Eagle Ford Generated $25 Billion In 2011

June 2012 Vol. 239 No. 6

Development of oil and natural gas in the Eagle Ford Shale contributed $25 billion in total economic output to the region in 2011, according to a study by the Center for Community and Business Research at The University of Texas at San Antonio Institute for Economic Development (UTSA).

“The Eagle Ford Shale has proven to be one of the most important economic engines in the state,” said Dr. Thomas Tunstall, director of the UTSA Center for Community & Business Research, and the study’s principal investigator.

“In 2011 alone, the play generated over $25 billion in revenue, supported 47,000 full-time jobs in the area, and provided $257 million in local government revenue.”

In fact, in just 2011, the shale development provided almost as large an economic surge to South Texas as an earlier UTSA study predicted would occur over nearly a decade. That projection estimated the Eagle Ford would account directly and indirectly for almost $21.5 billion in economic output by 2020.

The study also concluded that in 2011 shale development:

  • Paid $3.1 billion in salaries and benefits to workers;
  • Provided more than $12.6 billion in gross regional product;
  • Added more than $358 million in state revenues, including $120.4 million in severance taxes; and
  • Spurred a triple-digit sales tax revenue increase in various local counties.

Opportunity Of A Lifetime
“We view the Eagle Ford activity as an economic opportunity of a lifetime,” said Mario Hernandez, president of the San Antonio Economic Development Foundation. “The key goal is the increase in investment and jobs. And if the communities will partner with the private companies that are creating these jobs, it can be a win-win for everybody.”

The increased revenue from the Eagle Ford Shale is rebuilding local communities. New schools and new hospitals are being built, and new training programs have been launched to maximize hiring from the local workforce. The study projects the creation of approximately 117,000 full-time jobs by 2021, more than one-and-a-half times the 68,000 full-time jobs the earlier study had projected.

“The residents and local leadership of South Texas have taken a proactive and collaborative approach to this new economic opportunity, which we hope demonstrates how communities can embrace, invest and manage this new influx of revenues to ensure long-term regional prosperity,” said Leodoro Martinez, executive director for the Middle Rio Grande Development Council and Chairman of the Eagle Ford Consortium.

“Through the Eagle Ford Consortium, Eagle Ford Task Force and other community-industry collaborations, Eagle Ford leaders and residents are working together to develop training programs, enhance local employment opportunities, and forge solutions to community issues that maximize the benefits and manage the effects from increased development activity.”

The Eagle Ford Shale is a 50-mile-wide by 400-mile-long formation that runs from the southern portion of Texas to the east. The formation produces natural gas, condensate, oil, and natural gas liquids, with margins more favorable than other shale plays. The study assessed the economic impact of the Eagle Ford Shale on the 14 counties currently producing oil and natural gas from the formation as well as the six surrounding counties indirectly involved in its development.

From 2010 to 2011, crude oil production increased more than six-fold to more than 28 million barrels, condensate production tripled to more than 21 million barrels, and natural gas production doubled, according to the study funded by America’s Natural Gas Alliance, an industry group which paid a reported $90,000 for the report.

“The total number of recoverable reserves for the Eagle Ford shale is still unknown, but there are estimates that it could be as much as 7 to 10 billion barrels,” said Tunstall. “That would make it the largest on-shore oil reserve ever discovered in the Lower 48 states.”

The liquids-rich Eagle Ford shale play is one of the hottest North American shale fields, as oil prices have remained strong relative to natural gas prices, which have slumped to a decade low. The top three Eagle Ford operators in 2011 (ranked by completed oil wells) were EOG Resources Inc., Cheasapeake Energy Corp. and Burlington Resources, the study said.

$100,000 A Week
Oil industry executives said wells producing $100,000 a week in income are not unusual in the Eagle Ford, according to a Reuters report.

“We are evaluating a series of projects in that regard that could literally double our company’s earnings over the next few years,” said Curt Anastasio, president and CEO of San Antonio-based pipeline company NuStar Energy L.P. who moderated a presentation of the study.

Tunstall said the latest study is the “first chapter” in its look at the shale. In late summer, the center will look at workforce issues and a third installment will provide more detailed county-by-county data.

UTSA officials said the earlier study was conservative, as is the current one. But shale production “has far exceeded the expectations outlined in the initial report because of rapidly evolving business activity,” the study said.

All of the shale drilling translated to fatter paychecks, according to a report in the San Antonio Express News. Most of the counties saw average weekly wages jump from about $450-550 a week to $600-700 a week, Tunstall said.

Before the study was released, a Real Estate Council of San Antonio breakfast was held at the Petroleum Club where Adam Haynes, senior director for corporate development and government relations at Chesapeake Energy Corp., estimated there is at least 30 years of production in the Eagle Ford Shale.

Mark Witt, vice president and CFO of San Antonio-based Lewis Energy Group, said the natural gas production company has 1,000 employees and plans to add another 350 this year, with 50 of those jobs at its corporate headquarters.

Marcellus Generated $3.5 Billion In 2011
Marcellus Shale gas wells in Pennsylvania generated about $3.5 billion in gross revenues for drillers in 2011, along with about $1.2 billion in West Virginia, according to an analysis by The Associated Press.

But experts say that a sharp drop in wholesale prices over the last year means that in the future much more money will be made – and more jobs created – by petrochemical companies that process the gas into other industrial and consumer compounds.

In 2011 the formation produced just over 1 Bcf of gas in Pennsylvania, and about 350 Bcf in West Virginia. Ohio has almost no Marcellus production, but is exploring other gas fields in what is referred to as the Utica Shale. New York hasn’t allowed drilling.

