Explosive growth has occurred in the United States shale oil and gas industry. This latest cycle began in 2008 in places like North Dakota and South Texas when numerous revolutionary technological innovations came together to unlock oil and gas in places and in volumes no one had imagined were possible.
It has been widely publicized that US oil patch is where economic growth is occurring. Oil and gas development is leading the US in income growth according to a study by Sentier Research, an Annapolis, Md., firm. The US may well on its way to energy self-sufficiency because of the increased production of shale oil and gas.
Drilling oil and gas wells is time sensitive, expensive and must be completed quickly to be an economical and profitable enterprise. Supplying housing to oil industry workers where there is limited or no infrastructure is the challenge.
Eagle Ford Shale: A Very Brief History of the Most Recent Boom in South Texas
“The Eagle Ford Shale is a hydrocarbon producing formation of significant importance due to its capability of producing both gas and more oil than other traditional shale plays….The shale play trends across Texas from the Mexican border up into East Texas, roughly 50 miles wide and 400 miles long with an average thickness of 250 feet.”
“Petrohawk drilled the first of the Eagle Ford wells in 2008, discovering in the process the Hawkville (Eagle Ford) Field in La Salle County (District 1)….The wells in the deeper part of the play delivers a dry gas, but moving northeastward out of District 1 and updip, the wells produces more liquids. One of the fields discovered in District 2 is actually an oil field (Eagleville). The major operators joining Petrohawk in drilling the Eagle Ford Shale Play are Anadarko, Apache, Atlas, EOG, Lewis Petro, Geo Southern, Pioneer, SM Energy and XTO….” (courtesy of the Texas’ oil and gas industry regulator, the Texas Railroad Commission)
After first successful well was drilled in 2008 production has ramped up exponentially. There were only 40 producing oil leases in 2009, 72 producing oil leases in 2010 and there were 368 producing oil leases on schedule in 2011. The growth rates of natural gas has been even steeper with 67 producing gas wells in 2009, 158 producing gas wells in 2010 and 550 producing gas wells on schedule in 2011.
As of the end of 2011 255 active rig units are operating in the Eagle Ford play (from virtually none in 2008). Horizontal wells account for 238 of active rigs. The leading Eagle Ford rig count by county is Karnes County with 37 rigs followed Webb (36), La Salle (34), DeWitt (28), McMullen (22), Gonzales (20), and Dimmit (18).
The question for those in the commercial real estate business is how do firms craft commercial real estate solutions that can ramp up residential and commercial capacity almost overnight to meet the industry's exponential demand growth curve and yet remain flexible and fluid enough to respond to an industry prone to unpredictable and rapid busts? In other words how does a developer protect against a risky real estate ‘long position’ in highly cyclical volatile commodities such as oil and gas?
Just One Word: “Logistics”.
Each rig employs directly and indirectly 200 workers. To go from 0 to over 250 rigs in under four years means 20,000 to 40,000 workers descended upon once sleepy towns unprepared to absorb the rush of new employment.
Logistical discipline by its very nature is about responding to dynamic market demand with fast, flexible mobile cost-effective solutions. The winners in this hyper-competitive space are the most agile and the fleetest of foot.
Texas however has just such an expertise. Houston, Texas, for example, is home to the oil services industry that provides the wide array of logistical support for oil and gas production. These oil services companies have superior industry and market intelligence on activity such as current rig counts, oil and gas production forecasts, and employment growth by location as well as detailed oil industry worker profiles that inform workforce and workforce housing demand.
Housing Solutions: The Evolution of Much Maligned “Man Camp”
First on the ground are the most mobile units that can be moved in and assembled overnight. The companies are accustomed to operating in remote and harsh environments that lack local resources and infrastructure. They are the first responders in situations when insufficient local support is available.
Fast 'first solutions' may be as basic as RV camps. Or skid-mounted modular units (assembled like legos) into instant multi-story dormitories, lodges or hotels that can sleep thousands of workers (sometimes referred to as "man camps"). Logistics firms construct infrastructure in remote sites from scratch. Arrangements are made to import necessities and, when often necessary, truck out waste.
The camps may be contracted directly by oil companies but may also be “open camps” available to transient worker traffic at daily rates starting at $100 per night. Centralized hospitality, food and laundry services are included and in some cases reach the four to five star luxury levels. Rooms may be shared but the trend of late is to program development with larger units, suites actually, catering to the hard working, discerning oil field workforce who craves more privacy and individual space.
The competitive race is on to expand on and beef up amenities that include swimming pools, hot tubs, workout rooms, basketball courts, barbeque pits, restaurants, and other features and social activities that one might find in a luxury apartment or hotel complex. The next step in the evolution of camps is the introduction of separate or individual modular units containing complete kitchens and bedrooms and other extended-stay features that feel much more like a home and may provide enough room to accommodate family.
