Fort Worth Business Press - Energy Report

June

19,

2008ENERGY REPORTENERGY REPORT

Ben Fortson Jr.Marvin Gearhart

2008 Legends LuncheonHonorees

Ben Fortson Jr.Marvin Gearhart

2008 Legends LuncheonHonorees

T

June 19, 2008 Energy Report ✦ 3

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Barnett Shale Symposium Speakers

4 MARK METZLER • Texas Alliance of Energy Producer

5 JOHN S. BAEN • University of North Texas

6 DAN JARVIE • TCU Energy Institute

7 JOHN HOLDEN • Jackson Walker LLP

9 ROGER BEECHAM • Shannon, Gracey, Ratliff and Miller, LLP

10 Seeking oil in the Barnett ShaleEOG goes for the crude

12 Refurbishing the past XTO remakes historic building for Barnett Shale duties

15 The new BarnettsNew shale plays are developing around the country

18 Q&A Dan Steward, author of The Barnett Shale Play: Phoenix to the Fort Worth Basin, A History

21 Texas Alliance of Energy Producers2008 Fort Worth Legends Award Winners • Marvin Gearhart • Ben Fortson

24 Fort Worth Museum of Science and HistoryJourney to the center of the Barnett Shale

27 Finding the right spotFort Worth Energy works with large independents

29 Patrick ReardonChanges in oil and gas reserve rules

30 Barnett Shale Education Local community colleges begin training

31 James Frederick Korth Cantey Hanger LLP

32 Alex Mills Texas Alliance of Energy Producers

33 Ed Ireland Barnett Shale Energy Education Council

35 When the past returns Don Woodard’s oilfield classic

37 ChartsPowell Barnett Shale Newsletter

TEXAS PRESSASSOCIATION

MEMBER 2006

AWARD WINNER

3509 Hulen, No. 201 • Fort Worth, TX 76107817-336-8300 • Fax: 817-332-3038

www.fwbusinesspress.com • E-mail: [email protected]

I received a call a few weeks ago from a woman who had been approached byan “agent,” she said, who wanted to give her a bonus for some mineral rights toher land. She said the “agent” said her property was directly above some shalerock that was important to several energy companies. She wondered what sheshould do.

This would be typical of the calls I’ve received for the past several years, exceptthis call was not from Tanglewood, East Fort Worth, Cleburne or evenWeatherford. It was from New York state.

That’s right, the little shale play that started here has grown up, put on longpants, graduated and headed east.

We knew it would happen, but so soon? Despite the fact that shale plays are exploding from here to New York, we still

have plenty to talk about here. As you will see, we’re just getting started and thereare still plenty of topics for analysis, argument and discussion. And not just hereeither, but around the state, the nation and the world. Our Barnett Shale BreakfastSymposiums are the perfect place to start the discussion.

Robert Francis Editor Fort Worth Business Press

The shale doesn’t stop here anymore

PublisherBanks Dishmon

Chairman, Advisory BoardRichard L. Connor

EditorRobert Francis

Associate Editor Michael H. Price

Managing Editor Crystal Forester

ReportersElizabeth Bassett, Betty Dillard

Aleshia Howe, John-Laurent TroncheLeslie Wimmer

CorrespondentsJohn Armistead, Will Brackett

Tonie Auer, Dell Cain

ProductionBrent Latimer

Clayton Gardner

ListsMary Kennan

Accounting OfficeAnjanette Hamilton

Advertising ExecutivesMary Schlegel, Elizabeth Northern

Andrea Benford, Robert SoutherlandAnnie Warren

Vice President/OperationsShevoyd Hamilton

ReceptionistOlivia Jacobs

PhotographersGlen E. Ellman

Jon P. Uzzel

Cover art by Jon P. Uzzel

Inside

4 ✦ Energy Report Fort Worth Business Press

SYMPOSIUM SPEAKERS

The excitement intensi-fied about the poten-tial of oil in the

Barnett Shale when newsleaked out about new wellsbeing completed in thenorthern part of the tradi-tional natural gas play.

Mark Papa, CEO ofHouston-based EOGResources Inc., said the oilplay is something new andhas become efficientbecause of the new technology being developed.

“We are in the early stages of a major seachange in the onshore oil and gas business causedby technical improvements in horizontal drilling,”Papa told reporters at the company’s annual ana-lysts meeting.

“It is a really, really big deal,” he said. “Themagnitude is underestimated by Wall Street and byother exploration-and production companies.”

He believes the horizontal drilling techniquesdeveloped in drilling for gas reserves in the BarnettShale will have major implications for oil drillingand production, too.

Apparently, oil and gas analysts took Papa’scomments to heart as EOG’s stock surged to a 52-week high of $124.73 immediately after theannouncement.

EOG has drilled several new oil wells inMontague and Clay counties, which border theRed River. Montague County has the second high-est oil production in the 19-county region with 1.2million barrels of production so far. Wise County,immediately south of Montague, has had 4.1 mil-lion barrels of production and is the largest oil pro-ducer in the Barnett Shale.

Leasing activity has picked up in Archer andYoung counties, too.

EOG is trying to keep the information as quietas possible until they get its acreage under lease.

Economic impact The Fort Worth Chamber of Commerce com-

missioned economist Ray Perryman to conduct astudy of the economic impact the natural gas playis having on the citizens of North Texas.

He noted that last year he predicted a 20 per-cent increase per year, but the economy increased50 percent in 2007.

He also found activity in the Barnett Shale isresponsible for 8 percent of the economic activityin North Texas.

Perryman said the activity created 83,823 per-manent jobs and pumped more than $8.2 billioninto the local economy.

With the natural gas play in full bloom and theoil play beginning to bud, the oil and gas economyof North Texas appears to be on the verge of abountiful harvest.

The Energy Information Administration predictsdemand for natural gas and crude oil to continueto increase the remainder of this year and nextyear.

Natural gasTotal natural gas consumption is expected to

increase by 1.4 percent in 2008 and by 0.5 percentin 2009. The residential and commercial sectors areexpected to lead consumption growth in 2008because of the projected 5.4 percent increase inheating degree-days compared with 2007. In con-trast, the projected 12.4 percent decline in coolingdegree-days from the warm summer of 2007 isexpected to leave consumption of natural gas inthe electric power sector relatively unchanged.Finally, the declining real value of the U.S. dollarand some recovery in the fertilizer market areexpected to contribute to slight growth in industrialsector output and natural gas consumption in both2008 and 2009.

Total U.S. marketed natural gas production isexpected to increase by 4.6 percent in 2008, thendecline by 1.1 percent in 2009. Despite currentrepairs at the Independence Hub, production fromthe Federal Gulf of Mexico is expected to increaseby 4.2 percent in 2008. Sustained high rig countsin the lower-48 onshore region are expected tolead to an increase in onshore production of 4.9percent in 2008, according to the EIA.

Through the first four months of 2008 liquefiednatural gas (LNG) imports totaled an estimated 115billion cubic feet (Bcf), considerably lower than theimport total of 283 Bcf at this time last year. Theshift of LNG away from the United States this yearresults from higher prices available to LNG suppliersfor deliveries to both the Asia-Pacific region andEurope. Although EIA still expects significant addi-tions to world LNG productive capacity through2009, recent delays in bringing new liquefactionprojects to full operational capacity and currenthigh demand in other parts of the world will con-tinue to constrain LNG shipments to the UnitedStates. In 2007, LNG imports totaled 771 Bcf. The2008 LNG import forecast is revised downward to580 Bcf from 680 Bcf in last month’s EIA Outlook.

As of April 25, working natural gas in storagewas 1,371 Bcf, 3 Bcf below the five-year average(2003-2007), and 255 Bcf below the level duringthe corresponding week last year.

The Henry Hub spot price averaged $10.49 permillion cubic feet (Mcf) in April, $0.74 per Mcfabove the average March spot price. Continuingcool weather (heating degree-days were 6 percenthigher than normal in April), sagging imports ofLNG, lower inventories and higher oil prices haveall contributed to the recent strength in spot prices.Uncertainty over natural gas demand by the electricpower sector during the summer and the possibilityof hurricane-related supply disruptions later thisyear could impact spot prices in the comingmonths. On an annual basis, the Henry Hub spot

price is expected to average $9.69 per Mcf in 2008and $9.41 per Mcf in 2009, increases of $1.10 and$1.09 per Mcf, respectively, from last month’sEnergy Information Administration Outlook.

Crude OilProduction. In 2007, domestic crude oil output

averaged 5.1 million barrel per day (bbl/d),unchanged from 2006, according to the EIA. Totaloutput in 2008 is projected to grow by only 10,000bbl/d. In 2009, domestic crude oil production isprojected to average 5.3 million bbl/d, up 210,000bbl/d from 2008. Federal Gulf of Mexico output isexpected to rise by 260,000 bbl/d, but declines areprojected for Alaska (30,000 bbl/d) and the lower-48 states (20,000 bbl/d).

Total petroleum consumption of liquid fuels andother petroleum products averaged 20.7 millionbbl/d in 2007, essentially unchanged from 2006.Based on projections of weak economic growthand record high crude oil and product prices, con-sumption is projected to decline by 190,000 bbl/din 2008, a sharper drop than the 90,000 bbl/ddecline projected in the previous outlook. Afteraccounting for projected increases in ethanol use,U.S. petroleum consumption is projected to fall by330,000 bbl/d. In 2009, total petroleum and otherliquid fuel consumption is projected to rise by210,000 bbl/d.

Oil PricesWest Texas Intermediate crude oil prices, which

averaged $72.32 per barrel in 2007 are projectedto average $110 per barrel in 2008, up about $9per barrel from the projection in last month’sOutlook, and $103 per barrel in 2009, up about$11 per barrel from the previous outlook.

The Energy Information Administration projectsregular-grade motor gasoline retail prices, whichaveraged $2.81 per gallon in 2007, to average$3.52 per gallon this year, up 16 cents from lastmonth’s outlook. The motor gasoline price isexpected to average $3.66 over this summer (Aprilthrough September). These projections reflect ourassumption of a sizable narrowing of refiner gaso-line margins from last year, attributable to weak-ness in gasoline demand and growth in ethanolsupply. In 2009, regular-grade gasoline retail pricesare projected to average $3.44 per gallon, 20 centshigher than in the previous outlook.

EIA estimates that diesel fuel retail prices in2008 will average $3.94 per gallon, up from $2.88per gallon last year. This reflects global strength indiesel demand that is contributing to a widening ofthe margin between diesel prices and crude oilcosts since last year. Retail diesel prices are project-ed to average $3.67 per gallon in 2009.

Mark Metzler is chairman of the Texas Alliance ofEnergy Producers and president of FelderhoffProduction Co. in Gainsville.

ER

MARK METZLER

Texas Alliance of Energy Producers

Barnett Shale’s oil potential creates stir in gas play


SYMPOSIUM SPEAKERS

Along with the bless-ings of variousforms of income

from the current oil and gasboom, also comes the“curses” of those peskytaxes that help keep thisgreat country, state, coun-ties, cities and school dis-tricts running. The onlything worse than no cashor having no direct incomefrom the oil and gas boom, is getting lease bonusmoney, damages money and royaltypayments….and being ignorant about your taxesthat are due at the end of the year. Worse yet isnot realizing that these income blessings are alltaxable, if not now, eventually.

I am not a CPA, not a lawyer, however, I amwise enough to know I need one of each in mylife to maximize my income and honestly defer,reduce or avoid altogether my federal, state andlocal taxes.

The valuation of pipeline rights of ways andmineral rights, (undeveloped, leased, drilled/pro-ducing, partially developed or fully developed) isimportant for many reasons and the conclusionsrequire multiple approaches to estimate theirvalue depending on the intended use and pur-pose of the appraisal.

The basic over-simplified version of oil and gasassociated income and tax issues are as follows:

Bonus payments at signing of a lease:This taxable income in the year received and is

added to your other ordinary income.Question: Could you defer, not sign, the lease

until January? This could delay taxes until the fol-lowing year.

Well-site damages on your landCan be claimed as ordinary IRS income or

preferably treated as “damages” that reduce yourbasis or cost/price paid at the time you acquiredthe property. While still reportable, this changesthe “value” of the damage payment and convertsthe “income” from ordinary income to capitalgains (taxed at 15 percent in 2008) when and ifthe property is sold.

Question: If they drill on my homestead andthere are no taxes due on the sale (zero taxes dueup to $500,000 – tax free profit) of my home-stead, is it ever taxed?

Royalty payment IRS taxes:Yes, these payments are taxable every year by

the IRS and there are few expenses or deductionsto reduce or avoid paying the tax.

Question: How can I minimize these taxes?Now you need a CPA.

• Depletion allowance: A small portion ofthe income is excluded from taxation.

• Your annual royalty income statement:The statement will be sent to you and the IRS at

the end of the year by the oil company but ismore income than you actually received. Danger –Most oil companies send a gross income state-ment before legitimate expenses (you did notreceive this amount of money).

