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Energy: Texas Tops Finds From Brazil to Bakken as Best Prospect

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By Edward Klump – Mar 22, 2012 7:00 PM CT

Energy companies in search of oil riches rivaling the biggest finds from Brazil to Angola are flocking to Texas shale, where new wells have triggered a 230- fold increase in crude output in three years

More than 115 years after a gusher 55 miles (88 kilometers) south of Dallas ushered in Texas’ first oil boom, U.S. producers such as ConocoPhillips and Marathon Oil Corp. (MRO) are counting on the Eagle Ford Shale to boost crude output amid a glut-driven slump in natural-gas prices.

Drilling for oil in the brush-covered plains of south Texas is cheaper and less risky than exploration offshore Brazil, the largest oil find in the Western Hemisphere in 30 years, and more profitable than the remote, rougher terrain of the Bakken Shale in North Dakota and Montana.

“The Eagle Ford is the top basin we have in the world today,” David Roberts, chief operating officer at Marathon Oil, told analysts and investors on a conference call last month.

Surging production in shale formations has transformed the U.S. energy landscape, flooding the market with gas and boosting domestic oil production by 14 percent from three years ago after dropping by a third in the previous 17 years, according to Energy Department data. After worries of a global oil shortage drove prices to record highs above $140 a barrel in 2008, politicians and industry executives now are discussing the prospect of the U.S. weaning itself from dependence on imports.

Doubling Down

Marathon Oil and ConocoPhillips (COP) both plan to double their production in the Eagle Ford this year. EOG Resources Inc. (EOG), based in Houston, calls the Texas shale play its biggest source of growth, and last month boosted its estimated recoverable reserves there by 78 percent.

Oil production in the Eagle Ford jumped almost sevenfold in 2011 to surpass 30 million barrels, still less than Bakken production in North Dakota that exceeded 128 million barrels. This year daily oil production in the Eagle Ford is forecast to expand by 200,000 barrels, roughly the same amount as the Bakken, according to estimates by Wood Mackenzie Ltd. cited by Hill Vaden, an analyst with the industry consultant.

The South Texas oil fields are winning a larger portion of producers’ investment because it’s easier and more profitable to drill there compared to many prospects in the U.S. and in the world. Wells are faster and cheaper to develop, and the formation is located closer to refineries on the U.S. Gulf Coast, lowering transportation costs.

Higher Prices

EOG said it costs about $5.5 million per well in the Eagle Ford, compared with more than $8 million per well in the Bakken, because of different well configurations. An offshore Gulf of Mexico well can cost $100 million, said Brian Uhlmer, an analyst at Global Hunter Securities LLC in Houston.

Deep-water wells can take five months or longer to drill, compared to a couple of weeks for a well in the Eagle Ford, said Brian Cain, a spokesman for Anadarko Petroleum Corp. (APC)

Producers can get a higher price for their Eagle Ford output than they can in the Bakken. Prices for Texas and Louisiana (USCRLLSS) crude this week are as much as about $38 a barrel more than production in the Bakken (USCRLLSS), according to data compiled by Bloomberg.

“The economics there are absolutely stellar,” said Danny Brown, a general manager who helps oversee Anadarko’s Eagle Ford operations. Anadarko has said it is considering selling its exploration properties offshore Brazil.

Less Political Risk

Texas provides a more stable investment environment compared to many international projects, said Pavel Molchanov, an analyst at Raymond James & Associates in Houston.

“Clearly, there’s less political risk in Texas than in Libya, let’s say, or Kurdistan,” he said. Marathon Oil last year had output suspended in Libya during unrest in that country.

The Eagle Ford cuts across a 400-mile swath of southern Texas, according to the Railroad Commission, which regulates oil and gas production in the state. Producers have unlocked the resource using advances in horizontal drilling and hydraulic fracturing, which sends jets of water, sand and chemicals underground to break up rock.

Petrohawk Energy Corp., acquired by BHP Billiton Ltd. (BHP) last year, first drew attention to the Eagle Ford when it announced a gas find in 2008, a year when futures for the fuel in New York averaged more than $8 per million British thermal units.

Surging Production

Expanded use of fracturing, or fracking, across the U.S. caused a surge in gas output that drove prices to a 10-year low this month of $2.204 per million Btu. Meanwhile, crude in New York has climbed 15 percent since the end of 2010 and is trading for about $105 a barrel.

While drilling has slowed in U.S. shale gas fields such as the Fayetteville in Arkansas, development has accelerated in South Texas as producers focus on the formation’s oil-rich geology.

The Eagle Ford will help lead a surge in state drilling permits that’s on pace to reach 25,000 this year, the most since 1985, said Barry Smitherman, the commission’s chairman.

“It’s by far the most sought-after play anywhere — not only in this country, but anywhere around the world,” said Fadel Gheit, an analyst at Oppenheimer & Co. in New York.

A Sanford C. Bernstein report last August estimated Eagle Ford production would reach 1.2 million barrels of oil equivalent a day in 2015, with 750,000 of that being liquids.

“A long-time oil field axiom is that big fields tend to get bigger over time, and that’s certainly the case here,” EOG Chief Executive Officer Mark Papa told investors during a Feb. 17 conference call. “This continues to be the hottest and highest reinvestment rate-of-return play in North America.”

To contact the reporter on this story: Edward Klump in Houston at eklump@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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BAYTOWN, TX

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BAYTOWN, TEXAS. Baytown, a highly industrialized city of oil refining, rubber, chemical, and carbon black plants, is on Interstate Highway 10 and State Highway 146, thirty miles east of downtown Houston in southeastern Harris and western Chambers counties. Among its first settlers were Nathaniel Lynch, who in 1822 set up a ferry crossing at the junction of the San Jacinto River with Buffalo Bayou that is still in operation, and William Scottqv, one of Stephen F. Austin‘s Old Three Hundred, who received a land grant in 1824. His two leagues and one labor of land, over 9,000 acres, covered most of the area of present Baytown. Near his home on San Jacinto (Scott’s) Bay, a settlement grew to include a small store and a sawmill. It was called Bay Town.

