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11/04/2013

Market Opportunity Snapshot: South Central Shale

Challenges and opportunities in the Barnett, Eagle Ford and nearby shale plays.

This article is part of a series from NAHAD examining opportunities and challenges in shale oil and gas markets. This article provides a snapshot of the South Central region.

As of the end of 2011, the Barnett shale play underlying Fort Worth in Texas was the largest shale gas play in the U.S., with nearly 33 trillion cubic feet of shale natural gas proved reserves, according to the Energy Information Administration. According to the EIA, Texas' Eagle Ford play, underlying San Antonio, had the most significant increase from 2010-2011 in proved reserves out of the six largest U.S. shale plays; reserves there more than tripled during that time period.

The Woodfood, Haynesville/Bossier and Fayetteville plays underlying parts of Texas, Arkansas, Louisiana and Oklahoma add another 55.1 trillion cubic feet of reserves to the region.

Opportunities

Some of the greatest shale-driven opportunities in the region may be found in the following states, ranked from largest to smallest natural gas gross withdrawals and production from shale gas wells. Reserve, production and well count data are from the Energy Information Administration as of 2011.

Texas accounted for 28 percent of U.S. marketed natural gas production in 2011, making it the top natural gas producing state in the country. Natural gas withdrawals/production from shale wells increased 142 percent from 2007 to 2011 to 3.1 trillion cubic feet. The number of natural gas producing wells in the state jumped 36 percent to 100,966 during the same period.

Opportunities in Texas are particularly plentiful over the Permian Basin in the Western part of the state. Georg Eger, senior vice president and principal for Reliance Industrial Products Ltd.'s U.S. and Canada operations, says the company chose to open its second Texas location in the Midland-Odessa area, which overlies the basin, in October because "when you look at actual rig count of what's down in that area, when we first made the decision to go there, there were, I believe, over 500 drilling rigs within a certain radius." Reliance's other Texas location is in San Antonio.

Dry natural gas reserves in Louisiana, albeit a third of the size of those in Texas, were estimated at 30.4 trillion cubic feet in 2011. Natural gas withdrawals/production from shale wells jumped more than a hundred-fold from 2007 to 2011, to 2.1 trillion cubic feet. During the same period, the number of natural gas producing wells in the state jumped 22 percent to 21,235.

EIA estimates place Arkansas dry natural gas reserves at more than 16.4 trillion cubic feet of reserves. Natural gas withdrawals/production from shale wells was 935.2 billion cubic feet in 2011, a more than 10-fold increase from 84 billion in 2007. During the same period, the number of natural gas producing wells in Arkansas more than doubled to 8,388.

In Oklahoma, 2011 estimates placed dry natural gas reserves for the state at 27.8 trillion cubic feet. Natural gas withdrawals/production from shale wells was 449.2 billion cubic feet in 2011, an increase of 441 percent compared to 2007 levels. During the same period, the number of natural gas producing wells in the state increased 8 percent to 41,238.

Kelly McCarty, president of Abilene, TX-based McCarty Equipment Company, a United Distribution Group company, says the company serves all states in the region. While the oil market there has been strong in the past five years, low natural gas prices have held back the gas market, McCarty says. Within the next two to three years, though, McCarty Equipment Sales Manager Joel Lemley says he expects certain areas in the region may experience a larger uptick.

Distributors and manufacturers in the South Central region say challenges there are often opportunities in disguise.

Darrel Cole, president and CEO of The United Distribution Group, says the current appeal of the industry has drawn in competitors to the region that otherwise may not have pursued it. "But they're coming into it maybe not knowing fully how it operates, because this is a 24-hour-a-day industry, and many of them are coming from an eight to five industry," he says. Because McCarty Equipment is well-positioned and has the footprint, manpower and infrastructure to offer fast service around the clock, director of marketing Carl Mallory says what may be a challenge for its competitors is an opportunity for McCarty.

Amy Parrish, director of marketing for PT Coupling Co. in Enid, OK, has also turned challenge into opportunity in the region. While customer demands and state-to-state regulations often change, she says, the manufacturer's ability to custom-engineer products and its affiliation with NAHAD's Hose Safety Institute has allowed them to adapt quickly to customer needs.

Another area of opportunity Parrish says PT Coupling Co. has capitalized on is an increasing demand for ductile iron couplings, which she says have an abrasive resistance to sand. Demand has also increased for larger-diameter couplings, she says.

McCarty says increasing demand for larger assemblies, valves and numerous other products along with producers' increasing focus on safety has increased demand for crimped hose, an opportunity the company has jumped on. "It used to be four-inch and six-inch was the biggest you crimped," he said. But in 2009, the company bought its first 10-inch crimper, an investment that gave McCarty a unique capability not many competitors share, Mallory says.

Demand has also increased for hose that can withstand higher pressures, according to Lemley. "There used to be a lot of demand for 2,000- and 3,000-pound; now, you're seeing 5,000-pound plus."

Challenges

Like in other natural gas-rich areas, NAHAD members in the South Central region say staffing is a major challenge. Parrish at PT Coupling Co. says she competes for employees with her customers. "The pay scale for oil & gas is a lot higher than what we pay in our foundry, so we've lost some employees with that," she says. So PT Coupling has had to bring in workers from other cities to stay staffed. To help counter this challenge, Parrish says PT Coupling offers an above-average health plan.

The volatility of oil & gas in the region also creates challenges for distributors and manufacturers there.

Parrish says the current surge in activity in the Enid, OK, area resembles the boom the city experienced starting around 1980. When that boom ended around 1984, Parrish says the town "went from about 75,000 people back to 40,000 within a month or two." As business has ramped back up since the start of 2010, Parrish says the city's efforts to build more permanent and temporary housing have still fallen short of demand. To secure lodging for out-of-town reps for a recent sales meeting, for instance, Parrish says she had to book seven months in advance.

The volatility in the market is only exacerbated by a high degree of variability in production levels producers have experienced across the Barnett. A study released in September by the Alfred P. Sloan Foundation and the University of Texas, which examined 15,000 wells in northern Texas, shows that many of those drilled there in the past decade haven't produced expected yields.

The impact of anti-drilling regulation has had less of an impact on the South Central market than in other regions. But the region hasn't been entirely immune.

According to Forbes, Texas became the first state in the union in 2011 to require disclosure of all ingredients of fracturing fluids in Texas wells when Gov. Rick Perry signed the Texas Hydraulic Fracturing Fluid Disclosure bill into law. Drillers there must now disclose what chemicals are used in each of their wells on FracFocus.org, although the law allows companies to keep secret those chemicals deemed to be trade secrets.

New research could fuel further regulations.

A study released in March in the scientific journal Geology linked a magnitude 5.7 earthquake in 2011 in central Oklahoma to wastewater injection from oil and natural gas production. According to the study, Potentially Induced Earthquakes In Oklahoma, USA: Links Between Wastewater Injection and the 2011 Mw 5.7 Earthquake Sequence, "the tip of the initial rupture plane is within ∼200 m of active injection wells."


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