Lubbock Committee Sees Value In Drilling

This is just a re-post of an article I wrote for ClineShaleSite.com last week.  If you haven't, check that site out.

Have a Great Day,

-Matt Z.

Individual states hold the lion’s share of regulatory power over oil and gas drilling activities, but an often overlooked source of regulation comes from municipalities within those states. In Texas, “home rule” municipalities (i.e. towns with more than 5000 residents) are given broad powers to propose and enact ordinances to regulate anything within their area of incorporation that has not expressly been prohibited by the legislature. With the recent surge in drilling activity, many of these municipalities are making it a priority to update their drilling ordinances to address changes in practices due to the shale revolution, as well as changes in attitudes of their constituents. While these ordinances only affect drilling within city limits, a narrow area when compared to the overall size of Texas, they are important because they reflect the attitudes of civic leaders and residents towards the oil and gas industry.

Earlier this year, Lubbock’s City Council decided to revisit its drilling ordinances, and this potentially has implications for the Cline Shale due to Lubbock’s influence on other West Texas cities.  Although Lubbock sits about 80 miles north of the Cline’s perimeter, it is the largest city in West Texas and the largest within 250 miles of the formation.  Additionally, the dozens of active wells within the city limits are relevant on a daily basis to its residents. Other communities in West Texas are likely watching Lubbock closely for guidance with respect to their own drilling ordinances.

I recently attended a public meeting of the committee tasked with advising Lubbock’s City Council. You can learn more about the committee’s members and their qualifications here. As expected, tensions between industry supporters and those concerned with purported health risks associated with drilling were apparent during the meeting. On the one hand, drilling contractors spoke of the positive impact their business have had on the community, and, on the other hand, concerned citizens voiced reservations about the expansion of drilling activity. Anne Epstein, a doctor, the chairperson of the Lubbock Board of Health, and a member of the committee, also made a presentation outlining the public risks identified by the Board and presented recommendations to mitigate the same. Initially, Epstein took heat from the other committee members who demonstrated skepticism about the data Epstein and the Board of Health had relied upon. The issues that drew the most discussion were well bore integrity, fresh water use, water contamination, mandatory closed loop drilling, and well set-back distances.

However, in sum, what I observed during the meeting leads me to believe that the committee members will likely make modest proposals to the City Council. In other words, I do not think it likely that Lubbock will make drastic changes to expand the scope of its drilling ordinances. Even Epstein, the committee member most opposed to drilling, acknowledged that the opportunity sitting under our feet is too immense to impose a blanket ban on drilling and fracking.  I think this bodes well for Cline development. If Lubbock plays out as I predict, it indicates to the leadership of other area cities, that when they stand up to the draconian rules often proposed by energy industry skeptics, they will not be alone.

Marfa Wildcat Story

This morning I came across a good, fun read.  Jennifer Hiller (@Jennifer_Hiller), a reporter covering the Eagle Ford for the San Antonio Express-News spent a few days hanging with wildcatters way out in the sticks of far west Texas and writes about her experience here.  Woven into her story are tidbits of oil and gas law, oil and gas finance, logistics, and other nifty factoids.  It's a long article, but if you give it a chance you'll probably do like I did and get a quarter of the way through it and commit to reading to the end to see if they hit pay-dirt.  I wouldn't dare spoil it for you.

Happy Monday :)

New Friends: ClineShaleSite.com

Ok, big news: I've decided to share some of my writing with friends at ClineShaleSite.com

After talking with them and learning that we share a common excitement and long-term bullishness for the Cline, the decision to contribute to their site was an easy one.  You can click over and see my first post for them here; or, since it is slightly abbreviated there, I'll post the unabbreviated version below.

Barnhart is a small unincorporated town with a population less than 200 that sits about an hour’s drive south-west of San Angelo.  However, this is not your typical, sleepy, rural Texas town.  Every day the town’s streets swell with traffic as workers from other communities converge on Barnhart to make use of the South Orient Railroad, which connects the Permian Basin to Houston.  Sand and other oilfield materials go in to Barnhart; oil goes out to Houston.  With the development of the nearby Cline and Wolfcamp formations, this tiny town has become a very valuable outpost.

However, Barnhart has also become the source of much controversy since it was reported back in June that the town’s lone water well had run dry.  Since then, several publications (The Guardian, The Houston Chronicle, and The Daily Kos) have opined that fracking has consumed all of the town’s water leaving the residents and livestock there thirsty.

Currently, Texas is in its 3^rd year of a drought that began in 2011, a year which has been labeled one of (if not) the worst year(s) for rainfall in recorded history for the state.  The last two years have been a poor reprieve from that time.  Today, Texas lake water levels average 66% of capacity, and groundwater depletion is a growing concern.

