal around here, and Lubbockites are reminded of that fact daily by the blowing dust and cotton fibers from the hundreds of thousands of acres of exposed soil that surround the city.  But just 150 miles to the south (a trivial distance to Texans) there is a resurging oil boom taking place because of a formation discovered between Abilene and Midland called the Cline Shale, and my aim is to be a part of the effort to capitalize on that resource.

I've got high hopes for this blog; too many goals to list, but I want to name a few.  First of all I want to chart the progress of the oil companies drilling in the Cline Shale region.  Developing a formation can be a decades long process and I think it will be interesting to document how it plays out and who the big individual winners are.  Secondly, I want to write about some of the oil and gas law issues I’ve studied in law school.  I’ll be a practicing attorney soon and I could use the practice and potentially help enlighten some readers on a technical, but not impossible, area of the law.  Thirdly, I want to help people in the West Texas area take advantage of the opportunities the Cline Shale will provide.  Since the national housing market cratered 4 years ago, unemployment has been a major issue in the United States; and Texas, though it has weathered the economic storm much better than most states, still has an unemployment level that is much higher than before the bust.  I see the Cline Shale as a much needed impetus for statewide (and nationwide) economic renewal.  They say a rising tide lifts all boats.  Well I intend to be the bronzed lifeguard pointing at the coming waves.