Question: How can I reduce these taxes?Keep every check stub, and every monthly report,which is called a “check and well/lease detailstatement.” Common deductable expensesinclude, but are not limited to, the following.

• State severance taxes• Marketing changes (rip off to us)• Compressor charges• Pipeline/Transportation charges• Other exotic charges (there are many)Texas State Severance Taxes:No options here, everyone pays and your

check always has this tax taken out first.Texas is a wealthy state and has no state

income taxes due to our blessings of oil and gas.A visit by the Penn State Team in my office shouldlead to Pennsylvania following the Texas model.They pay no severance taxes. Our Texas $8 billionsurplus is due to the following taxes collected atthe well head on every drop and cubic foot ofnatural gas.

Severance taxes:Oil = 7.5 percent on every barrel produced at

market value. That is $9.75 per barrel of oil at$130 per barrel.

Natural gas = 5.6 percent or 50 cents per1,000 square feet (mcf) at $9.

Question: How do I know if I am getting paidfairly or how much oil and gas is actually beingsold under my land?

Trust me, you are not getting cheated and Iwill explain this at the seminar.

Local ad valorum taxes and royalty:Oil and gas rights and their values in Texas are

not taxable as part of your real estate until oil andgas is produced and sold. One of the biggest little“dirty” secrets in the oil and gas boom is that youwill get an end-of-the-year tax statement fromthe appraisal district on the present accessed/mar-ket value of your royalty income stream – just likeyou do on your house. A good idea is to save 5percent to 8 percent of your monthly income topay your city and school taxes in December. Oilcompanies pay their part, but never yours.

There is much confusion on this for severalreasons:

• The tax offices are running months behinddue to the 8,600 wells drilled in North Texas anddelays in information, reporting and royalty pay-ments held in suspension on many wells.

• Outside contracting firms handle your oiland gas valuation and tax statements from far-away places, like Austin.

• The appeal process is cumbersome, timeconsuming and quite often the information pro-vided on your statement is wrong. Not all wellsshow up in the data, but local taxes will eventual-

ly be due and payable or your rights can be soldon the courthouse steps.

• The Texas law and valuation model on royal-ty/mineral taxes is complicated, but in my opinion,friendly to the oil companies and royalty owners,and is much less than “true market value.”

Pipeline easements and damage payments:All income is reportable to the IRS but not all

income is taxable the year received if you havegood representation at the time an easement issigned and also have a good professional andqualified CPA and appraiser. The actual damageincome to the value of the land and remainder ofyour land can be deferred until the land is sold,similar to the well-site damages. I recommendtwo checks: one for the granting of the easement(taxable) and one for damages, marked damages.

Estate taxes on mineral rights to the IRS:Danger – You are likely unaware that you have

a Texas lotto ticket that you have won that has anincome stream from royalty that has a marketvalue of 50 months to 60 months of income pluspotential mineral right values worth much more(all known and unknown oil and gas producingzones). Without estate planning at your death,the present value of your mineral estate will bevalues by the IRS and will be added to your estateand taxed at 35 percent to 55 percent on moniesyou or your heirs have not yet received. If youreceive $10,000 per month royalty checks andyou are over the estate exclusion limits after con-sidering the value of all your other assets, (house,business, cash, collectibles, stocks, bonds, etc.)your estate could easily owe an additional$200,000 to $300,000 to the IRS because of thevalue of your royalty and minerals rights.

Question: How can I reduce these estatetaxes and liabilities, but yet still get the money tospend in my life?

• Time your death carefully. Fifty-five percentwill be the new tax after Bush’s tax relief expiresand greatly depends on year of your death andthe exclusion amounts for any given year through2011.

• Deed your minerals to a trust or family limit-ed partnership.

The “best” of the two options are topics ofhuge discussions between CPAs, estate planners,lawyers, professors and owners. Oil and gasincome are blessings, but taxes will be paid.Dividing your land into two estates (surface andminerals) is a wise decision for many reasons andonly requires a mineral deed ($350 to $500 perdeed) and a valuation of both estates to establishan IRS basis or remaining values.

Baen is a professor of business at University of NorthTexas and offers several articles on the Barnett Shaleand oil and gas topics atwww.coba.unt.edu/firel/baen

ER

JOHN S. BAEN

University of North Texas

Valuation and tax implications of the Barnet Shale


SYMPOSIUM SPEAKERS

Where is the mostlikely place tofind hydrocar-

bons in a sedimentarybasin? In a petroleumsource rock.

Petroleum source rocksare formed from the depo-sition, preservation anddecomposition of biologicalmatter. This biological mat-ter can range from micro-organisms such as plankton, bacteria and algae toplant debris. Globally, it is estimated that only 1percent of deposited organic matter is preserved,the remaining portion being consumed or alteredby biological activity requiring the presence ofoxygen.

Preservation of organic matter occurs underspecific environments such as oxygen-deprivedconditions in deep water marine settings. TheBarnett Shale is one such accumulation containingpreserved organic matter deposited and preservedunder oxygen-deprived, marine conditions. Howdo we know that it is a marine sediment? Theanswer is the presence of marine fossils. This alsomeans that about 300 million years ago, thefuture Fort Worth basin was under several hun-dred feet of sea water.

Most petroleum (oil and gas) is formed fromthe thermal decomposition of organic matter,which requires exposure to heat. In geologicterms this is accomplished primarily by burial ofsediments and then exposing them to elevatedtemperatures as heat from the mantle is conduct-ed through sediments to the surface.Temperatures for thermal oil and gas formationfrom biological material is relatively high – about80°C to 200°C – with the bulk of oil beingformed between 80°C and 150°C (ca. 175°F -400°F) and the bulk of gas forming between150°C and 200°C (300°F -400°F).

Present-day temperatures of the Barnett Shaleat 4,000 feet to 8,000 feet are about 80°C(175°F). Thus, we know it had to have beenburied to much greater depths in the geologicalpast, perhaps as deep as 15,000 feet in order toaccount for the thermal decomposition of theorganic matter to petroleum.

How did this burial and subsequent uplift tran-spire? First, the South American craton pushedupward and over the North American craton,which we identify as the Ouachita Thrust Front(just east of Fort Worth). This resulted in subduc-tion and subsidence of the already depositedBarnett Shale downward closer to the mantleresulting in a high heat flux through the sedi-ments. There may also have been hot fluidspushed through more porous sediments from thethrust front resulting in even more heat exposure.Additional sediments were deposited on top of

the Barnett Shale, which were later eroded, i.e.,removed by surface geological processes, duringuplift of the basin resulting in the present-daydepth of burial of the Barnett Shale. This is whythere is more gas production to the east andmore oil production to the north and west – high-er temperatures were reached in the gas proneareas.

Thus, a key role for the geochemist is to iden-tify the degree of cooking of the source rock inthe geological past.

The trapA petroleum source rock will generate oil and

gas, much of which is expelled out of the sourcerock and migrates into a trap. Conventionalexploration looks for such traps and then, if suc-cessful, produces oil or gas or a mixture of thetwo from the reservoir rock.

A petroleum system involves all the compo-nents and processes necessary to generate, expel,migrate and trap petroleum. Conventional pro-duction is from a trap, i.e., a closed container,where it was filled with oil and gas that migratedfrom a petroleum source rock that may be nearby,i.e., hundreds to thousands of feet away, or faraway, from tens of miles to upward of hundredsof miles away from the trap.

What is different about the Barnett Shale? It issource, trap and seal – it is a self-contained petro-leum system. There is no need to identify a specif-ic trap and account for hydrocarbon charge viaexpulsion and migration from a source rock. Thus,rather than looking for subtle traps where petro-leum might be trapped, a shale resource play suchas the Barnett Shale can be mapped in terms ofdepth and thickness of the shale rock “kitchen”over miles and hydrocarbon charge is presentbecause… it is the source rock for petroleum.

The keys to successful Barnett Shale gas pro-duction are identifying those areas where the for-mation is organic-rich, sufficiently thick, and suffi-ciently cooked to convert the preserved organicmatter to hydrocarbons.

The next problem is for production geologistsand engineers – how do we get it to flow petrole-um – either gas or oil? This was a key to the com-mercial development of the Barnett Shale andMitchell Energy personnel figured out how to dothis, and Devon Energy figured out how to makemarginally economic wells into highly economicwells by drilling horizontally.

Two plays There are two plays in the Barnett Shale: shale

gas and shale oil. The primary interest in the FortWorth Basin is shale gas as a large portion of theshale has been sufficiently cooked to convert bothpreserved organic matter and retained oil to gas.However, the Barnett Shale does generate oil inareas where it has not been sufficiently cooked to

gas and thus, becomes a potential shale oil playwhere primarily oil would be produced. This issemantically different from oil shale such as theGreen River Oil Shale, found in various RockyMountain basins, which can be converted to largeamounts of oil by physically heating masses of therock. However, when these processes are con-ducted over short periods of time (days to years),the temperature requirements for such a processare much higher (350°C). One then has to consid-er the energy balance from such a process: theenergy input has to be less than potential energyoutput of the generated oil, otherwise the processis a waste of energy. It increases supply, but theenergy balance can be a net gain of zero or evennegative.

How do we evaluate the Barnett Shale orother shales for their native oil and gas produc-tion potential? A geological chemist (geochemist)analyzes pieces of the rock or samples of oil orgas to assess various characteristics. For example,we want to know if shale is sufficiently organicrich to yield commercial amounts of petroleum sowe measure total organic carbon. Typically theBarnett Shale in the main producing area aver-ages 4.5 weight percent organic carbon in thetotal rock mass. However, its original organic car-bon content was likely about 7 weight percent orhigher. The difference is the amount of carbonthat would be found in all the oil and gas gener-ated, i.e., 2.5 weight percent. This amount ofgenerative organic matter may appear to be a lowamount, but when converted to oil or gas equiva-lents, this amounts to about 150 million barrels ofoil equivalent per square mile where the BarnettShale is 350 feet thick.

Remember the Barnett Shale has expelled a lotof hydrocarbons and this is verified by conven-tional oil and gas production. In fact we estimatethe Barnett Shale has previously expelled approxi-mately 60 percent of the hydrocarbons that itgenerated. Thus, only 40 percent of its totalhydrocarbon generative potential remains in theshale, and only a small portion of this is beingproduced.

The second key parameter that we need toknow is the extent of cooking of the shale – itsthermal maturity – is it in the oil window or thegas window? Barnett Shale in the oil window willflow some gas with oil, but the rates will be sub-stantially lower due to the incomplete conversionof organic matter

When compared to other source rocks aroundthe world in terms of its total generative poten-tial, the Barnett Shale ranks in the top 20 percentof all petroleum source rocks.

Jarvie is president of Worldwide Geochemistry LLCand a member of TCU’s Energy Institute Board ofDirectors.

ER

DAN JARVIE

Worldwide Geochemistry

Petroleum source rock: A trap for natural gas


SYMPOSIUM SPEAKERS

The nature of theactivity in the BarnettShale has increased

the conflict between themineral developer and thesurface owner. Theencroachment of theBarnett Shale and other oiland gas developments intourban areas and the expan-sion of urban developmentinto traditional mineraldevelopment areas have increased the historicalfriction between the surface and the minerals.This conflict has affected homeowners, developersand ranchers alike.

Mark Papa, CEO of Houston-based EOGResources Inc., said the oil play is something newand has become efficient because of the newtechnology being developed.

Many people are wondering why the mineralestate is the dominant estate. As the originalcourts involved with that determination reasoned,were the minerals not the dominant estate, thesurface owners, especially those who did not ownany minerals, would not permit the developmentof the tract and thus the minerals would never bedeveloped. Thus, those minerals would never con-tribute to the energy needs of the country.

While the mineral estate is the dominantestate, the courts have attempted to providesome protection to the owner of the surface. Theaccommodation doctrine was developed in theGetty case. There it was held that an oil companythat had other means by which its mineral estatecould be developed should accommodate a sur-face owner that had a pre-existing irrigation sys-tem that had no other means to use its surfacefor its existing agricultural purposes. In essence,where an existing surface use could be accommo-dated by the mineral owner, the mineral ownerwould be required to do so.

There have also been legislative attempts tolevel the playing field, such as statewide Rule 76,where under certain specified circumstances, asurface developer could require a hearing beforethe Railroad Commission of Texas to create a“qualified subdivision.” In essence, surface devel-opers could obtain through a hearing before thecommission a determination that limited the min-eral development of the subject surface to speci-fied drilling locations.

Today the most common method of reachingan accommodation between the mineral and sur-face owner is the use of a surface use agreement.The surface use agreement can be created atalmost any time. Frequently a surface use agree-ment is created at the time the minerals are sepa-rated from the surface or at a later date when

mineral development is being sought. Often thenegotiation of restrictions on mineral develop-ment occurs at the time the owner of both thesurface and the minerals attempts to sell the sur-face while retaining ownership of the minerals. Ifthe purchaser of the surface is unable to obtainownership of the minerals along with the pur-chase of the surface, the purchaser will seek torestrict the development of those minerals byexcluding the use of the surface for such develop-ment entirely.