Is fracking to blame for the Barnhart well running dry?  To answer this in the affirmative, like the above mentioned publications, is to give in to pure speculation and ignore the myriad of factors that weigh on this issue.  It’s easy to blame and demagogue the highly visible semi-trucks hauling tank-full after tank-full of water.  It’s more difficult to point the finger at the ranchers and farmers who often account for 3 to 20 times the water used for fracking in the communities around oil rich formations.  The author of the Guardian article points out that in nearby Crocket County fracking consumes 25% of all water used, but she fails to note that there are less than 3700 people living in that mostly infertile area.  All of the authors seem intent on fear mongering by pointing to Barnhart as evidence that the oil industry is going to run our entire country out of water, but in Texas - the number one state for oil and gas production by far – fracking has never accounted for more than 1% of annual statewide water use.

The real issue to be highlighted in Barnhart is the necessity for smart leadership and coordinated efforts among parties with an interest in maintaining the value of a common resource – that resource being the town, its people, infrastructure, and also its groundwater.  It would behoove the people of Barnhart to incorporate their town, elect leaders, extract tax revenue, and begin the coordinated dance with the oil companies that other Texas municipalities have learned to embrace.    

Today Barnhart is not without water.  Five days after the well went dry local crews were able to bring an old railway water well back into production to meet the community’s needs, but it’s just a temporary fix to their water issue.  In the long-term nothing short of breaking out of this awful Texas drought will sustain the efforts in the Permian.  My suggestion to those concerned is to do as the salty old Texans who have survived through thick and thin do – pray for rain.

Cline Shale Area Tax Revenues for June

Over the last few months I've noticed that Abilene Reporter-News (ARN) has done a good job of reporting on the sales tax revenues from some of the municipalities in the area of the Cline Shale.  But those familiar with the area should notice they don't report on ALL of the cities in and around the Cline.  Most notably they leave out Midland, San Angelo, and Roscoe (and maybe Lubbock is worth mentioning too).  With a population of about 1300, it's no major offense that Roscoe wasn't included in their report, but it does seem odd that ARN decides to include much smaller towns like Robert Lee, Roby, and Mertzon.  The latter two towns are smaller than Roscoe by half.  Curious.

Anyway, I'm going to take what ARN reports and include the approximate populations of the towns to give a better frame of reference.  My conclusion about this data is below - but I'll save you the time - this data shows nothing really significant.

Increase/Decrease in Year-Over-Year Sales Tax Revenue

Abilene (pop. 118,100) - up 0.78%

Big Lake (pop. 3,000) - down 4.13%

Big Spring (pop. 27,400) - up 3.70%

Colorado City (pop. 4,200) - up 18.78%

Mertzon (pop. 800) - up 84.27%

Robert Lee (pop. 1,100) - up 11.73%

Roby (pop. 700) - down 6.5%

Snyder (pop. 11,200) - down 1.01%

Sterling City (pop. 900) - up 9.73%

Sweetwater (pop. 11,000) - up 8.55%

My conclusion about these numbers is similar to that of the previous month's report, which I blogged about two posts ago.  This is a mixed bag of data, and it is obviously too soon in the development of this formation to see major effects of drilling operations.  Sure, Mertzon's 84% increase is likely due to drilling activity, but how much activity do you think it takes to move its' needle?  Less than a thousand people live there.  If by chance a tour bus stops in Mertzon for lunch one month, that could result in an 84% increase in sales tax.  I kid.  But seriously, one thing to keep in mind when reading these numbers is that Texas in general has a strong economy and there are many factors at play on the economics of these municipalities, not just the oil industry.

Here is the original ARN article this data was taken from.

And if your interested, here is ARN's article on May's sales tax receipt data, and here is the one for April.

I see a spreadsheet and some data-tinkering in my future.

Devon to reduce Cline rig activity

According to the Tyner Land Solutions twitter account Devon Energy, the largest operator in the Cline, revealed in their conference call that they are less than pleased with their well data results and are taking steps to reduce their presence in the Cline.  It sounds like they have had some success, but also some costly failures and they're going to trim operations to go with what works.

Really interesting updates from Devon on their #Cline program today in their Q2 conference call. Summary to follow: $DVN
— Tyner Land Solutions (@TynerLand) August 7, 2013

"Yeah, on the Cline, we’ve decreased our rig activity right now. We’ve seen a lot of variability on the Cline." $DVN Q2
— Tyner Land Solutions (@TynerLand) August 7, 2013

"we certainly have our concerns about the Cline, but we’re also getting additional 3D.... We’re looking at our completion techniques." $DVN
— Tyner Land Solutions (@TynerLand) August 7, 2013

"For the short term, we’ve decreased down to two rigs…"
— Tyner Land Solutions (@TynerLand) August 7, 2013

"…doing what I call mini developments in Sterling County, seeing how low we can get the well costs to have economic developments…"
— Tyner Land Solutions (@TynerLand) August 7, 2013

"In the meantime, we’re studying the well results we have to date. We’re getting 3D. …the results have been pretty mixed so far." $DVN
— Tyner Land Solutions (@TynerLand) August 7, 2013

"So we need to do some studying here before we go back out there with a significant program."$DVN
— Tyner Land Solutions (@TynerLand) August 7, 2013

Devon's report dove-tails off what I said at the end of my blog post yesterday.  We are seeing increased drilling permits issued, and some increased tax revenues in cities around the Cline, but what ultimately matters is whether Cline wells deliver the oil that analyst claim is there.  Hopefully in the grand scheme of things today's news will only represent a "one step back" in Cline development, and we'll see "two steps forward" soon.