“We are producing record levels of natural gas,” said Fadel Gheit, a senior oil and gas analyst with Oppenheimer & Co. in New York. Gheit expects the trend to continue because the industry has mastered horizontal drilling deep underground. That means the wells don’t just go down, but also out thousands of feet through the gas-rich shale.

Just a few years ago drillers were being paid $4, $5 or even $6 for each 1,000 cubic feet of gas. Now the price is about $2-2.50, meaning industry revenues may drop this year even as production grows.

The AP estimated 2011 revenues using an average wholesale price of $3.50 for that year. But at current volumes each $1 drop in price costs the drilling industry a billion dollars or more in Pennsylvania alone. Drillers are slowing production in an attempt to boost prices, but Gheit thinks the trend of plentiful, cheap natural gas will continue, mostly because the industry continues to find new, deep underground fields that can be profitably drilled.

“We’re really just at the tip of the iceberg,” he said, since at least 10 new and previously unknown gas fields will go into production over the next year around the country. Gheit and others said the gas that’s produced represents only part of the money generated.

Patrick Creighton, a spokesman for the Marcellus Shale Coalition, estimated it costs the industry about $5 million to bring a well into production. With about 2,200 active wells in the state, that comes to $11 billion in additional investments, mostly over the last four years. The industry is also building or planning billions of dollars of new pipeline construction.

Creighton said the minimum royalty in Pennsylvania is 12.5% of well revenues, meaning property owners there were paid more than $400 million last year.

Gheit said the real value of shale gas is that the lower energy cost is making American industry more competitive around the world. That opens doors for long-term investments such as Shell Oil’s plan to build a huge petrochemical plant in western Pennsylvania.

“In my view this is much bigger than anything we’ve seen in our lives” as far as a new energy development, Gheit said of shale gas.

Kathryn Klaber, president of the Marcellus Shale Coalition, said the current low natural gas prices benefit consumers throughout the state.

“Every single Pennsylvanian has more money in their pocket today – to save, invest and help make ends meet — as a result of plentiful natural gas development from the Marcellus Shale,” she said.

The AP analysis of production and revenue used data from the Pennsylvania Department of Environmental Protection, Bentek Energy LLC, and the U.S. Energy Information Administration.

Energy Security Still An Issue
Meanwhile, increasing domestic production of oil won’t significantly boost energy security in the United States, according to a report by the Congressional Budget Office released May 9 that assessed the nation’s ability to withstand disruptions to its energy supply.

The CBO advocated policies that reduce demand for oil, such as promoting more fuel-efficient and alternative-fuel vehicles.

“Policies that promoted greater production of oil in the United States would probably not protect U.S. consumers from sudden worldwide increase in oil prices, even if increased production lowered the world price of oil on an ongoing basis,” the report noted. “In fact, such lower prices would encourage greater use of oil, thus making consumers more vulnerable to increases in oil prices.”

The United States is more susceptible to disruptions in the crude oil than other types of energy because the nation relies heavily on crude oil for transportation. Also, the U.S. maintains a larger stock of natural gas and coal than it does for oil, the report noted.

Further, the lack of fuel diversity for transportation makes U.S. transportation system highly susceptible to the oil market. By comparison, the nation’s electric power is generated from a portfolio of sources, including coal, natural gas and renewables.

“The United States has no alternatives that can be readily substituted in large quantities for oil in providing fuel for transportation,” the CBO noted. “Consumers have less flexibility in the near term in how they use transportation.”

The CBO also produced an inforgraphic to visualize the results of its report.

Markey Wants More Investment In Gas Pipelines
Following the bombing of a natural gas pipeline in Yemen that disrupted fuel shipments to Boston, Congressman Edward J. Markey (D-MA) called for increased investments in domestic pipelines – which could boost recent efforts to expand a natural gas pipeline that serves New England, according to a report in the Boston Globe.

In a three-page letter to federal Energy Secretary Steven Chu, Markey questioned whether the region should import liquefied natural gas from Yemen when domestic gas production is booming because of drilling in shale formations across the country, including in Pennsylvania.

“These natural gas supply problems highlight the importance of developing the domestic infrastructure that would allow all Americans to benefit from the low-price, abundant, and secure supplies of natural gas now being produced in the United States,’’ wrote Markey, a ranking member of the House Natural Resources Committee.

In an interview, Markey said he would “seriously consider’’ supporting a proposal by Spectra Energy Corp. to expand the Algonquin Gas Transmission pipeline that delivers natural gas to New England.

“They want to use the same route that the Algonquin was licensed for a generation ago, so much of the work is already done,’’ Markey said, but “we still have to make sure we walk through all the environmental and safety issues.’’

Spectra has said it wants to expand the capacity of the Algonquin pipeline in southern New England by about 15% and estimated the cheaper supplies from Northeast gas fields would help save gas and electric customers up to $651 million a year. Richard Kruse, a Spectra vice president, told the Globe the company was prepared to move forward with the project, depending on market conditions.

“As demand in the region continues to grow, additional natural gas pipeline infrastructure – connecting consumers to diverse supply sources – will be needed,’’ he said.

Cathy Landry, a spokeswoman for the Interstate Natural Gas Association of America, said Markey’s attention could spur interest in new pipeline projects. “One of the benefits of domestic natural gas is you really don’t have to worry about political supply cutoffs,’’ Landry said, “so that certainly gives a nod to why you should do a pipeline.’’

Federal, state, and regional energy officials began making contingency plans after pipeline bombings in Yemen stopped two tankers of LNG from shipping to a terminal in Everett, MA which is in Markey’s district. The loss of that supply could cause fuel shortages for electric power plants in Greater Boston this summer, especially if a heat wave increases power demand or a local plant has an unexpected outage.

Nearly half the electricity in New England is generated by natural gas-fired plants. Almost 60% of Massachusetts’ electricity is produced by gas plants, the Globe said.

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