The Barnett Shale formation is ideal for such asolution because most minerals are developedfrom wells with locations as far away as 4,000feet from the tract being developed. While it isdifficult to foresee both the surface use and themineral development needs in advance, the factthat the surface footprint used is small in relationto the aerial extent of the minerals developed pro-vides an opportunity to resolve the issue in amanner that meets everyone’s needs.

Problems naturally arise from the inability ofthe parties to know exactly what will be neededby both the surface and mineral developer in thefuture because precise uses are frequentlyunknown at the time an agreement is reached.Many parties are content to reach an accommo-dation with the lessee oil company developerattempting to drill a well on the property. Theyare overlooking the fact that leases expire andfuture owners will not be bound by such anagreement unless all mineral owners and the thenlessee have agreed to any surface restriction. Careshould be taken to get all the parties to the tableand resolve the issues forever. For logical reasons,the earlier this is done, the better it is for every-one.

Pipeline tensions Additional tension is created by pipelines and

their right of condemnation. Increased productionhas increased the need for the expansion ofpipelines of every nature. Obviously bringingpipelines through urban areas can be expensiveand time consuming for pipeline companies anddisruptive for surface users. The negotiation ofrights of way and easements tend to achieve bet-ter results for all parties.

Frequently pipelines will accommodate surfaceowners both in terms of route and other desiredobjectives. For the surface owner, a negotiatedresolution almost always provides a better solu-tion for there is a significant likelihood that unlessthe pipeline operator has made an error, it willprevail in obtaining the right of way. So long asthe pipeline operator has properly registered withthe Railroad Commission of Texas and has theright of condemnation, it is not a question ofwhether the pipeline will go through, it is simply a

question of what amount of damages will bepaid.

The same issue of what constitutes damagesand how damages are calculated is at issue inpipeline rights of way and in mineral develop-ment. Conflict has increased between the mineralowner and surface owner regarding the locationof wells and the right of ingress and egress forpurposes of gathering lines and access to drillsites. While it is generally true that the mineralowner has a right to burden the surface estate tothe extent necessary to develop the mineralsunder that surface, special rules and facts canresult in limitations on the methodology andextent of the mineral developer’s activities. Thesame thing is true with regard to geophysicalactivity on the properties. Surface owners shouldconsult with professionals to determine the man-ner in which activities are being conducted is con-sistent with the rights of all parties involved.

Another significant development has resultedfrom the creation and revision of municipal ordi-nances. Municipalities have attempted to dividethe line between meeting the desires of their citi-zens while encouraging a growing revenue sourceduring times of growing revenue needs.Frequently municipalities have increasing restrictedand delineated the timing and manner in whichmineral activities can be conducted. It has becomeincreasingly important for all parties to participatein the development of the ordinances to ensurethe needs of all parties are met to the greatestextent possible.

We will see increased activity in the develop-ment of law regarding municipal ordinances. Thesupremacy of municipal ordinances that conflictwith the powers of other entities will be tested.

Recently, landowners, through the Internetand other communication technology, havebecome more united in demanding concessionsfrom oil companies and making others aware oftheir rights. They have banded together to collec-tively achieve results that were previously unob-tainable by individual owners. With the develop-ment of minerals in “rooftop” areas or housingdevelopments, oil companies have encounteredorganized negotiation of leases and activities,which has impacted both the results achieved andthe manner in which all parties approach attain-ing their objectives.

The future undoubtedly will be shaped by leg-islation, judicial determinations and the increaseduse of technology and technological advance-ments.

John Holden is a partner in the Business Transactionsection and a member of the Energy practice groupof Jackson Walker LLP.

ER

JOHN HOLDEN

Jackson Walker LLP

Continued conflict: mineral developer and surface owner


SYMPOSIUM SPEAKERS

None of the titleissues discussedbelow is collectively

unique. They have evolvedas oil and gas law devel-oped. The development ofthe Barnett Shale has creat-ed an economic boom forNorth Texas that has causedtitle issues to come to theforefront concerning title tothe minerals that underliethe urban areas. Whilethere are more title issues that may affect proper-ty interests, I have chosen a few that are worthyof discussion. They are unique to mineral owner-ship and to operators concerning their ability todrill and operate in the close quarters of urbanareas.

Restrictive covenants and deed restrictions These restrictions may limit an operator’s use of

the surface and subsurface for drilling an oil andgas well. These restrictions are normally of recordand included in the deed conveying the propertyor in a separate instrument filed of record. Theselimitations will be enforceable if they are createdprior to the severance of the minerals from thesurface estate. Dyegard Land Partnership v.Hoover, 39 S.W.3d 300 (Tex. App.—Fort Worth2001).

Non-surface useAn operator has the right to the reasonable use

of the surface to conduct drilling operations sub-ject only to limits imposed by the lease. Some ofthe problems can be avoided by the landowner ifhe enters into a surface use agreement. Thisagreement may provide for the non-use of thesurface in drilling operations. A landowner shouldbe aware that such agreement providing for sur-face damages will not require the lessee to reme-diate subsurface contamination or damages.Unless the surface use provisions are contained inthe lease, this agreement must be negotiated as aseparate contract. Humble Oil & Ref. Co. v.Williams, 420 S.W.2d 133 (Tex. 1967); Jones v.Getty Oil Co., 470 S.W.2d 618 (Tex. 1971) andFenner v. Samson Resources Co., Not Reported inS.W.3d, 2005 WL 2123043 (Tex. App.—Houston[1st Dist.] (mem.op.).

Deeds of trust and other liensIn most subdivisions, the properties are going

to be subject to deeds of trusts securing notesfinancing each individual lot located within thesubdivision. This deed of trust creates a lien onthe property. Other liens may be created on thelots by home improvement loans, home equityloans, delinquent taxes, judgments and other obli-gations. Under the chain-of-title rule, any opera-

tor is deemed to know all the facts of the liensincluded in this chain-of-title through which heacquires his oil and gas lease. For example, if a lotis pledged as collateral by a deed of trust securinga purchase money loan, and the owner subse-quently leases the minerals under his lot, the leasewill be subject to the deed of trust. If productionis obtained under the oil and gas lease before theroyalty can be paid, a subordination or a releaseof the deed of trust covering his property must beobtained. The same requirement applies to allother liens that may be filed on the property. Ifsubordination or a release is not obtained, theoperator may escrow and hold the royalty pay-ments until such subordination or release hasbeen obtained. Without a subordination, if theproperty is foreclosed, the lease may be terminat-ed. Williams v. Jennings, 755 S.W.2d 874 (Tex.App. – Houston [14th Dist.] 1988); Stowe v. Head,278 S.W.2d 120 (Tex. App.—Tyler 1987, no writ).

Strips and goresUnder Texas law, when a deed conveys land

abutting a right-of-way, title to the center of theright-of-way also passes by the deed. State v.Fuller, 407 S.W.2d 215 (Tex. 1966); Cox v.Campbell, 135 Tex. 428, 143 S.W.2d 361 (1940);Rio Bravo Oil Co. v. Weed, 121 Tex. 427, 50S.W.2d 1080 (1932); Reagan v. Marathon OilCompany, 50 S.W.3d 70 (Tex. App.—Waco 2001,no pet.). This general rule applies even if thedescription of the land terminates at the right-of-way, unless a contrary intention is expressed inplain and unequivocal terms. Under the strips-and-gores doctrine, it is presumed that a grantorhas no intention of reserving a fee interest in anarrow, adjoining strip of land when such landceases to be useful to the grantor after the con-veyance. To overcome this presumption, thegrantor must explicitly reserve in the deed withplain and specific language an interest in a nar-row strip of land adjoining the conveyed land.Cantley v. Gulf Production Co., 135 Tex. 339, 143S.W.2d 912 (1940); Cox v. Campbell, 135 Tex.428, 143 S.W.2d 361 (1940). This rule applies tocity lots for they are adjoining streets and ease-ments that were acquired by public dedication,easement or eminent domain. If the right-of-wayis acquired by deed, this doctrine may not applyand the mineral interest underlying the interestmay belong to the grantee.

References to documents not filed of recordsThe chain-of-title doctrine may also affect

instruments referenced in recorded documents. Inthe Westland Oil case, several sections of landwere leased to the oil company. This oil companyentered into a farmout agreement with a secondcompany who in turn transferred these rights to athird company. The second company subsequentlyfarmed out these same rights along with some

other rights to a fourth company but referencedan operating agreement between the second andthird company that was not filed of record. Thethird company drilled and earned assignments ofoil and gas interests under its farmout. The fourthcompany brought suit against the third companyclaiming it did not have notice of the first farmoutagreement because it was not filed of record. Thecourt said due to the operating agreement beingreferenced in the second farmout agreement, thefourth company was charged with knowledge ofthe first farmout agreement and took subject toit. Westland Oil Development Corp. v. Gulf OilCorp., 637 S.W. 2d 903 (Tex. 1982). These typesof transactions usually affect the oil and gas oper-ator more often than the land or mineral owners.If a landowner or mineral owner is examining titleto the minerals underlying a tract of land, ifextrinsic instruments are referenced in the publicrecord but not recorded, a thorough searchshould be made to locate and examine the refer-enced instruments.

Reserved minerals While one may acquire a tract of land insured

by a title policy, he or she may not know if he orshe owns the minerals unless a title search is con-ducted. If the minerals are not present, they mayhave been reserved in a prior deed or conveyed toa third party. If one does not own the minerals,he or she is not entitled to royalties under a leasebut may have his or her surface used for drillingpurposes. Humphreys-Mexia Co. v. Gammon, 113Tex. 247, 254 S.W. 296 (1923).

Pooling and unitizationMost leases allow interests from one or more

leases to be pooled into a drilling unit or unitizedto cover an entire reservoir. This action in mostcases is voluntary on the part of the operator. Thepooling of interests may cause ones royalty inter-est to be only a portion of the royalty expected ifnot all of the lease is pooled. Smith and Weaver,Texas Law of Oil and Gas § 1.1.D (LexisNexis2007).

ConclusionIn the Barnett Shale, urban area tracts are

being drilled that have never been subject to oiland gas development. One may own the surfacebut not own the underlying minerals or one mayown all the minerals under a lease but not receiveall the royalty he or she feels is due. If one ownsproperty, his or her surface acreage may be deter-mined by title insurance but to ascertain owner-ship of his or her mineral interest, a title examina-tion must be conducted.

Roger E. Beecham is a partner at Shannon, Gracey,Ratliff and Miller LLP.

ER

ROGER E. BEECHAM

Shannon, Gracey, Ratliff and Miller, LLP

Unique title issues in the Barnett Shale gas play


EOG’s quest for oil in the Barnett ShaleBy John ArmisteadSpecial to the Business Press

The Barnett Shale in the Fort Worth Basin of North Texas is synony-mous with natural gas – and a lot of it. But one company, alreadyflush with success in finding natural gas in the area is also making a

case for getting oil out of the Barnett Shale. Crude oil? In the Barnett Shale? Houston-based EOG Resources Inc.,

the No. 4 producer of natural gas in the Barnett, is betting that it canrecover plenty by using the right technologies.

Crude oil has been recovered from other geologic formations in partsof the Fort Worth Basin for many years, but EOG’s venture will be the firstlarge scale attempt to try to coax oil from the Barnett Shale, a formationthat has been a producer of huge volumes of natural gas.

“We have proven that you can pull crude oil from the Barnett in ourfairway counties of Archer, Clay and Montague in North Texas,” said MarkPapa, EOG Resources chairman and CEO, during a recent investor confer-ence. “It will be more difficult to capture the oil from the Barnett forma-

tion, and initially we’ll probably realize a production of only about 2.5 per-cent of the available in the Barnett.”

Papa says his company has proven that high quality oil is in the north-ern extension of the Barnett Shale in substantial enough quantities to pro-ceed with exploration and realize a good return on the investments. Thechairman and CEO of the Houston-based energy company spoke on theoil prospects for the Barnett Shale a Stanford C. Bernstein and Co.Strategic Decisions Conference on May 28.

Papa added as techniques for oil drilling and recovery in the shaleimprove – just as they did for gas – the percentage of recoverable oil willincrease.

“With several exploratory wells we have proven that this can be done,and we are doing everything we need to do for our ramp-up early in2009,” says Papa.

EOG is not to be taken lightly. In September 2007 the low-key compa-ny brought into production the biggest Barnett Shale horizontal well tothat time with its Fowler Unit No. 4H in Johnson County.

EOG had revenues of $4.2 billion in 2007 and had total estimated net

Robert L. Gaudin, CEOof Grande Energy Co.

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proved reserves of 7,745 billion cubic feet equivalent, of which 6,669 billioncubic feet were natural gas reserves and 179 million barrels, or 1,076 Bcfe,were crude oil, condensate and natural gas liquids reserves, as of the end of2007. About 67 percent of EOG's reserves are located in the United States.