Residential development that meets workforce needs is one of rare development opportunities to be found in remote or rural locations that were once forgotten and mostly unknown places just five years ago. Boom towns in North Dakota and South Texas are now even attracting large institutional interest. Sam Zell is talking up the opportunities in North Dakota. Numerous national hotel chains are promoting (by encouraging franchisees to open) new hotel facilities in South Texas.
Conventional real estate developers must be careful. Recent growth in oil country has been fast and furious but could evaporate overnight. The concerns, criticism and political influence by those fundamentally opposed to fracking used in shale oil and gas plays are difficult to quantify and will lessen only with much greater industry transparency. As of January 31, 2012 Texas moved in this direction by requiring disclosure of the chemicals used in fracking.
Those who have been around industry awhile will tell you that the only thing that is constant about energy production is change.
The 2012 Natural Gas Glut: South Texas Production on the Move, Shift to Higher Value Liquids
At the time Eagle Ford Shale came on line in 2008 natural gas had peaked at $8 per 1,000 cubic feet with a trend line headed up sharply. The rapid ramp up was predicated on these favorable economics.
Due to the success of producing shale gas from sources located across the US and another warm winter the market has become oversupplied and the price of natural gas has reached a 10-year low and is expected to remain there ($ 2.50 per mcf).
There is a chance that wholesale gas prices may drop below $2 per mcf, a low not struck since September 2009. Prices are so low companies are storing natural gas not selling it. Storage sites are near capacity. The overhang could crash prices later in 2012. Citigroup has estimated the tipping point for high-cost producers is about $1.80, 27% below today's price. At prices so low and storage costs high producers may forced by unfavorable market conditions to give the gas away.
Big natural gas producers such as Chesapeake are cutting back on gas production. The company is moving half the drilling rigs it uses for dry gas wells into wells that produce both wet and dry gas. Wet gas or NGL’s (such as ethylene, propylene and butadiene are chemicals used to make plastic or textiles) commands higher prices. WTI oil prices remain firm at around $100 per bbl. Optimism about US economic growth and global supply-chain uncertainty provide strong support at the $100 level.
In 2011, over a third of North Dakota's gas output (too costly to produce given limited current transmission infrastructure) has been burned off as production growth outpaced pipeline capacity. Nationwide the flaring is less than 1% of production. At some point North Dakota gas will be added to natural gas oversupply.
Oil and gas production (and employment) never stands still. It is always on the move.
The temporary glut of natural gas highlights the fact that communities and oil service firms must think hard about what happens as growth matures. Planning is required.
Williams County in North Dakota (with nearly 10,000 temporary housing units) has instituted a moratorium on temporary, skid mounted housing. Williams County is not alone as other jurisdictions too have clamped down on temporary housing until more comprehensive resource plans can be drawn.
It is not the skid mounted housing per se that is the problem but the explosive growth and strain on infrastructure and local resources that has moved cities and counties to restrict or block large-scale, resource intense, dense man camps.
Unperturbed, some companies see the resource constraints simply as opportunities to meet a new needs. Late in 2011 Target Logistics has addressed one of the big infrastructure concerns by constructing a $3.1 million waste water treatment plant in Tioga that not only takes care of its own camp needs but can handle requirements in the fast growing communities. Instead of having to ship waste water to Minot to be processed waste is processed on site and the cleaned up waste water can be used for fracking, a definite win-win that recycles and saves valuable water resources.
Designs for Re-use
Another concern expressed by communities in North Dakota is that if (when) the oil boom fades cities and counties do not want to be left with unsightly, abandoned camps. Logistics companies are obligated to remove what they have brought in but are also looking ahead and anticipating the evolution of housing needs in oil and gas shale areas as growth driven by energy matures.
Capital Lodge in Tioga ND (maxing out at 2500 units) had programmed flexibility and re-usability into their modular camp units so that when the boom wears off housing units can become four bedroom homes by moving or removing walls.
Target Logistics is thinking of next steps too. They are formulating long term plans to convert temporary housing to permanent solutions by redeveloping and reusing structures. In the beginning this may look like extended stay facilities that include kitchen and room to accommodate families. It could evolve into multifamily development and assisted living facilities as well by building on the existing infrastructure of provisions, kitchens, laundry and other services baked into the bones of man camps. The trick is to address the needs of the ongoing staff of support workers who will remain long after the drilling rigs are gone.
The answer to what happens after the boom is to design units from at the start of it that can be plugged in, unplugged, moved, reconfigured and reused in support of the community and permanent workforce needs of an evolving oil economy.