The Economist: The New Kid on the Block
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M. Ray Perryman
Texas oil and natural gas exploration and production activity has been on a strong upswing. The industry has enjoyed significant growth the past several years based on technological improvements which have both increased total recoverable amounts and improved economies. Production of natural gas is up significantly, and estimates of the total amount still in the ground have jumped substantially. Oil fields once seen as essentially played out are also being reworked with new methods.
This is a topic I’ve discussed before. It’s close to home for me as a native of East Texas (near the fabled Kilgore field), a current resident of Odessa (in the heart of one of the richest oil fields in the country), and an economist who has watched the industry for more than 30 years. Although the Texas economy has diversified to the point that energy is no longer the dominant force it once was, the sector still drives a large share of economic activity (particularly in some regions).
Most of the recent increase in production of natural gas has come from shale formations such as the Barnett Shale in the Metroplex area and the Eagle Ford Shale in South Texas. These fields are emerging as a crucial component of the nation’s natural gas supply, and estimates of the total potential US supply from shale sources is rising rapidly over time as new fields are discovered and explored. In fact, the US Energy Information Administration (EIA) recently estimated that shale gas would account for nearly half of the total US supply by 2035; other analysts have pegged the likely share even higher.
For the areas in close proximity to fields, the economic stimulus is particularly strong. In the Permian Basin, oil production peaked in the early 1970s, and for decades the key objective of operators was to recover known reserves as economically as possible. However, new methods and previously unexplored formations are allowing a resurgence of activity and the night skies are once again lit up by rigs.
The Barnett Shale became known decades ago, but the first wells weren’t drilled until about 1993 and permit numbers were fairly low through 2000. Things took off after that, and in 2001, 819 permits were issued. The level of activity jumped through the middle of the decade, reaching a peak of 4,145 in 2008. Since that time, lower prices and a recession pushed permits down, but even so they remain in the range of 2,000 per year. Though drilling is slower, production continues to rise. In 2011, almost 2.0 trillion cubic feet (TCF) were produced, bringing the field’s total since 1993 to 10.8 TCF.
The new kid on the block is the Eagle Ford Shale, which is a 50-mile wide field in South Texas extending from the Mexican border up into east Texas. The first wells were drilled in 2008, and the number of permits rose quickly to reach 2,826 last year. The Eagle Ford produces more oil than traditional shale plays, and its high carbonate content makes it more “fracable” (yes, that is now a word) than some plays. Gas production was 287 billion cubic feet in 2011, along with more than 36.6 million barrels of oil and 20.9 million barrels of condensate. The higher concentration of oil makes investments more attractive in today’s pricing environment.
A study by Dr. Thomas Tunstall, director of the Center for Community & Business Research at The University of Texas at San Antonio found that the Eagle Ford paid $3.1 billion in salaries and benefits to workers, $120.4 million in severance taxes, and led to triple-digit sales tax revenue growth in local counties. Add to that the multiplier effects flowing through the economy, and you end up with big gains in business activity in the region and beyond.
Increasing US supplies enhances energy security, and natural gas has desirable environmental properties. Industry development will contribute to lower energy prices in the future (compared to what they would be in the absence of shale development), and by allowing consumer and business resources to be expended in more productive ways, lower prices will in turn contribute to economic expansion. Exploration and production involve huge capital investments, thousands of jobs, and millions in royalty payments. All in all, the innovations which have allowed for economically feasible development of shale plays are a huge gain for Texas.
Dr. Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.