One of the first things EOG is doing in its quest for developing crude oilresources from the Barnett Shale, Papa says, is constructing a gas plant toprocess natural gas in the oil-bearing shale.

“In these northern counties, there is no infrastructure, so we are havingto build our own. There are no gas or oil pipelines and no processing facili-ties in the area of our leases,” he says.

EOG, as of the first of this year, had 250,000 net acres under lease, pri-marily in Clay and Montague counties. The economically viable trap is about40 miles east to west and 20 miles north to south, according to the compa-ny. EOG estimates its potential net reserve range in these counties is from227 million to 463 million barrels of oil equivalent in the Barnett Shale. Theshale is estimated to be from 250 feet to 700 feet thick in the area, accord-ing to the company.

A ‘sweet’ prospect Papa pointed out the crude oil in this area of the Barnett is comparable in

quality to the West Texas sweet crude. “What we have seen is normal, high quality crude, or sweet crude in the

40 to 42 degree range. If West Texas sweet is bringing $130 a barrel, forexample, then the oil we are recovering should be valued at about thesame,” he says.

Papa added EOG will have no measurable production from its oil wells in2008 while it continues exploratory drilling and putting together an infra-structure to process and move products. The company as of May had com-pleted eight horizontal wells and about a dozen vertical wells. EOG plans todrill 60 to 80 wells in 2008, about 160 in 2009, and as many as 240 in2010, according to Papa.

Papa says the expected after tax rate of return on the oil productioncould be in the range of 50 percent.

“If you have the first mover advantage in an area like ours in the north-ern extension of the Barnett, and establish your position well, your rate ofreturn on investment can be more significant. The advantages flow throughyour profit and loss statement and establish a leading position with yourpeer group,” he says.

EOG estimates the finding cost per barrel of oil in the play at $18 and thelifting cost at $5.

Even though the oil is more difficult to get out of the shale, EOG says,the experience gained from the initial exploration and production likely willhave application to other wells as the recovery techniques improve.

Little wonder that EOG and others are interested in the possibilities ofBarnett Shale oil as the price of crude oil has increased significantly in recentmonths, hitting $130 per barrel in late May of this year.

Difficult issuesNew technological advantages and techniques are coming that may make

oil in the Barnett Shale a reality, says Robert Gaudin, founder, chairman andCEO of Grande Energy Co. of Fort Worth, but there remain some difficultissues to overcome.

“I respect EOG’s technological capabilities,” he says. “The company has alot of very smart, very capable people developing their technical expertise. Ifanyone can be successful in working through the problems in the oil win-dow in the Barnett, it probably will be EOG.

“There is still a long way to go, but with development of new technolo-gies, like new stimulation approaches for enhancing fracturing, and the priceof oil, it is promising. And, EOG doesn’t quit in the face of adversity.”

Gaudin added that for a long time there has been talk about the oil win-dow in the Barnett Shale but there have been so many uncertainties as tohow get the oil out of the formation.

“There are several possibilities for achieving some success in getting oilout of the Barnett,” he says. “One is with the Marble Falls formation sittingon top of the Barnett. If porosity is good enough, oil might be recovered inthose good spots. Another promising oil recovery might be through theForestburg Lime separating the upper and lower Barnett Shale. In some areasthe separation might be good enough to provide accumulations of oil. Thethird major possibility is in areas where the Barnett Shale is naturally heavily

fractured. Access to oil is better in these areas, although once the easy oil ispulled from the fractured areas, the production drops off precipitously. Toget further recovery may require new types of fracturing techniques toenhance recovery.”

By the book Dan Steward, who now works for Republic Energy Corp. of Dallas, but

was with Mitchell Energy in the early years of Barnett Shale development,says he too was impressed with EOG and the company’s application of tech-nology both in Barnett Shale gas recovery efforts and in its success in theBakken Shale oil recovery efforts.

“Their work in the northern tier of the Barnett Shale is encouraging,” hesays. “I think what we are beginning to see is more of a fractured shale playrather than an oil resource play at this time. That may change to a resourceplay over time and with improvements in techniques”

Steward, author of The Barnett Shale Play, Phoenix of the Fort WorthBasin: A History, added “It is the understanding of people familiar with oilin this particular part of the basin that EOG is trying some stimulation tech-niques not previously used in the Barnett Shale. It is going to take some timeto get all the elements of recovering oil from the formation working for suc-cess.

“As with a lot of the successes in the Barnett Shale gas recovery, theimproved technologies are the major benefit of the time, money and hardwork in exploration and production. These technologies will have far-reach-ing beneficial effects in the future.”

EOG is predicting production of about 83 million cubic feet of natural gasper day by next year in the oil-producing area, and 191 million cubic feet aday in 2010. In 2007 EOG averaged 254 million cubic feet of gas a day in thecore area of the Barnett, according to the Railroad Commission of Texas. ER

Mark Papa, chairmanand CEO of EOGResources PH

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Modern use for an early 20th century la

XTO resurrects

the Swift & CoBuilding for

Barnett Shale

duties

By DEL CAIN

Special to the Business Press

She’s 106 years old but she doesn’t look aday over… well, over a day if you ignore thequestion of style. “She” was the office and

administrative building for Swift and Co. at theirmeat packing facility in the Fort WorthStockyards.

The French Colonial-style building was meticu-lously restored by XTO Energy Inc. The buildingwas acquired by the company in May 2006, workbegan in July of that year and the interior wasready for use by the company’s Barnett Shaleoperation late in 2007 and the exterior work wascompleted in March 2008.

In the late 1890s, both Swift and Armour andcompany were courted by some of Fort Worth’sleading citizens to locate meat processing plantsat the then-bustling stockyards and cattle market.Both companies were won over and two plots of

land were provided; one on the north side ofExchange Street and one on the south. A flip of acoin awarded the southern site to Swift and con-struction started on both plants in 1902.Completed the next year, the office buildinganchored a plant that eventually included about50 buildings and employed, at its height of opera-tion in the late ’50s, around 1,700 people.

The two companies were, in fact, responsiblefor a significant portion of the population growthin the area during the early part of the 20th cen-tury as people were drawn to the prospect ofsteady work at the two plants.

Two new towns were established, North ForthWorth and Niles City (named for one of the origi-nal investors in the Stockyards, Louville Niles ofBoston, Mass., but both were soon absorbed intothe city of Fort Worth. The Stockyards investorsbuilt about 70 rental houses on Stockyards-ownedproperty in Niles City, located just east of theStockyards as the township was incorporated

Photos by Jon P. Uzzel


y landmark

almost entirely on land they owned. The shape ofFort Worth was also changed as the businessesgrew and employees needed more places to liveconvenient to work. Developments, such as RosenHeights located just west of the plants, wereplanned to provided that housing.

The 28,000-square-foot building remainedoffices for Swift until 1971. Then, after twodecades of declining business – due primarily tothe development of feed lots, cattle sales andmeat-packing operations in smaller towns – thecompany shuttered its Fort Worth operation. Thatdecline also was fed by the increasing use oftrucking to replace what had been a commodityshipped primarily by rail ever since the inventionin 1878 of the first practical refrigerated rail carby engineer Andrew Chase. Chase, in fact, hadbeen hired to do just that by Gustavus Swift, thenpresident of Swift. The plant and offices wereshuttered and so, too, was a vast economicengine for the city of Fort Worth.

From drill site to restorationAsked about the impetus to restore older

buildings such as this and the W. T. WaggonerBuilding and others, Joy Webster, vice-presidentof facilities for XTO says, “Oh, it absolutely startswith Mr. Simpson, [Bob R. Simpson, CEO].”

She continues to explain it is his view thatthere is value in “older things.” As an antique col-lector himself, he sees what you buy of value thatyou can keep or restore will not only be of valueto the community but will increase in value forthe owner, Webster says.

In addition to the Waggoner and Swift build-ings, XTO also refurbished and restored the BakerBuilding, built in 1910, in downtown Fort Worth.The building is now known as the Bob R. SimpsonBuilding and is also used for corporate offices.The oil and gas firm continues to grow along withthe energy industry. In 2007, XTO had $5.5 billionin revenue and currently has more than 2,000employees worldwide.

The Swift building came to XTO’s attention ini-tially when employees from the company’sBarnett Shale operation were seeking out drillsites near the Stockyards. Excited about their find,they told company officials of their discovery. Inshort order, Webster was called by the building’sowner who wanted to show it to her as potentialheadquarters building for XTO. Although thebuilding was obviously too small, she was eagerto see it simply because of its history. That tourpersuaded her the building was not only deserv-ing of restoration, but it would make an ideallocation for the company’s Barnett Shale division.

One result of this has been recognition fromthe National Trust, which presented Mr. Simpsonwith its Hero Award. While the Swift Building ispart of the Stockyards National Historic District,there is also an effort currently to have the building given an individual designation because ithas now been rescued from the list of “endan-

The Swift Building was refurbished by XTO Energy Inc.


gered treasures,” where it rested for some time. “Our preservation awards recognize excellence

in the restoration, rehabilitation or adaptive use ofhistoric buildings or sites,” says Mary Saltarelli, ofHistoric Fort Worth Inc. “The Swift and Co.Building was on our ‘Most Endangered Places List’for two years. XTO saved it and adapted it fortheir use — their work is an example of historicpreservation as economic development.”

A tour is enlightening as it reveals the lengthsto which the company went to preserve the her-itage of the building. From the recreated fenceoutside to the carefully restored mosaic of theSwift and Co. logo in the entryway to door facingcaps modeled from a surviving original, therestoration is impressive. Even the floors are lum-ber reused from the three layers of hardwoodflooring found when the interior was stripped outfor restoration. There was enough of that formost of the first two floors as well as the third,which was originally a rough finished storage areaand has now become the office conference roomdominated by 40 feet of a U-shaped conferencetable built from old shelving found stored there.

History abounds Everywhere one looks there are reminders of

the building’s origin. There is a lighted displaycase holding Swift and Co. memorabilia, somedonated and some found during the reconstruc-tion. Letters and pictures from the building’s firstincarnation abound and even more are still resting

in Webster’s XTO office waiting for their properplace. There are even touches to recall the build-ing’s 20 years as an Old Spaghetti Warehouserestaurant. A marble-topped table from that timesits in the corner of a hall and the restaurant’sstained glass windows now filter the light into theconference room.

Behind the main building is a brick structurethat once served as the “time card building.” It isthe space that all employees, whether theyworked in the office or in the plant had to passthrough to clock in and out for their shifts. Thathas been restored as a place to maintain morememories of Swift. Enlarged photographs of theplant and the work that went on there aremounted as windows between panes of glass sothat natural light floods them and makes themeven more impressive. The high point of this littleaddition is an 8 feet by 10 feet reproduction of aphotograph that is mounted on the end wall. Itwas taken, probably sometime in the ’30s or ’40s,and shows a group of eight to 10 men all outfit-ted in suits and hats. They are the company’s buy-ers and are poised to ride the Swift-provided bicy-cles down the hill to the Stockyards for their dayof buying livestock.

One of the conference room walls displayslaths from the original attic, which are coveredwith graffiti from 1902 on – names and datesthat people inscribed in pencil in that storagespace. As they perhaps hoped, their names willcarry on and still be associated with the history of

the building that likely was the center of theirlives so long ago.

Sarah Biles, administrator of the StockyardsMuseum and member of the North Fort WorthHistorical Society says, “It’s a gorgeous building,one of the three – along with the Coliseum andthe Stock Exchange buildings – of the mostimportant and beautiful here in the Stockyards.XTO did a wonderful job.”

There is a sense of “museum” about the placeand yet, it is clearly a place of work. No surpriseas XTO has more than 250,000 net acres in playin the prolific Barnett Shale. The Fort Worth firm’scurrent gross production in the Barnett Shalereached 620 million cubic feet estimate (MMcfe)per day in the first quarter of 2008 – the No. 2producer in the shale.

So, while there is a “museum” quality to thesite, there are also busy people doing their jobswherever you go in this space, but they seem totake pride in what their employer has accom-plished here.

“What this, (the packing plants and the FortWorth Stockyards) was in its day, the BarnettShale is for this area today,” says Webster. “So it’sfitting to locate our local operation in this beauti-ful building and maintain its presence in our com-munity.”

Not a bad compliment for a 106-year-old –even if she is a building.

Contact Cain at [email protected]

ER

Energy Report ✦ 15

New shale playsjoin Barnett Shaleas gas producers By Robert FrancisFort Worth Business Press

With the price of oil and gas on the rise andenergy a top concern among U.S. con-sumers and economic analysts, it should be

little surprise that energy companies are seeking newsources of energy – particularly natural gas.

As anyone in Texas, particularly North Texas, canattest, the Barnett Shale has created an economicboom unprecedented in recent times, while at thesame time creating more than a few difficult politicaland social issues.

While the Barnett Shale has been responsible formore than 3 trillion cubic feet of natural gas, thetechnology used to “crack” the shale in the FortWorth Basin is now being put to use in other shalesaround the country. Some of those shales may some-day prove to be larger than the Barnett.

