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A Brief Economic Overview

The Houston Economy, O&G Activity and the Implications for Commercial Real Estate Harold Hunt, PhD Real Estate Center at Texas A&M College Station, Texas hhunt@tamu.edu. A Brief Economic Overview. Texas Job Growth. Texas versus the U.S. 3.4%. 1.8%. Texas Job Growth.

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A Brief Economic Overview

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  1. The Houston Economy, O&G Activity and the Implications for Commercial Real EstateHarold Hunt, PhDReal Estate Center at Texas A&MCollege Station, Texashhunt@tamu.edu

  2. A Brief Economic Overview

  3. Texas Job Growth • Texasversus the U.S. 3.4% 1.8%

  4. Texas Job Growth • Texas still capturing market sharein private-sector jobs. 347,200 / 2,470,000 =14.1%of private job growth 25 mil. / 300 mil. = 8% of pop.

  5. Texas Employment Growth by Industry • Mining (O&G) again the leader (by %).

  6. Texas Employment Growth by Industry • Prof. & Bus. Services the absolute leader.

  7. Job Growth Past 12 MonthsEnding August, 2014 Source: Texas Workforce Commission

  8. Job Growth Past 12 MonthsEnding August, 2014 Source: Texas Workforce Commission

  9. Job Growth Past 12 MonthsEnding August, 2014 Source: Texas Workforce Commission

  10. Houston MSA Employment and Annual Employment Growth by Category( August, 2014) Biggest absolute increase in jobs Biggest % increase in jobs Source: Texas Workforce Commission

  11. How Large is the Energy Industry in Houston? Recent estimates by the Bureau of Economic Analysis (BEA) say: • The Mining & Logging (O&G) sector in Houston accounted for 19.8% of the region’s GDP. • When you add in chemicals, refining, and oilfield equipment manufacturing, energy accounts for 32.0% of the region’s GDP. • When you add in fabricated metal products, P/L transportation, and engineering services, energy accounts for 38.1% of the region’s GDP. Source: GHP: The Economy at a Glance Oct. 2014

  12. So Where is the Energy Sector Headed? The most critical question for real estate professionals still seems to be: • How long will the drilling activity in Texas last?

  13. First, a Quick Overview

  14. Active Drilling Rigs in Texas(As of October 17th, 2014) Source: Baker Hughes

  15. Rig Counts(Land Rigs: October 17th, 2014 vs October 18th, 2013)

  16. Two Definitions • Porosity - the percentage of void space in a material. • Permeability – The property of a porous material to permit a liquid or gas to pass through it.

  17. Permeability of Shale Mid-East Reservoirs Shales Source: SPE International

  18. Conventional vs Unconventional Drilling Low Permeability Source rock 5,000 ft. or more Source: U.S. Energy Information Administration

  19. Equipment to Fracture a Well

  20. My Early Prediction of the Length of Eagle Ford Drilling Activity The Dallas Federal Reserve reported that 5 mil. acres of the Eagle Ford are under lease. So I assumed: • 4 mil. acres/200 acres drained per well = 20k total wells • 250 rigs x 5 wells drilled per yr. = 1,250 wells per yr. • 20k wells needed/1,250 wells per yr. = 16 years to drill

  21. Completed Wells in the Eagle Ford As of Aug, 2011: 263 Producing Oil Wells 394 Producing Gas Wells Source: Texas Railroad Commission

  22. Completed Wells in the Eagle Ford 11 Months Later… As of July, 2012: 1,690 Producing Oil Wells 710 Producing Gas Wells An Increase of: 1,427 Producing Oil Wells 316 Producing Gas Wells Total Increase: 1,743 wells Source: Texas Railroad Commission

  23. Completed Wells in the Eagle Ford 12 Months Later… As of July, 2013: 3,868 Producing Oil Wells 1,681 Producing Gas Wells An Increase of: 2,178 Producing Oil Wells 971 Producing Gas Wells Total Increase: 3,149 wells Source: Texas Railroad Commission

  24. Completed Wells in the Eagle Ford 12 Months Later… As of July, 2014: 6,414 Producing Oil Wells 3,214 Producing Gas Wells An Increase of: 2,546 Producing Oil Wells 1,533 Producing Gas Wells Total Increase: 4,079 wells Source: Texas Railroad Commission

  25. Several Factors Affect the Speed and Number of Wells that Get Drilled • Drilling one well to “hold a field by production” giving way to “pad drilling” where multiple wells are drilled from one drillsite, saving time and money. • Drilling rigs that “walk” or move along rails will significantly reduce the downtime between drilling a well. • Thewell spacing continues to tighten, leading to more producing wells on a given amount of acreage. • Tapping other pay zones will extend the drilling activity in fields.

  26. 1) Evolution to Pad Drilling

  27. Pad Drilling Example

  28. Karnes Co. Drilling Pads

  29. Gonzales Co. Drilling Pads

  30. 2 Wells On One Pad in Gonzales Co.

  31. 3 Wells On One Pad in Gonzales Co.

  32. 4 Wells Just Drilled by EOG in Gonzales Co. (using FracFocus.org)

  33. 22 Wells On One Pad

  34. 2) Moving the Rigs Gets Faster

  35. Walking Rigs

  36. Rigs Moving on Rails

  37. Rigs Moving on Rails

  38. Piping Moves With Rig Movement

  39. Increasing Efficiency Begins to Show Up 2012 Q1 Started 1 well every 24 days 2014 Q3 Started 1 well every 16 days Source: Baker Hughes Quarterly Well Count Report

  40. Well Costs Dropped from $14 mil. to $6 mil. Sept. 2010 Sept. 2013 Source: UTSA Economic Impact of the Eagle Ford Shale Study

  41. 3) Well Spacing Gets Tighter

  42. Rosetta Resources Map of Its Well Spacing Plan Source: Rosetta Resources

  43. EOG Pushed Downspacing, Dramatically Increasing the Well Count

  44. Factors to Consider With Increased Downspacing • When laterals get close enough, they start to rob production from each other. • A Marathon test showed two wells on 40-acre spacing each had about 80% of the recovery as one well on 80-acre spacing. Ex. 1 well @ 80 acres produces 1,000 bbls of oil (Total = 1,000 bbls) vs 2 wells @ 40 acres produce 800 bbls of oil each (Total = 1,600 bbls) • So increased production from downspacing must be weighed against increased well cost.

  45. 4) Tapping Other Pay Zones in the Future

  46. Multiple Payzones Could Extend the Drilling Activity in a Play Austin Chalk Eagle Ford Buda Pearsall

  47. Multiple Payzones Could Extend the Drilling Activity in a Play The Permian 13 Payzones identified so far by Pioneer Pearsall

  48. Vertical Wells versus Horizontal Wells Using Pad Drilling

  49. Horizontal Wells Using Pad Drilling in Multiple Stacked Plays

  50. Also Experimenting With“Stacked Lateral” Development

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