Later area settlers included Ashbel Smith, who in 1847 purchased a plantation named Evergreen on Tabbs Bay. He lived there for forty-nine years. Also living in the area for a time were Mrs. Anson (Mary Smith McCrory) Jones, David G. Burnet, and Sam Houston.qqv At the outbreak of the Civil War Smith organized a local unit called the Bayland Guards for Confederate service. They later became part of the Second Texas Regiment and saw action at Shiloh and Vicksburg.

A shipyard established at the mouth of Goose Creek in the early 1850s by John and Thomas S. Chubb built one ship, the Bagdad, which was launched in 1864 and had to run a Yankee blockade at Galveston to escape. In 1867 Dr. Smith and several associates founded the Bayland Orphans’ Home for Children of Confederate soldiers (see BAYLAND ORPHANS’ HOME FOR BOYS) on the west side of Goose Creek. The orphanage moved into Houston in 1888.

The area, though, remained largely undeveloped and isolated into the twentieth century. A rough county road ran from Crosby to Cedar Bayou, a small community of stores, shipyards, and brickyards. The only other entry into the area was by boat. Then, in 1908, after two unsuccessful drilling attempts, an oil strike was made beside Tabbs Bay. In 1916 the Goose Creek oilfield became famous as the first offshore drilling operation in Texas (second in the nation) and the third-largest producing field, after the Humble and Sour Lake oilfields.qqv

The towns of Pelly and Goose Creek developed near the oilfield in 1917–18. In 1917 Ross S. Sterling and his associates decided to build a refinery near the Goose Creek field and founded the Humble Oil and Refining Company (Exxon Company, U.S.A.qv). They bought some 2,200 acres in the William Scott survey and called their site Baytown. Construction began in the fall of 1919.

Baytown grew up around the refinery. At first the community was only a collection of army tents, barracks, and small shacks; it became permanent in 1923 when Humble laid out streets, provided utilities, sold lots, and even furnished financing for employees’ homes. Humble also furnished housing for its supervisors and skilled employees in a special “company addition” and built a large community building for their recreational needs. A special management-labor Joint Conference was formed to handle work-related problems. Later, this group also discussed municipal problems and became, in effect, the city council for the community. These and other employee-relations programs were initiated to reduce labor problems like those that had occurred in the Texas-Louisiana oilfield strike of 1917. Leading up to that incident, management policies, inflation, and poor working conditions had brought about the organization of a union local in Goose Creek in December 1916. When the oil producers refused to discuss grievances with union representatives in October 1917, 2,000 Goose Creek workers joined approximately 10,000 oilfield workers in seventeen Texas and Louisiana oilfields in a walkout on November 1, 1917. With hired guards and army troops maintaining order, the producers negotiated directly with the Department of Labor in January 1918 and effected a settlement that rejected all significant union demands. This near total victory for the producers undermined union effectiveness for several years. In the late 1930s and early 1940s the Congress of Industrial Organizations made several attempts to represent Humble employees instead of the Joint Conference, and later the Baytown Employees Federation attempted to organize, but each time Humble employees voted for the company union by large margins.

Due to this pervasive paternalism of Humble, the community of Baytown never incorporated, and this enabled Pelly to annex the “contiguous and unincorporated” territory of Baytown in December 1945. But, when Pelly and Goose Creek voted to consolidate in early 1947, the citizens selected the name Baytown for their new combined city. On January 24, 1948, the city of Baytown was established.

Baytown grew in population from 20,958 in 1948 to 67,117 in 1990 and in area from 7½ square miles to more than thirty-two. Its boundaries stretch from near the San Jacinto River eastward into Chambers County and include several former communities such as Cedar Bayou and Wooster.

Exxon, still a major employer, runs one of more than ten major petrochemical plants now in the Baytown area. In 1970 United States Steel opened the Texas Works near Baytown, and during its peak years the plant employed more than 2,000 workers with an annual payroll of $35 million. Due to the nation’s economic downturn and the decline of American steel in the early 1980s, the plant closed in July 1986.

In 1992 Baytown had twenty-three public schools, Lee College (a two-year community college), sixty-seven churches, seven banks, two savings and loan associations, three credit unions, three modern hospitals, a daily newspaper, a radio station, cable television, and a large public library. One of the nation’s largest single-level shopping malls houses major retailers and employs nearly 2,000. The city is served by two railroads and an interstate highway. In September 1953 the Baytown-La Porte Tunnel, which crossed the Houston Ship Channel, opened for traffic. In the mid-1990s the innovative eight-lane, 450-foot, twin-tower, cable-stayed Fred Hartman Bridge replaced the forty-year-old tunnel. In 2000 Baytown had 66,430 residents and 2,565 businesses.

BIBLIOGRAPHY:

Anne Rebecca Daniels, Baytown during the Depression, 1929–1933 (M.A. thesis, Lamar University, 1981; Ann Arbor: University Microfilms, 1983). Margaret Swett Henson, History of Baytown (Baytown, Texas: Bay Area Heritage Society, 1986). Henrietta M. Larson and Kenneth Wiggins Porter, History of Humble Oil and Refining Company (New York: Harper, 1959). Walter Rundell, Jr., Early Texas Oil: A Photographic History, 1866–1936 (College Station: Texas A&M University Press, 1977). Buck A. Young, “A Remembered Utopia,” East Texas Historical Journal 20 (1982).

Buck A. Young

Timeline of Texas History – Baytown

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