Here are some of the larger shale plays around thecountry.

Haynesville Shale Perhaps the closest shale play to the Barnett Shale,

the Haynesville Shale is located East Texas andNorthwest Louisiana. At its recent annual meeting onJune 6, Chesapeake Energy Corp. officials said thecompany owns or is committed to more than500,000 acres of leashold and has completed sixwells in the area. Officials of the Oklahoma City-based company said at least 12 drilling rigs are antici-pated in the area by the end of the year and at least30 by the end of 2009.

Chesapeake CEO Aubrey K. McClendon said thefirm’s initial success in the area has prompted it toaccelerate drilling activity to “generate substantialproduction growth and capture outstanding financialreturns,” according to a release from the company.

“Our technical analysis of the play over the pasttwo years combined with the impressive drillingresults on our first six horizontal wells and wellsrecently drilled by others in the industry continue tosupport our assessment that the Haynesville Shaleplay could potentially have a larger impact on thecompany than any other play in which we have par-ticipated to date,” said McClendon.

To date, McClendon and company, along with XTOEnergy, are the only Barnett Shale operators vying forleaseholds in the area, about 280 miles east of FortWorth; however, several smaller companies haveclaimed a stake in the shale.

Houston-based Petrohawk Energy Corp. officialssaid in April that the company entered into agreements with several private parties to acquire


additional leasehold interests in the Haynesville Shale areaand now has more than 70,000 net acres.

“This expansion in the emerging Haynesville Shale playis part of our ongoing efforts to add substantially to ourlower-risk, higher-margin inventory of drilling opportunitiesin core areas where we bring experience and economiesof scale to the table,” said Floyd C. Wilson, chairman,president and CEO, in a release.

Marcellus Shale The Marcellus Shale covers an area of 54,000 square

miles, from upstate New York, across Pennsylvania intoeastern Ohio and across most of West Virginia. In totalarea it is larger than the entire state of Pennsylvania.

According to a recent study by Penn State Universityand the State University of New York at Fredonia, the playcould contain as much as 50 trillion cubic feet of recover-able natural gas.

One of the big players in the Marcellus Shale is RangeResources Corp., which has more than 1.1 million netacres in the play. Range’s Fort Worth neighbor XTO EnergyInc. made a big push in the play in April when it pur-chased 152,000 net acres from Linn Energy Chesapeake,EOG Resources, Cabot Oil and Gas, and AnadarkoPetroleum also have major stakes in the area.

Fayetteville Shale According to a recent study from the Univeristy of

Arkansas, natural gas drilling in the eight-countyFayetteville Shale play will produce a $17.9 billion eco-nomic benefit to the state through 2012.

Houston-based Southwestern Energy Co., Chesapeakeand XTO Energy have made major investments in thestate. In April, XTO Energy purchased 55,631 net acres inthe Fayetteville Shale from Southwestern Energy fro $520million.

“XTO’s shale play strategy is focused on growing ouracreage positions in the right geographic and geologicallocations across the premier shale basins. This acquisitionexpands our visible growth potential in the FayettevilleShale,” said Keith A. Hutton, XTO president, in a releaseat the time. “Given our engineering assessment, weexpect the acreage, which is contiguous to our core devel-opment footprint, to hold resource potential in excess of 1Tcfe (trillion cubic feet estimate). With the pipeline infra-structure already in place, our immediate plans includeusing four drilling rigs in 2008 and at least six rigs in2009. We expect proved reserves attributable to thisacquisition to grow to 160 Bcfe this year and at least 325Bcfe by year-end 2009. Overall, our operational teams arededicated to making XTO a top producer and value cre-ator in the Fayetteville Shale.”

Woodford ShaleLocated in the Arkoma Basin in southeastern Oklahoma,

the Woodford Shale has not yet shown the same amountof activity as some of the other shale plays, but companiescontinue to eye the area. Newfield Exploration Co. is amajor player in the Woodford Shale with 165,000 net

Like several other Barnett Shaleplayers, Range Resources is making bigmoves into other shales plays, such as theMarcellus Shale, part of the DevonianShale, in Pennslyvania and West Virginia.The company is also pursuing a coal bedmethane play in Virginia.

Map courtesy of Range Resources.

acres, but Devon Energy and Chesapeake also have some projects inthe area. Devon, for example, plans to drill 107 wells in theWoodford Shale in 2008.

Bakken Shale Shale plays are not just limited to natural gas. In a recent report, the U.S. Geological Survey published a new

assessment of the Bakken Shale play of North Dakota and Montana.The report says that 3 billion to 4.3 billion barrels of undiscovered oilare technically recoverable with current technology and industry prac-tices. This estimate by the USGS made the Bakken Shale the largestcontinuous oil accumulation in the lower 48 states. In addition, theUSGS has estimated total oil-in-place at 200 to 400 billion barrels.

In May, XTO Energy officials said the company was purchasing352,000 net acres in the Bakken Shale, located in Montana andNorth Dakota. EOG Resources Inc. of Houston also has interests inthe Bakken Shale play.

Contact Francis at [email protected]

ER

812 Main Street • Fort Worth, Texas817.877.3999

Enjoy a little appetizer


Barnett Shale veteran compiles personal, comprehensive account of play’s early days

By JOHN-LAURENT TRONCHE

Fort Worth Business Press

Dan B. Steward is a consultant ofgeology at Republic Energy Inc.,and the author of The Barnett Shale

Play: Phoenix to the Fort Worth Basin, AHistory. Steward, formerly of Barnett Shaletrailblazer Mitchell Energy, wrote the bookat the request of Mitchell’s George P.Mitchell, seen by many as the father of theshale play. Steward’s book is for salethrough the Fort Worth Geological Survey,one of the publishers, and can be pur-chased online at www.fwgs.org for $40.

How did you get involved in developing and writing this BarnettShale chronicle?

I had been involved with the Barnettalmost since its inception. The first wellwas drilled in spring 1981. I came to workin October of ’81 right at the time theyput a slightly larger stimulation on theBarnett, wasn’t much but we got somegas out of it. Over the years, from 1981 tillwe merged and Devon took us over I wasinvolved in all aspects of the Barnett, and Itended to act as a liaison of sorts to geolo-gy. I then took a job with Republic Energy.In July of 2005, I assisted about four orfive other people and we gave GeorgeMitchell an update on the Barnett Shale.

A day after, Mr. Mitchell asked if Iwould write a history of the Barnett Shale.He felt like I knew a lot of its history, a lotof the important wells and the differenttechnologies we used. And he wanted meto write it according to the way I remem-bered it. He asked me in July 2005, and Ihad a manuscript written by August of2006. I turned the manuscript over toGeorge Mitchell, he turned it over to theFort Worth Geological Society and theNorth Texas Geological Society. And theypublished it, and the proceeds go to schol-arships for college funds, and its ownoperations.

How was the writing process?I spent my career trying not to write. I

don’t like writing. I didn’t want to write

this. My wife had suggested I write it, andI said, ‘No.’ When Mr. Mitchell asked meto write, there were only two people whocould’ve written it. That was Mr. Mitchelland an old boss of mine at MitchellEnergy. This book is not about me. It’sabout Mitchell Energy, George Mitchelland what the Barnett Shale team did. I amthe historian that documented it. I don’twant people to think I wrote this for myown ego, or my own edification, I wrotethis because George Mitchell asked me to.

How did you gather the information,and to whom did you speak whilewriting your book?

When Mr. Mitchell asked me to do this,he told me ‘Dan you were there, you sawall of this, you write it from your perspec-tive.’ I sat down and started pulling frommy remembrances, and I keep personaljournals and I started going through topick out what I remember and there was aWeb site I used to reconstruct the chronol-ogy of it. I had to reconstruct the historyand do a lot of estimated recovery analysisfrom this Web site.

I tend to write chapter to chapter, andas I wrote them I’d give them to myfriends at Mitchell and see if they remem-bered it differently. In one or two cases Ihad a number or two wrong, but I don’tremember any significant points changed. Iwould say that I asked probably 30 to 40people review it. I wrote things and then Iasked people to review it. I don’t believethat I went to people before I started writ-ing. I tried to write something the way Iremembered it, and then I went to peopleafterward. And most of those people werepeople who were in the trenches, asopposed to senior management. … Anumber of people, when they read it, theysaid, ‘Damn, I forgot all about that.’

Contact Tronche at [email protected]

ER

In conclusion, I hope that thereader will get a sense of thecomplexity of the play and abetter understanding why it isoften referred to as the 17year overnight success. Therewere many times during itsearly life that the Barnett playwas on the verge of failing,and had it not been for theconviction, commitment anddetermination of George P.Mitchell and Mitchell Energy, itwould not be what it is today.

– Author’s Note from The Barnett Shale Play: Phoenixto the Fort Worth Basin, A History by Dan B. Steward

w


By Tonie AuerSpecial to the Business Press

Getting to know Ben Fortson Jr. isn’t easy. If you ask him to namehis business philosophy, he tells you simply: to acquire oil and gasleases.

That’s it.A man of few words, but great accomplishments.At the helm of Fortson Oil Co. in Fort Worth as an independent oil

producer, Fortson grew up in the oil industry and made it his life.He was born in Oklahoma City and moved to Fort Worth at the

age of 4 when his father established Fortson & Polk Oil.He graduated from Fort Worth’s Paschal High School and attended

the University of Texas for two years before serving in the military andreturning to graduate from Texas Christian University in 1957. Soonafter, he made two of the most important decisions of his life — hemarried Kay Kimbell Carter, and he accepted a job with Champlin Oil,which was his first foray in the oil business.

On the job for Champlin — a Fortune 500 company — Fortsoncompiled files in the lease records department. Six months after tak-ing the job, he was offered a scout position in the land depart-

By Tonie AuerSpecial to the Business Press

Throughout his almost 60 years in the petroleum field, MarvinGearhart evolved by applying technology to solve problems. That ishis secret to success; never static, but moving forward and staying ontop of where the industry is going.

“I grew up in the business,” Gearhart recalls. “My dad was a drillerand a pumper. So, from a very young age I listened to my dad andanother cousin and his father talk. Sunday dinners, that was all we’dtalk about, the oil business. Growing up in the business, it is in yourblood.”

Innovations developed by Gearhart and his partner, Harold Owen,paved the way for key technological advances such as horizontaldrilling, which has helped make the Barnett Shale possible.

Today, Gearhart is the chairman of the board for Gearhart Co. Herecently was honored by the Texas Alliance of Energy Producers withtheir Fort Worth Legends award (See sidebar, pg. 23).

It was 1949 when Gearhart graduated from Kansas StateUniversity and went to work as a wireline logging engineer withWelex Jet Services in Fort Worth. In 1955 he and Owen

Veteran oilmenreceive ‘Legends’

honor

Fortson career built on acquisition Gearhart continues innovations

Ben Fortson, left, and Marvin Gearhart receive the Fort Worth Legends Award from the Texas Alliance of Energy Producers. Photos by Jon P. Uzzel


After a year in the fields of Oklahoma, he returned to Fort Worth andset up his one-man operation that would eventually turn into Fortson OilCo., which is known for acquisition and divestiture, exploration and pro-duction services in the Permian Basin and South Central regions.

Short-lived setback The energy downdraft in 1998 had a ripple effect throughout the

industry, and like many of his counterparts throughout the sector, hebegan to downsize Fortson Oil. Dismantling the company that took himnearly 40 years to build was painful, but the setback was short-lived.Two years later, with his characteristic determination and optimism, heset the company on a course to begin accumulating mineral leases inthe East Texas Bossier Sand Play. The company resumed drilling and, inpartnership with three major independents, has drilled more than 350wells during a seven-year period.

That simple business philosophy of acquiring oil and gas leases isbecause “they are the least expensive component of a prospect, start tofinish.”

“Ben is a personal friend and I like him very much,” says MarvinGearhart, chairman of the board for Gearhart Co., another oil industryfirm in Fort Worth, and a co-winner of the Fort Worth Legends Awardfrom the Texas Alliance of Energy Producers.

“He has always been in the production side of the business and I havealways been on the service side plus building and selling equipment tothe service industry,” says Gearhart. “In my opinion, the industry viewsBen very positively and as someone the local industry respects and cancount on him to do what is good for our community and our industry. I

guess you could say that anyone who pumps money into our industrymakes him a good industry leader because without the financialresources to drill wells, we don’t have an industry.”

Community serviceFortson’s business successes are matched only by the community

achievements he and his wife have made. Since 1964, he has served on the board of directors of the Kimbell Art

Foundation, helping to realize Kay Kimbell’s vision of building a world-class art museum. The Kimbell Art Foundation, established in 1935 byKay Kimbell, operates the Kimbell Art Museum in Fort Worth. The publicart museum, which opened in 1972, was started with a gift fromKimbell of several hundred works of art. Today the museum housespieces dating from antiquity into the 20th century. When Kimbell died in1964, he left his fortune to the Kimbell Art Foundation to establish andsupport the Kimbell Art Museum.

