Huge reserves of natural gas under East Texas will fuel the future economy, experts say

Published on Saturday, 20 May 2017 12:17 - Written by ROY MAYNARD, rmaynard@tylerpaper.com

As far back as 1911, geologists predicted that significant mineral wealth lay below East Texas, in what was then called the Woodbine Stratum - a formation above the Haynesville Shale.

And Columbus Marion “Dad” Joiner proved them right in 1930, when the Daisy Bradford No. 3 well struck oil just outside Henderson in western Rusk County. It was really just a drill stem test - they weren’t expecting to hit anything. But at 3,592 feet, Joiner tapped into what was for years thought to be the largest oil and gas reserves in the world.

But no one predicted the vastness of the energy wealth available here. Last month, the U.S. Geological Survey announced a re-evaluation of the Haynesville and Bossier shale formations.

Instead of the previously estimated 61.4 trillion cubic feet of natural gas available (as of 2011), USGS now said there’s 304 trillion cubic feet.

“These estimates, the largest continuous natural gas assessment USGS has yet conducted, include petroleum in both conventional and continuous accumulations, and consist of undiscovered, technically recoverable resources,” the USGS says.

This is big news for East Texas and the nation as a whole.

“The new maps are very impressive,” said Ernest LaFlure, who retired as vice president of EOG Resources’ Tyler division in 2015. “I’d say they’re unprecedented.”

These huge reserves under East Texas, along with two important trends - the export of liquid natural gas and the conversion of the nation’s electrical generation from coal to cleaner and cheaper natural gas - will have a positive long-term effect on the East Texas economy.

 

TECHNOLOGY

The new estimates include better understanding of the underground formations, he said, but also what improved technology can reach. The USGS measures “recoverable” resources, and the industry is getting better and better at recovering oil and gas.

“As the USGS revisits many of the oil and gas basins of the United States, we continually find that technological revolutions of the past few years have truly been a game changer in the amount of resources that are technically recoverable,” said Walter Guidroz, program coordinator of the USGS Energy Resources Program.

But LaFlure, a member of the American Association of Petroleum Geologists and an authority on the Haynesville Shale formation, said there’s a caveat. Technically recoverable doesn’t mean profitable - yet.

“The USGS is looking at what’s recoverable, but they’re not putting any prices with those numbers,” LaFlure said. “When companies look at those same opportunities, they have to ask themselves some questions - can I recover it and be able to make a reasonable profit in the current economic climate? Does it make financial sense?”

Gas developers operate on a break-even number, he explained.

“Right now, natural gas is bouncing around at plus or minus $3.20 (per thousand cubic feet) each day,” said LaFlure. “And there have been numerous assessments that say the break-even range to produce Haynesville gas is around $3.50. So right now, the price of gas is just below that. And many analysts say that before we start seeing really large amounts of capital invested, it will need to be between $4.75 and $5 per thousand cubic feet.”

It has been that high as recently as February 2015.

What’s depressing natural gas prices for now is a glut in supply. Hydraulic fracturing - fracking - is one of those technologies the USGS and LaFlure are speaking of. In 2014, Saudi Arabia responded to remarkable advances in U.S. petroleum production, due to fracking, by trying to strangle the new technology in its cradle. They reasoned that by overproducing at their own wellheads, and keeping oil prices artificially low, they could outlast U.S. oil producers. But the strategy backfired and caused the Americans to become much leaner and more efficient.

As Reuters reported last year, “In shale fields from Texas to North Dakota, production costs have roughly halved since 2014, when Saudi Arabia signaled an output free-for-all in an attempt to drive higher-cost shale producers out of the market. Rather than killing the U.S. shale industry, the ensuing two-year price war made shale a stronger rival, even in the current low-price environment.”

 

CHANGES AHEAD

Technological advances aren’t the only game changer. Two important trends mean natural gas - produced in abundance here in East Texas - will play an ever bigger role in the region’s economy in coming years.

The first is natural gas exports. In April, Cheniere Energy shipped its 100th cargo of liquefied natural gas (LNG). The first cargo left a south Louisiana port in February 2016, after a 50-year period in which no U.S. natural gas was shipped abroad.

With new markets opening up and new infrastructure being built to handle increased exports, an incredible amount of capital is being pumped into Texas right now.

“What’s really exciting is all of the petrochemical and LNG investments we are seeing along the Gulf Coast,” said Steve Everley, of Texans for Natural Gas. “They’re all being built here, not overseas, because of the abundance of oil and natural gas in Texas. These are each multi-billion dollar projects that support thousands of good-paying jobs.”

In fact, there are seven major LNG projects currently underway in Texas, from the Rio Grande Valley to Corpus Christi to Freeport to Port Arthur. Together, they could have an economic impact of more than $145 billion and support more than 70,000 jobs in Texas.

Tyler and East Texas will play a significant role in LNG exports. One reason for that is the extensive network of pipelines underneath our feet. Those pipelines lead straight to the Gulf Coast, where the natural gas is being processed.

