The Economist: A Whale of a Shale
By Ray Perryman
May 25, 2013 at 5:25 a.m.
If early estimates prove to be even close to true, the vast amounts of recoverable oil and natural gas will make the Cline Shale go down in history as the largest shale play ever.
Communities across the Permian Basin have already been feeling the effects of surging exploration activity, and indications are that the pace may pick up rapidly.
The Cline Shale is about 140 miles long, 70 miles wide and 200-550 feet thick stretching through the Permian Basin and southward.
Test wells are exceeding expectations and indicate the shale could contain 3.6 million barrels of recoverable oil per square mile or as much as 30 billion barrels in total.
Yes, billion. That's multiples of the likely production from other well-known shales such as the Bakken up north or the Eagle Ford here in Texas.
Shale formations such as the Cline are still a relatively new source of oil and gas production. Hydraulic fracturing, or fracking, and other improvements in drilling tools and techniques have been crucial to opening up these fields.
Fracking involves injecting a high-pressure mix of water, sand and chemicals to allow oil and gas to flow out of the fine-grained shales.
Texas is full of shales, and the ability to tap them for oil and gas has created a boom in new activity.
The Barnett Shale, which is situated under Fort Worth and a large surrounding area, was one of the first shale formations to be developed. The Barnett's existence was known for decades before the first wells were drilled in about 1993.
After a few slow years, permit activity took off, peaking at 4,145 in 2008. However, the Barnett is primarily a natural gas producer, and today's much lower prices aren't as favorable to drilling there.
Nonetheless, thousands of wells are completed in the Barnett each year, and production continues to rise.
The Eagle Ford Shale is a 50-mile wide field extending from the Mexican border up into east Texas. The first wells were drilled in 2008, and the number of permits rose quickly to 2,826 in 2011 and 4,143 last year. The Eagle Ford produces more oil than the Barnett and has a high carbonate content which is favorable to fracking.
The Cline is the newest shale to emerge as a major site of activity. Even apart from the sheer magnitude of the recoverable reserves, the mix of oil, dry gas and liquids is particularly favorable given the high oil price environment.
In addition, operating costs in the Permian Basin are lower than in some of the other shales, and a longstanding network of suppliers, service firms and other necessities for the business is already in place.
The economic benefits of the boom accrue through many channels. Owners of the minerals receive royalty payments, and oil companies generate profits.
A spectrum of vendors to the industry - oil-field service companies, trucking firms, equipment makers, you name it- also win. Restaurants, hotels, gas stations, stores and others see higher sales. Real estate prices trend up, making sellers happy.
Property taxes increase due to rising tax base and production values. Taxes also bump up with retail sales volumes and hotel/motel occupancy.
However, the boom does not come without a price, and there are challenges to capitalizing on all the Cline could offer. Even before the potential of the Cline was widely known, oil and natural gas exploration and production activity was on a strong upswing.
In the Permian Basin, oil fields once seen as essentially played out are being reworked with new methods.
Oil production had been trending downward since the early 1970s, and for decades the key objective of operators was to recover known reserves as economically as possible. New exploration and recovery methods re-energized the sector in the Permian Basin; however, and oil production totals began to rise a few years ago.
The area's roadways are already crowded with oil-field trucks and other traffic, hotel and motel rooms are hard to find and cost a premium, and it's difficult to locate people to fill jobs.
Dealing with the additional action stemming from the Cline will further tax the area's infrastructure.Other communities beyond Midland and Odessa are beginning to feel an upswing in action. San Angelo, Abilene, Sweetwater, Big Spring and places in between are seeing an increase in corporate activity, housing sales and hotel/motel room nights.
For residents of these areas not directly or indirectly benefiting from activity, the boom is less attractive.
The high wages offered by oil companies are hard for other employers to match, and holding on to valuable employees is difficult. Wages are being bid up in these communities, and the situation is likely to get worse.
Housing supplies are also beginning to run short, making it tough for buyers to find and afford homes.
Roadways are deteriorating under the weight of truck traffic; many are maintained by counties that will have to come up with funds to maintain them.
Water is always an issue, and population growth will certainly lead to strains in this regard.
Love it or hate it, however, it looks like the Cline boom is coming. Texas oil production has doubled since 2005, and Texas Railroad Commissioner Barry Smitherman is on record with an estimate that it could double again by 2016 and triple by the early 2020s.
The economic benefits of this increase in production are massive, including thousands upon thousands of high-paying jobs. The shales around the state are a driving factor, and it appears that their effects will only magnify with the massive Cline.
M. Ray Perryman is president and chief executive officer of The Perryman Group (perrymangroup.com). He also serves as institute distinguished professor of economic theory and method at the International Institute for Advanced Studies.