Fortson’s wife, Kay, has served as president and chair of the board ofdirectors of the Kimbell Art Foundation since 1975 and as a directorsince 1956. She is also an active trustee of Texas Christian University,where Fortson is a trustee emeritus.

In just one of the examples of the Fortsons’ generosity, in 2005, thecouple contributed $1 million to the Brown Foundation Institute ofMolecular Medicine for the Prevention of Human Diseases at theUniversity of Texas Health Science Center at Houston to help unravel themolecular mysteries behind human diseases.

That gift was designed to establish a distinguished chair, named forthe Fortsons, in the new Research Center for the Neurosciences. Theendowed faculty position would help the insitute recruit a top scientistto conduct research into the fundamental causes behind neurodegener-ative diseases like Alzheimer’s, Parkinson’s and amyotrophic lateral sclerosis.

Additionally, the Fortsons received the 65th annual Golden DeedsAward from the city’s Exchange Club, in recognition of their extraordi-nary contributions and citizenship in the mid 1990s.

In 2007, Fortson and his wife celebrated their 50th wedding anniver-sary. They have four children and 11 grandchildren. ER

Texas Alliance of EnergyProducers Fort Worth

Legends Award

Fortson

The Texas Alliance of Energy Producers implementedits Legends Merit Award program to honor membersthat had made a long-time contribution to the betterment of the industry, community and country.

22 ✦ Energy Report

2003 S.B. (Burk) BurnettDixon (Dick) Thomas

HarbisonCharles Anthony Fischer

2005 B. J. KellenbergerArch RowanCharles Rowan

2007 Bob R. Simpson

2002 Amon G. Carter and familyKay Kimbell and familyE.A. and W. A. Landreth

and familyW.A. “Monty” Moncrief

and familySid Richardson and family

2004 H. E. (Eddie) ChilesFrank Darden Jr.Edgar Sperry HillJames Houston Hill, George Pat Hill

2006 William L. AdamsCharles W. Seely

2008 Ben Fortson Marvin Gearhart


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formed Gearhart-Owen Industries Inc. a wireline service provider andmanufacturer of logging trucks and wireline tools, which eventuallyhad more than 14,000 employees in 27 countries worldwide.

“When I graduated from school, I had three opportunities towork. Welex (Jet Services) was an independent just getting started, soI got into wireline logging because it was interesting to me,” he says.“I stayed with it until a sales manager changed to a drilling bit com-pany and I went with him. Then Harold Owen and I started our ownbusiness, so I got back into wireline business and stayed in it for 35years. When I sold it, I got back in drill bit business.”

InnovationsIn the 1970s, Gearhart began developing an innovative series of

open-hole tools and computerized analysis systems, completing thetask in 1975. The result – a Direst Digital Logging system, outper-formed existing analog systems used by competition and began gen-erating significant income for Gearhart-Owen.

The company also developed Measure While Drilling technology.MWD not only saved drilling companies time and money because iteliminated the wireline, it helped make directional drilling easierbecause down hole tools were able to send directional data back tothe surface without disturbing drilling operations.

By the end of that decade, the company was one of the fastestgrowing companies on the New York Stock Exchange.

After the acquisition of Gearhart Industries in 1988 by Halliburton,Gearhart formed Rock Bit International. This company manufactureddrill bits and MWD systems. He sold the business in 2005 and startedhis current effort, which focuses on drilling tools and systems for theBarnett Shale and horizontal drilling.

Gearhart has released a new line of digital surveying and surfacemonitoring tools since the company’s inception. The company’s goalis to lower costs to customers and set a new precedent for what theindustry has come to expect from Gearhart: quality digital tools.

“Technology is the biggest aspect (of how the industry haschanged over the years),” Gearhart says. “That is the whole thingthat makes the Barnett Shale possible — the new technology. I try toapply new technology to solve problems. We were already here rightin the middle of the Barnett Shale, so it came in all around us.”

Today’s industryObserving the energy industry today, Gearhart says he never antici-

pated “anything like the prices and the levels they are reaching now— it just seems surreal. My main focus has always been new technol-ogy and how to drill and produce wells more efficiently and how toget them to produce more. It is only because of horizontal drillingand new fracturing techniques that makes the present boom eco-nomic and, of course, as prices go up, it drives the activity up,” hesays.

His current focus, The Gearhart Cos., provides innovative downholesurvey tools, drilling instrumentation, geological services, gas detec-tion services and high quality custom built wireline trucks with a spe-cialty in the area of oil well surveying, surface data acquisition andcontrol, MWD tools and services and wireline trucks.

Gearhart continues to focus on developing state-of-the-art technol-ogy and has assembled a team of geoscientists and petrophysicists

with more than 90 years of combined oilfield problem solving experi-ence. The years of solving problems have resulted in numerousunique processes, papers and U.S. patents. The Gearhart Co. under-takes a number of new tool development projects both for its owninterests and in collaboration with third parties who have specificdownhole tool developments that the Gearhart name has alwaysbeen famous for.

Gearhart doesn’t plan to retire any time soon, either, despite hislong illustrious career.

“It’s not my style of living,” he says. “That is for different folks. Mywork is my hobby and my enjoyment. It is not like going to work forme; it is like going to have fun. If you’d rather be doing that thananything else, you might as well keep doing it.”

Gearhart lives in Fort Worth with his wife, Jan. Together they havefour children and 14 grandchildren. He is a Legion of Honor Memberin the Society of Petroleum Engineers and active in numerous otherorganizations. ER

Gearhart


Museum of Science & History:Journey to the center of the Barnett Shale

By MICHAEL H. PRICE


Amuseum tells the story of its surroundings, whether nestledamong upon the prehistoric remains of the La Brea Tar Pits inLos Angeles or the tribal strongholds and Cavalry enclaves of

the Palo Duro Canyon near Amarillo. A combination of educationwith participatory entertainment is implicit, as far as the savviermuseums are concerned.

Texas’ oil-and-gas industry has inspired such memorable outcrop-pings as the East Texas Oil Museum at Kilgore and an imposingDerrick Room at the Panhandle-Plains Historical Museum at Canyon— seemingly a working oil-patch outpost of the last century, await-ing the return of its drilling crew.

A striking addition to the lore of energy promises to bringthe Fort Worth Museum of Science & History to the world-wide forefront of its field. The $20 million Energy Adventuredevelopment — part of an overall $75 million reconstructionof the Museum of Science & History — derives in part fromthe practical experience of local leaders in the industry itself,headed by family-tradition oilman Charlie Moncrief, and inpart from the ability of the exhibit developers to find appeal-ing spectacle in scientific fact.

“The starting-point,” explains Moncrief, “is the startingpoint — the very creation of the universe itself. The bigbang, I mean.”

In a cosmic process of connect the dots, the EnergyAdventure will trace the big bang theory along a route lead-ing directly to North Texas’ Barnett Shale formation, the pres-ent-day source of what Moncrief characterizes as “the great-est gas play in the world.” The exhibit promises to equip itsvisitors with an understanding of fuel, from prehistoric ori-gins to practical applications and futuristic possibilities.

The breakthrough attraction will represent a basic compo-nent of the museum. The energy displays will account for more than10,000 square feet of the overall 140,000-square-foot propertyalong Gendy and Montgomery streets. The museum is due for com-pletion during the fall of 2009.

Moncrief, as head of the energy-show fund campaign, is nearingcompletion of a $20 million underwriting objective. His three-yearcampaign for the Energy Adventure exhibit has attracted such princi-pal corporate donors as XTO Energy Inc. of Fort Worth andOklahoma City-based Devon Energy Corp., both with immensestakes in North Texas’ Barnett Shale gas play. The benevolent-foun-dation interests of Fort Worth’s influential Darden family representkey early support, Moncrief says.

“We’ve got a brand-new building going up, out here,” says VanA. Romans, president of the Museum of Science & History. “And it

will contain many, many appealing attractions — from the familiarelements of the original museum, to such entirely new componentsas the energy exhibition and our developing relationship with the[Texas & Southwestern] Cattle Raisers Museum.”

Already, the museum’s Omni Theatre, a superscreen-movie venueleft standing in a general razing of the original property, has begunto show exterior modifications that will match the new construction.Chief architect Ricardo Legorreta has designed the museum with acombination of earthen tones and vivid splashes of color.

Moncrief, when first approached with the idea of developing anenergy exhibit, sensed the Barnett Shale must become a focus ofsuch a project.

Science had long known that tremendous reserves of fuel laywithin the dense rock of the Barnett Shale, formed hundreds of mil-


Key donors and advisersAmong contributors to the $75 million capital campaign for the

Fort Worth Museum of Science & History are these companies, institu-tions and individuals — all of which and whom have demonstrated aparticular interest in the Energy Adventure exhibit:XTO Energy Inc. will be recognized as lead donor for the energygallery, and Devon Energy Corp. will be recognized as lead donor fora 4-D theater inside the gallery. The museum also cites significantcontributions from Burnett Oil Co. Inc.; The Discovery Fund; LoweFoundation; T.J. Brown & C.A. Lupton Foundation; Chesapeake EnergyCorp.; Chief Oil & Gas; EnCana Oil & Gas (USA) Inc.; Exxon MobilCorp.; Wm. A. and Elizabeth B. Moncrief Foundation; Jane Rector;Charlotte and Jim Finley; Range Resources Corp.; Encore AcquisitionCo.; Marshall R. Young Oil Co.; Collins and Young LLC; Rex and RendaTillerson; EOG Resources Inc.; and Charlie and Kit Moncrief.

The museum also has recognized these key advisers:Bonnie F. Jacobs, director of Environmental Science Program atSouthern Methodist University; Eric C. Potter, associate director ofBureau of Economic Geology, Jackson School of Geosciences at theUniversity of Texas at Austin; Ken M. Morgan, associate dean of theCollege of Science & Engineering at Texas Christian University; AndréeGriffin, manager of geology, Fort Worth Basin, at XTO Energy; and BillVoss, curator emeritus at the Fort Worth Museum of Science andHistory.Representing the museum staff in connection with the project areAaron Pan, curator of science; Cathy Barthelemy, director of schoolservices; Leishawn Spotted Bear, assistant curator of science; MikiGabbard, assistant director of education; and Charlie Walter, chiefoperating officer.


lions of years ago from organic deposits. But recovery posed a chal-lenge. Technological leaps of recent years have enabled the crackingof the shale to release its gas.

“The backbone of the exhibit is the Barnett Shale,” says Moncrief.“But we’re going to take people back in time to the big bang of 330million years ago — to the formation of the universe itself, throughthe formation of our own planet, homing in upon our North Texasregion, the Fort Worth Basin, as things took shape through the agesof continental drift, through the inland seas, through the primitivelife-forms whose remains formed the fossil fuels on which we alldepend.

“The aim,” adds Moncrief, “is to send the youngsters away withan awareness of science and mathematics — and of what they cando to help this great Earth of ours.”

The museum enlisted Chick Russell, creative director of Pasadena-based Chick Russell Communications, to transform Moncrief’s con-cept of a prehistory-to-now travelogue into virtual-environment set-tings. The displays will place visitors amid a persuasive replica of theMississippian Seas that once covered the now-arid Southwest; con-front them with walk-through, three- and four-dimensional depic-tions of a steadily exploding universe; and place them in lifelikedrilling-site situations, with hands-on interaction. A centerpiece willbe a massive seismic acquisition truck, contributed by Midland’sDawson Geophysical Inc., to demonstrate the seismic-reading processes essential to energy exploration.

“I’m just the writer, here,” Russell says. “Charlie Moncrief is thestoryteller. “The stories Charlie has told us [have] enabled us to create

a set of environments that will equip their visitors with a real under-standing, not only of where our energy sources come from and howthey are reached, but also of what challenges are emerging for thefuture.

“During the next 25 years,” Russell adds, “We’ll need 45 percentmore energy. This requirement means continued exploration, ofcourse, but it also means conservation and the development of suchalternative sources as nuclear energy, coal, wind, solar and hydroelec-tric power. All sources will be portrayed.

“The objective is to cause people to think about energy in a newway.”

The energy project has involved contingents of academic andindustrial consultants in addition to the phalanx of donors, saidmuseum executives Charlie Walter, chief operating officer, and CarlG. Hamm, senior vice president for fund development and marketing.

The new museum fund-raising campaign has completed 80 per-cent of its $75 million objective, Romans said. Fort Worth philanthro-pists Stacie and David McDavid are in charge of the general capitalcampaign, with such participants as attorney Dee J. Kelly Jr. and realestate broker Martha Williams in addition to Moncrief. The campaignincludes a $5 million cash reserve to sustain operating costs duringthe transition and the first few years in the new facility.

The Museum of Science & History, which has grown from WorldWar II-era beginnings to attract hundreds of thousands of school-children a year, has settled for the duration of construction into tem-porary outbuildings and guest-exhibitor space in the neighboringNational Cowgirl Museum & Hall of Fame.