“In recent years, companies invested in high expansions for natural gas pipelines,” explained LaFlure. “But as soon as those investments were made, the changes happened - prices fell. Suddenly those brand new natural gas pipelines were in place, but empty, or not being kept full. The transportation costs on those lines were very high, and that made it even more difficult for Haynesville producers - us - to compete.”

What has changed, he added, is that many of the original operators of those pipelines have sold their interests and assets. New owners and operators aren’t bound by old contracts, so they can cut those transportation costs.

“What that means is that we have plenty of takeaway capacity in East Texas,” LaFlure said. “And because the new operators are negotiating better terms, that’s another factor that could lower the break-even price for natural gas production.”

GENERATION

The other important trend is in electrical generation. Coal is losing steam, as natural gas continues to gain.

“In 2016, electricity generated from natural gas accounted for the largest share, 33.8 percent, of total U.S. generation, surpassing coal, at 30.4 percent, for the first time,” reports the U.S. government’s Energy Information Agency. “Between 2011 and 2016, coal and natural gas combined accounted for 66 percent of total U.S. electricity generation. However, the relative shares of output from these two fuels has shifted, with coal’s share declining from 42.3 percent in 2011 to 30.4 percent in 2016. Over the same period, the natural gas share increased from 24.7 percent to 33.8 percent.”

That’s been evident in East Texas. In November 2016, Luminant announced it was laying off workers from its Martin Lake complex in nearby Rusk County. The old coal-fired power generating stations that once provided the bulk of the state’s electricity are no longer viable, especially with new pollution controls.

Yet in March, a massive new natural gas electrical generation plant in New Summerfield in Cherokee County was announced. The FGE Eagle Pines project is a $2.1 billion natural gas electrical generation facility, expected to be completed in 2019.

FGE, a Houston-area firm, already has a fact sheet up on its website.

“FGE Eagle Pines represents over $2.1 billion of direct investment in Cherokee County and the State of Texas,” the website says. “FGE Eagle Pines will create 3,450 megawatts of capacity, generating electricity to power over 3.5 million homes.”

The project could generate as many as 800 jobs during construction, and 40 permanent jobs for operations.

Everley, with Texans for Natural Gas, says this also has a positive impact on the environment. That’s because natural gas is much cleaner than coal. It’s also cheaper, making it the go-to power source for the near future.

“The more natural gas we find, the more we will continue reducing air pollution,” he said. “The United States leads the world in reducing carbon dioxide emissions and the No. 1 reason is abundant natural gas.”

As Forbes magazine reported last year, “In 2015, U.S. carbon dioxide emissions fell by 145 million tons, by far the largest decline of any country in the world. … Power companies switching from coal to natural gas made the single biggest contribution toward lower emissions in the U.S. in 2015.”

A SLOW BOOM

It starts in the ground, of course, with active rigs producing oil and natural gas. Rig counts are rising, as economist Ray Perryman points out in his Perryman Report.

“It looks like we may have turned the corner back toward expansion, though there are some signals the recovery may face some challenges,” he wrote in early May. “Since the low point in October 2016, employment in the sector has expanded by about 35,000 jobs nationwide. More than 7,000 of those have been added here in Texas.”

That’s because drilling is increasing.

“As of April 21, the Baker Hughes U.S. Rig Count stood at 834, more than double the number of a year prior (401),” Perryman wrote. “In Texas, there were 426 rigs running on April 21, up from 187 operating in the state a year ago.”

But that’s just where it starts.

William Preston is president and COO of KP Engineering, based in Tyler. In February, KPE announced it had won a contract to design a second petroleum processing facility. Though the location and price haven’t been disclosed yet, the company’s first contract with Targa Resources Inc. was a crude and condensate splitter and tank farm, valued at $100 million, in Channelview.

Preston said the future of the natural gas industry in East Texas is bright.

“The business of processing the natural gas is called midstream, and it’s unquestionably the fastest growing part of our business,” Preston said. “Two years ago, we were predominantly in the refining business, with about 80 percent of our work. This year, more than one-third of our business will be in midstream. And next year, that’s going to be even higher.”

His company is ramping up, adding square footage to its facilities in Tyler and Houston, and hiring employees.

“Over the last three years, we’ve grown by a factor of three,” Preston said. “There’s a boom coming and we’re poised to take advantage of that. There’s a bright, bright future in natural gas.”

But LaFlure said that it won’t be the kind of boom East Texas has seen before, when the East Texas Oilfield made history, and when H.L. Hunt drove down from Arkansas and - over cheese and crackers - negotiated for the rights of the Daisy Bradford No. 3, along with thousands of acres of East Texas mineral rights.

Dad Joiner earned and lost a fortune in the 1930s, mostly due to bad business practices (he tended to oversell the number of shares in his ventures, according to the Handbook of Texas Online).

But the coming boom won’t be like that.

“The USGS report - 304 trillion cubic feet of natural gas - is very encouraging for the long-term,” said LaFlure. “And there will be some steady improvement in natural gas activity in East Texas. But it’s going to be slow. We’re not going to have the kind of quick boom we’ve seen in the past.”

At the same time, he added, “such abundant supply will keep prices moderated and not result in the price spike booms of the past.”

 

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