Slump-buster, Abilene, Timing

Ok, it seems like forever since I've written a blog post.  Unfortunately, this whole summer I've been full of ideas to write about but short on time and focus because of summer school and work.  I just finished my last law school exam though, so hopefully these next few months will see more prolific blogging from me.  Because this is my first time to add to this blog in a while, I'm not real optimistic about it's content. Nonetheless, I need a slump-buster.  So here's what I have:

As I mentioned, I'm in law school right now, and that actually has some connection to what I want to write about today - timing.  I began law school in the fall of 2010.  Typically law school lasts three school-years (6 semesters).  So, if you do the math (2010 + 3 =2013), you should come to the conclusion that my pace in school is a little off, and that I should have graduated this May.  I can hear you're thoughts, reader.  "Have you been taking you're time, Matt?  Slacking off?"  Well, the answer to your inquisition, dear reader, is no.  I have not been slacking off.  I was given the opportunity to get two graduate degrees while at Texas Tech, a JD and an MBA, and I decided "why not?"  Two is better than one, right?  Well, the answer to that rhetorical question is "not necessarily," especially if time is of the essence.  The added classwork of the MBA is going to keep me in school an extra semester, which will delay graduation, taking the bar exam, and finding a job by about 6 months.  I'll take the Texas bar exam next February and get the results in May 2014. 

I haven't always been keen on graduating a semester late, but lately I've been of the opinion that it's not such a bad thing.  Why?  Because I'd like to land a high paying oil and gas related job.  But, like most people who want to live and work in west Texas, I don't want to move to the desert: Midland.  I'd prefer Abilene.  In Abilene the cost of living is much cheaper, the city is surrounded by picturesque ranches, and its not too far away from major cities: Dallas and Austin.  However, Abilene doesn't have much of an oil industry right now.  In fact, the few people I've asked have said there aren't but a few oil and gas lawyers in Abilene - maybe not even ten.  But that could be changing fast.  Some analysts have predicted that the activity from the Cline Shale should really heat up in the third quarter of this year, and because of the capacity issues in Midland due to the multiple producing formations in the Permian Basin, Abilene should receive a substantial amount of the Cline's economic activity.

So far the tax revenues in Abilene tend to support this theory.  The taxes collected in Abilene from sales in the month of April this year showed an increase of 7.88 percent over the April 2012 sales figure.  And the May total came in at 9.26 percent above the previous year.  Now this increase in economic activity is almost certainly not directly due to Cline Shale exploration - the Cline Shale formation doesn't even reach as far west as Taylor County where Abilene sits.  Plus we're still really early in the development of this formation; it's only been about a year since the blogs started to run with the story of this exciting new play.  Rather, the increased activity in Abilene is probably due to infrastructure spending by companies, and maybe the City of Abilene, getting ready for what's coming.  Devon Energy, the largest holder of interest in the Cline has built a field office in Abilene.  It wouldn't surprise me if the other big players like Apache Corporation and Laredo Petroleum were in the process of doing the same.  The movements of these giants can spur smaller companies to follow suit and the net effect this pre-production cold-war can have on the economics of a mid-sized rural city like Abilene can be quite substantial.   

Other cities in and around the Cline Shale showed mixed data.  The city of Sweetwater, which sits at a very strategic location in relation to the Cline showed a slight decline in year over year sales tax receipts for the month of May, while Coleman and Anson, two small towns outside the formation, both showed over a 17% increase.  These towns are significantly smaller than Abilene, though; and in my opinion their size makes them poor economic barometers.  Heck, Sterling City showed a 127% increase in year over year sales tax revenues collected in April, but that city (village rather) has less than a 1000 residents.  Whoopty do. 

Let me conclude this post by saying anything could happen between now and next May.  I've seen some Cline-followers on twitter reporting on the amount of drilling permits issued to the big operators in the area.  That's exciting stuff, but drilling permits don't equal oil in a pipeline headed to market.  At least not yet while we're still in the speculative stage of the game.  Time will tell if this is really the biggest inland discovery of oil in the lower 48, and for now that's ok with me.  Time is a resource I have a little bit too much of right now.  Here's hoping the next 9 months produce some real gushers and a chance of a decent job for this debt-laden future-lawyer.

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