Contact Price at [email protected]

ER


Local firm competes, cooperates with larger players By Tonie AuerSpecial to the Business Press

Barnett Shale. Drilling rights. Leases. All terms becoming more com-mon in Tarrant County and surrounding areas as the energy industrycontinues to find ways to access the pockets of natural gas.

Working to capitalize on the natural gas drilling interest, in 2006 FortWorth attorney C.W. “Dub” Stocker III started Fort Worth Energy Co. LLC,which is primarily engaged in the acquisition of oil and gas properties inTarrant County and the surrounding areas.

“I was looking out our law firm conference room window up the railroadtrack and decided that the only way I could compete with the very large com-panies was to go into a highly congested urban area and buy the well sites;deal fairly with the neighborhoods and build my reputation that way,” heexplained. “I fleshed the vision (of the firm) out with a friend in the oil busi-ness; a well respected petroleum engineer named Ray Walker, who had start-ed Stroud. Ray and I had talked about doing other deals outside the Barnett,but they always were sold before we could present them to investors. Fromthis experience, I knew starting my own company was the right thing to do.”

The company is currently focused on securing drilling leases in urbanareas, principally from Lancaster in downtown Fort Worth going south alongInterstate 35W toward Interstate 20 to Felix to its western boundary atUniversity Drive.

Origins of the companyA Fort Worth native, Stocker was both practicing law and running Fort

Worth Energy until Oct. 19, 2007, when he decided it best to focus on onecareer before it took a toll on his health. While his law career was highly suc-

cessful, he knew he couldn’t continue practicing law and trying to run hisnew business.

As a former oil company attorney, and owner of his own oil and gas com-pany in the early 1980s, Stocker saw the opportunity to take advantage ofthe local Barnett Shale interest for natural gas drilling and decided to jumpright into it. Stocker worked for the locally based Snyder Oil Co. as an in-house lawyer in the early 1980s before starting his own company withSnyder’s head landman (and his law school buddy) Kyle Miller, who remainsin the energy business today in Denver. When oil prices plunged, he sold hisassets and paid his bankers.

Owning 11 acres at the site of an old cottonseed mill on Biddison andHemphill streets on the city’s near southside, Stocker was looking for someway to make some money there. Originally, he planned to make it into a fleamarket. Stocker had been one the original investors in Stroud, another localenergy company that eventually sold to Fort Worth-based Range ResourcesCorp. Seeing Stroud and others huge successes in the Barnett Shale, “I want-ed to get back into the oil business,” he says.

The first Fort Worth Energy lease was signed in September 2006. It wasthe historic Texas Steel property, the state’s first steel mill, on Hemphill Street.

Fort Worth Energy is more than just Stocker, he says. Helping put up theseed capital for the venture was longtime friend and fellow SouthwestChristian School board member Bob Benda with Westwood Contractors.

“He believed in my vision,” Stocker says, “and Bob gave me seed moneyon my vision until I could raise some more. We have had great legal work pro-vided for us by my old law firm Whitaker Chalk Swindle & Sawyer and fromthe Reardon firm and excellent land work from Penn & Associates.”

C.W. “Dub” Stocker III started Fort Worth Energy Co. in 2006.

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Competing with the big boys“I wondered, ‘How can I compete with XTO,

Chesapeake and other large companies?’” saysStocker. “They all had track records and significanthistories; they were already out there taking the low-hanging fruit; and could outbid me anytime theywanted. So, I went out into the highly congestedurban area just south of Fort Worth.”

The trick has been doing the necessary legwork.Fort Worth Energy entered into an agreement inAugust 2007 to sell its well sites and leases in adefined area of mutual interest to XTO Energy Inc.for an undisclosed price, Stocker says.

It hasn’t all been smooth sailing. After sellingleases to XTO, Fort Worth Energy was sued by another suitor, Chesapeake Energy Corp., thatclaimed it had an agreement to purchase the assetsfrom Fort Worth Energy. The litigation is still ongoing.

Stocker remains pleased with the results andplans to continue the work in other areas. Eachhome site has to get an individual lease for the prop-erty; some of these neighborhoods have hundredsof homes in their areas.

“Imagine the plots of land that had to beresearched. It is a logistical nightmare to put ittogether,” Stocker says. “We are compiling thou-sands of leases that we have to file and do the leg-work on. We were willing to do it because we coulddo it and knew we could compete. While selling itswell sites to XTO, Fort Worth Energy has reservedwhat it hopes to be valuable interest in all leases and

well sites. It’s the ‘if you can’t beat ‘em, join ‘em’ phi-losophy.”

Working with the residents“We initially identified well sites and targeted all

the neighborhoods our drill bit could reach.Eventually homeowners associations began bargain-ing for neighborhood leases and it became apparentthat for many, quality of life was more importantthan the bonus checks,” Stocker says. “Potentialwell sites were near a hospital and Mistletoe Heights,so we worked hard with them to find another wellsite and we did find one on 15th Street behind theHangman’s House of Horrors. They wanted us northof the freeway and we accommodated them.”

Stocker also worked to develop relationshipswith the various neighborhood associations.

“We went to the neighborhood associations andmade friends with them,” Stocker says. “We madefinancial gifts to projects like the Worth HeightsElementary School PTA for playground equipment.”

That effort paid off. “We liked the fact that they were presenting

what they were trying to do before they startedapproaching people, on the front end,” says BillConley, Ryan Place Improvement Association’sappointed chairman of the gas and oil task forcecommittee. “They were upfront about their inten-tions and their understanding of our concerns aboutthe noise and traffic.”

Conley says the response of the Fort WorthEnergy executives regarding what they planned to

do to proactively address those concerns made a bigimpact on the residents.

“They reached out to the group rather than try togo door to door, which was the tactic of other leas-ing agents … so the neighborhood was not bom-barded by landmen was a major plus,” he added.

At one point, nine different companies wereapproaching residents, leading to confusion aboutwho was offering what, Conley says.

“Fort Worth Energy was clear to their goals andhow they would work with us and our committeeand that was the most important distinction that wefound,” he says. “As we started to craft leasing doc-uments, many concerns were anticipated andaddressed in a draft document … there are alwayssticking points, but we had made it clear as a neigh-borhood association that safety and security andenvironmental issues were important. The verythings we talked, they were very accommodating onand it was clearly a very collaborative effort withXTO.”

Working with XTO Energy, Stocker says he antic-ipates the first well from the land on which FortWorth Energy has secured leases will be startedwithin a year.

“When you see and understand the monumen-tal task to get all the leases secured and wells per-mitted, it is unbelievable,” Stocker says, “but welove what we are doing.”

Contact Auer at [email protected]

ER


Patrick ReardonSpecial to the Business Press

In December 2007, the Securities and Exchange Commissiontook the first regulatory steps toward updating its rules on dis-closure of oil and gas reserves by public energy companies. TheSEC released a “concept release” that invited public commenton a number of questions relating to these disclosures.Traditionally, the SEC has used these comments to proposechanges to the existing rules.

The annual reports sent to investors by public energy com-panies must include estimates of the companies’ proved oiland gas reserves and the estimated present value in dollars ofthose reserves. These estimates are also included or incorporat-ed in prospectuses for energy company offerings.

Given the prominence of oil and gas reserve disclosure in thevaluation of energy stocks, changes to the SEC disclosure rulesmay affect the valuations given these stocks, as well as possiblyaffecting ratings given to energy companies’ traded debt securities.

Deficiencies in current systemIn its concept release, the SEC acknowledges that there have

been significant changes in the energy industry as well asmarked advances in recovery technology since the SEC adopt-ed the current reserve disclosure rules in 1978 and 1982.Echoing recent calls for change from the industry, the SECnotes that its rules may be “not fully aligned with currentindustry practice.” In fact, the SEC’s current rules do notreflect the many changes in recovery technology that havedeveloped since 1978.

In addition, the SEC observes that the Society of PetroleumEngineers, after two years of collaboration with a number ofother professional organizations, issued the most recentupdates to the profession’s standards for computing oil andgas energy reserves in February 2007. Known as the“Petroleum Resources Management System,” the SPE reservestandards are widely used in the United States when the use ofthe SEC rules is not mandated, as well as internationally. TheSEC bars public energy companies from disclosing reserve esti-mates in SEC filings using methodology other than its own.

Unlike the SPE rules, SEC rules permit disclosure of only“proved” reserves, using its relatively narrow definition of thiscategory. Information about “probable” or “possible” revenuescannot now be given. Also, SEC rules do not permit disclosureof reserves in unconventional formations, such as oil shale, tarsands and coal.

Rodney Waller, senior vice president/chief compliance officerof Fort Worth-based Range Resources Corp. agrees the presentinformation is not optimum.

“The SEC has historically imposed regulations governingreserve disclosures that stressed comparability across compa-nies,” he says. “In reality, even though a company's oil and gasreserves are its most important assets, we have little real [infor-mation] as to the quality of those reserves.”

Noting the limited scope of the current reserve disclosures,investment banker Adam Connors, associate director of corpo-rate finance at C. K. Cooper & Co., comments that publicenergy companies “can be difficult to pick apart and thenpiece together for a full, complete picture.”

SEC asks questionsBecause the SEC intends the concept release as a starting

point to possible changes to these rules, the release asks inter-ested members of the public to comment on questions on anumber of topics. Among the questions posed were:

• Should the SEC permit disclosure of categories of reservesin addition to proved reserves?

• Should reserves from unconventional formations (oil shale,tar sands and coal) also be disclosed?

• What would be the standards for stating that productionfrom reserves is reasonably certain and that the production willbe economically viable?

• Should the SEC adopt all or part of the SPE’s PetroleumResources Management System as a replacement for the SEC’sseparate rules?

• Can reserve-estimating rules be adopted that are flexibleenough to accommodate future technology improvements?

• Should reserve estimates be reviewed by independent,outside petroleum engineers? (The current rules allow publiccompanies to make their own reserves estimates.)

In asking its questions, the SEC does not distinguish U.S.onshore reserves from offshore reserves or reserves locatedabroad.

Ideas for broader disclosureWaller calls for the disclosure of more information to help

investors.“The calculation of reserves incorporates a significant num-

ber of professional assumptions,” he says. “None of these spe-cific assumptions is disclosed to help the investor to comparecompanies. The disclosure of estimated ultimate recoveries, theaggregate average production curves and relative productionand drilling costs used in determining reserves for significantfields would be a major step toward improving the mix ofinformation available to investors.”

Adding specific disclosures regarding less than provedreserves and unconventional formations could paint a morecomplete picture of energy companies, says Connors. The lackof information about these other reserves invites investor spec-ulation as to their value. More complete estimates and infor-mation, he predicts, will reduce uncertainty.

SEC appoints petroleum engineer professorIn anticipation of possible changes in the reserve disclosure

rules, the SEC announced in October 2007 that it had appoint-ed Texas A&M University petroleum engineering professor W.John Lee as an Academic Engineering Fellow through August2008. Lee will provide the needed engineering expertise forthe SEC’s rule making in this area.

TimingDuring the comment period, the SEC received more than 80

letters offering opinions in response to the concept release. Asenior SEC staffer recently offered a personal opinion that newrules may be first published by the end of 2008.

A version of this article first appeared in Oil & Gas Investor magazine.

Patrick Reardon practices securities, M&A and corporate law withThe Reardon Firm in Fort Worth.

ER

SEC moving to change reserve disclosure rules

Oil and gasreservesDefinition: Oil and gasreserves are the estimat-ed quantities of crudeoil and natural gas thatare reasonably believedto be recoverable undercurrent economic andoperating conditions.


By Will Brackett Special to the Business Press

To fill a growing education gap between the needfor workers in the oil and gas field and the programsbeing offered, several energy companies are nowpartnering with area community colleges.

Two North Texas community colleges are already orsoon will be offering oil and gas programs throughpartnerships with some of the largest Barnett Shaleplayers.

Navarro College in Corsicana started its program inJanuary, while North Central Texas College will belaunching its program this fall at its campus in Bowie.

The programs came about after both schools wereapproached by energy companies, led by Denver-based EnCana Oil & Gas (USA) Inc.

Fort Worth-based XTO Energy Inc. joined EnCanato co-sponsor Navarro’s program, while NCTC’s pro-gram is also being sponsored by Houston-based EOGResources Inc., along with several service companiesincluding Bowie-based Energy Service Co., AlliedProduction Solutions and Complete ProductionServices.

Emily Klement, dean of NCTC’s Bowie Campus,says EnCana approached the school with a plan,which was quickly embraced by the college.

“They [EnCana] came to the Bowie Campus withthe vision...the rest is history,” she says.

Deb West, community relations adviser withEnCana, says the company considers such programsimportant to maintaining well-trained employees.

“As a large portion of our workforce nears retire-ment, it is incumbent upon industry, schools andcommunities to collaborate and work together to cre-ate ways to bolster our workforce and provide acareer path to young adults in a booming industry,”she says. “Our hat goes off to both schools for whatthey have accomplished so far and the life-changingopportunities they are providing to the studentsenrolled in the oil and gas programs.”

The two colleges have established a partnershipand will work together to develop the programs.

Navarro’s program covers three semesters and con-fers an oil and gas production technology certificate.Navarro is also working toward the program confer-ring an Associate of Applied Science degree, whichwill require an additional semester, by sometime in2009

The inaugural class started in January and is led byDon Capone II, who serves as the program’s coordina-tor and as an instructor. XTO has provided twoinstructors to teach classes along with Capone. Inaddition, XTO and EnCana have provided employees,as well as those from the service companies withwhich they do business, to serve as guest lecturers.

The students spend their third semester in the field

as an intern with EnCana or XTO serving in one ofthree positions: lease operator, environmental safetyand health technician, and gas plant operator.

“They [EnCana and XTO] need a pipeline for [new]employees,” Capone says.

Another benefit of the partnership with EnCanaand XTO is that Navarro has established a live datalink to EnCana and XTO wells, Capone says. Studentswill analyze daily production reports over the finaltwo semesters of the program and will provideCapone with weekly reports, noting any problems orwhat they see as abnormalities. So far, Capone sayshe has a data link to 441 wells in what he calls his“adopt a well program,” which also has the goal ofteaching students strong computer skills, somethinghe says both companies say they desperately neednew hires to possess.

“The program is industry driven,” Capone says.

NCTC’s program Meanwhile, in Bowie NCTC plans to begin its pro-

gram in the fall semester. The school has brokenground on a new 6,560-square-foot expansion to thepresent building, which will house the oil and gasprogram.

“This program is a response to the tremendousincrease in job opportunities created by the explo-ration and increasing significance of the Barnett Shalenatural gas reserve — now believed to be the largestonshore natural gas field in the entire United States,”says Emily Klement, dean of NCTC’s Bowie campus.

NCTC received approval from the Texas HigherEducation Coordinating Board in January to offer theoil and gas program. Billy Giles, who came to NCTCfrom another community college where he wasinvolved in technology programs for many years, willserve as the program’s coordinator. The school plansto have 24 to 30 students in the associate programand hopes to offer 15 to 18 scholarships. The pro-gram will include a one-year certificate, which covers30 hours while the two-year (four semesters) oil andgas technology program will confer an associatedegree with a minimum of 63 hours. The goal is forgraduates of the program to be prepared for entry-level careers in the oil and gas industry.

Just as with Navarro, NCTC’s sponsors are taking anactive role in developing the program. AlliedProduction Solutions is designing, building and donat-ing training equipment just for NCTC’s program,while Energy Service Company of Bowie has designedits training center with NCTC’s program in mind, pro-viding state-of-the-art training opportunities for theprogram’s students.

Will Brackett is the managing editor of the PowellBarnett Shale Newsletter.

ER

Energy programs on tap at community colleges

As a large portion

of our workforce

nears retirement,

it is incumbent

upon industry,

schools and com-

munities to collab-

orate and work

together to create

ways to bolster

our workforce and

provide a career

path to young

adults in a boom-

ing industry.

– Deb West, EnCana Oil & Gas

For more information:

Navarro Collegewww.pe.tamunavarrocollege.edu

North Central Texas Collegewww.NCTC.edu


By James Frederick KorthSpecial to the Business Press

The Barnett Shale has made almost everyone livingin Fort Worth bona fide Texas oilmen. Most landown-ers in Tarrant and surrounding “shale” counties havesigned or are in the process of signing oil and gasleases. Problem is, most people don’t realize theimplications of what they are signing.

In Texas, when you as the property owner, the les-sor, execute an oil and gas lease you are creating twoseparate estates: the surface estate and the mineralestate. Under Texas law, the mineral estate is thedominant estate. This basically means the surfaceestate is burdened with a servitude. Put another way,it grants the company leasing the property, the les-see, the right to use of your property, in this case thesurface.

The lessee’s rights include the right to come andgo as necessary and to use as much of the surface asis reasonably necessary to produce the minerals,including seismic testing, geophysical exploration,drilling, building roads and electric power lines,installing gathering pipelines, removing trees,installing machinery and storage tanks, and usingany water that is necessary to develop the minerals.

Because the lessee’s mineral estate is dominant,the lessee is not required to pay for use of or dam-age to the surface. The lessee also is not compelledto maintain or restore the surface in the absence oflease provisions requiring its restoration. As a generalmatter, if activities are reasonable, the surface ownerwill not be entitled to compensation for use andoccupancy of the property. The lessee may only berequired to compensate the surface owner when theuse of the surface is in excess of an amount reason-ably necessary or if the lessee operates in a negligentmanner.

What is reasonably necessary to develop the min-erals? Over time, the “rule of reasonable use” hasevolved. The doctrine requires the lessee use only somuch of the surface and in such a manner as is “rea-sonably necessary” to effectuate the purpose of thelease. Further, a lessee must also have “due regard”for the rights of surface owners.

This concept of “due regard,” known as the“Accommodation Doctrine,” was first articulated bythe Texas Supreme Court in Getty Oil v. Jones. InGetty Oil, the lessee installed a pump jack to produceoil from a well drilled on Jones’ surface. The pumpjack extended to a height of approximately 17 feeton the upstroke. The height of the pump preventedthe full rotation of the center pivot irrigation system,which Jones had used for many years to irrigate hisland.

Jones asked the oil company to install shorterpumps or dig pits to lower the height of the pumps.

Getty refused, claiming the pumps were reasonablynecessary to produce oil and gas. When the two liti-gated the matter, the court applied theAccommodation Doctrine and ordered Getty to sinkthe pump jack below the surface of the ground toavoid interference with Jones’ irrigation system.

The doctrine is not limitless in its application, but itdoes balance the rights of the surface owner and themineral owner in the use of the surface. The doctrineholds that if the proposed use of the surface by thelessee will substantially impair existing surface usesand the lessee has a reasonable alternative available,the mineral owner must accommodate the surfaceowner.

While the concept may sound simple in its applica-tion, the surface owner has a large burden to carry inorder to prevail. If the surface owner desires toinvoke the doctrine, he must show that the lesseehas other means of access and production thatwould not interfere with the surface owner’s existinguse, the other means of access and production arereasonable (both in cost and feasibility), and anyalternative use of the surface is impracticable andunreasonable under all the circumstances. This is notan insignificant burden of proof.

That burden is why invoking the AccommodationDoctrine is not really the best option for surfaceowners. It should generally be used as a last resort.While some municipal drilling ordinance will providea good deal of protection for landowners living with-in the municipalities’ jurisdiction, they may not ade-quately cover the landowner’s special concerns. Alandowner can and should therefore negotiate sur-face use restrictions and surface damages with thelessee before signing a lease. Properly incorporateddamage clauses can protect the surface owner forwhat could be decades to come. However, negotiat-ing damages isn’t always an option.

Damages clauses can’t be negotiated by the sur-face owner if the property was purchased subject toan existing oil and gas lease. Damages also can’t benegotiated when only the surface is purchased. Ineither of these cases, absent a clause in a lease, thelessee is not obligated to pay for damages so long asthe use is reasonable. Although some local compa-nies will pay surface owners damages out of goodwill, they are by no means required to. You shouldavoid the risk altogether and put yourself in a posi-tion where you will not have to invoke theAccommodation Doctrine. When signing a lease,make sure that the lease you sign has adequatelyaddressed surface damage and usage; if you are buy-ing property subject to an existing lease, make surethat the lease adequately protects your surface.

James Frederick Korth is an attorney with the CanteyHanger law firm in Fort Worth. He can be reached at817-877-2897 or by e-mail at [email protected]

ER

Leases not always what they seem on the surface

In Texas, when

you as the

property owner,

the Lessor, execute

an oil and gas

lease you are

creating two

separate estates:

the surface estate

and the mineral

estate.


The oil and gas gamble is fraught with perilAlex MillsSpecial to the Business Press

Many large independent oil and gas producers venturedoutside the shores of the U.S. in the 1990s in search oflarger and more lucrative production. However, many havegiven up on their international adventures and are return-ing to the U.S., according to an article in the May issue ofOil and Gas Investor magazine.

“International exploration beckoned independent NorthAmerican E&P’s a decade or so ago,” wrote author SteveLoon. “Margins at home were slim as commodity pricesdipped as low as $10 per barrel in 1999, and many produc-ers viewed U.S. assets as mature and depleting. The nextbig discovery awaited afar.”

The strategy also included the possibility of finding anelephant (an industry term for large reserves), or an acquisi-tion strategy to purchase proven properties at bargainprices.

However, political risks in many countries became a hugenegative. For example, Pioneer Natural Resource Co. inDallas ventured into projects in Australia, Argentina,Canada, and offshore in South and West Africa. Argentinadevalued the peso and implemented a 20 percent tax on oilexports. That was enough for CEO Scott Sheffield and heordered the sale of Pioneer’s assets.

Changes Conditions were changing, too, after the bust of 1998

and 1999. Prices of crude oil and natural gas increased,equipment and leases were plentiful and cheap, and tech-nological improvements made unconventional propertiesprofitable. Pioneer reallocated funds for expanded projectsin Texas’ Permian Basin and the Fort Worth Basin BarnettShale, and is the first independent to venture into the high-stakes play at Alaska’s North Slope.

“Meanwhile, Pioneer determined not to develop OlowiField offshore Gabon and sold it to Canadian NationalResources in 2005,” Loon wrote. “Interests in Nigeria andthe Ivory Coast were allowed to expire.”

Even though 95 percent of Pioneer’s focus is within theU.S., Pioneer is not opposed to the right venture.

The report outlined problems many companies encoun-tered in foreign countries, such as Russia, New Zealand,Venezuela, Ecuador and Azerbaijan.

Ironically, U.S. politicians ripped U.S. major oil companyexecutives in hearings in the U.S. House and Senate recent-ly over high gasoline prices.

Alex Mills is president of the Texas Alliance of EnergyProducers. The opinions expressed are of the author and donot necessarily represent the opinions and/or policies of theTexas Alliance of Energy Producers.

ER

Even though 95 percent of

Pioneer’s focus iswithin the U.S.,

Pioneer is notopposed to the

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To order, call (817) 336-8300


By ED IRELAND

Special to the Business Press

While the positive economic impact of theBarnett Shale on North Texas is becoming clear –thousands of new jobs and billions of dollarsinjected into the economy, insulating North Texasfrom the national economic downturn – thereare also many questions. One is the use of waterfor drilling in the Barnett Shale.

Know this: Best practices in the energy indus-try promote the economical use of fresh water –not only because it is a precious natural resource,but also because it is costly. There is no questionthat gas drilling requires what appears to be sig-nificant amounts of water. However, the TarrantRegional Water District has reported that use ofwater by the natural gas drilling industry hasbeen running less than 2 percent of total waterused in the region.

The Barnett Shale formation is so dense andimpermeable that hydraulic fracturing (or fracing)is the only economic means of developing thereserves. Hydraulic fracing means pumping largeamounts of fresh water into a well with enoughpressure to create artificial fractures in the denserock, thereby liberating the natural gas trappedinside.

You may wonder: why use fresh water for thispurpose? Why not re-use water, or use the salinewater that is so abundant deep underground?The reason is because saltwater corrodes wellsand drilling equipment and it isn’t compatiblewith the additives that are used in the drillingand fracturing operations. It is also less environ-mentally friendly when storing and handling onthe surface.

Recycling research The energy industry and Texas A&M University

researchers are studying techniques for recyclingwastewater for use in frac operations as well asother applications. There are two stages to recy-cling wastewater: the first and easiest stage is tofilter out shale cuttings and other suspendedmaterials. The second, more difficult stage,where research and development are under way,involves getting rid of dissolved materials in thewater, such as salt and leftover chemicals,through a distillation or membrane treatment.

According to David Burnett, a professor atTexas A&M’s Global Petroleum Research Institute,industry has an incentive to recycle more waterused because of the expense and impact of haul-ing it to off-site disposal locations.

Devon Energy Corp. is a forerunner in this

area, and is using distillation technology to recy-cle water produced at several drilling sites in itsBarnett operations. Each of its four recycling sitestreats 200,000 gallons of water per day. The typi-cal gas well operated by any company canrequire between 3 million to 4 million gallons ofwater for fracturing operations, so recycling tech-nology currently makes a modest dent in theoverall amount of freshwater being used.

According to Burnett, in the near future it willbe possible for companies to recycle about athird of the water used in natural gas operations.In another two or three years, he believes, about50 percent of the wastewater will be recyclabledue to advances in the technology. But eventhen, he says, we will be left with the challengeof getting rid of roughly half of the hyper-salinewastewater.

Injection wellsIn the meantime, the typical method for get-

ting rid of wastewater is to pump it back into theearth from which it came by using high-pressureinjection wells. Currently, the city of Fort Worth isstudying whether to lift its moratorium on suchinjection wells, but in rural areas within theBarnett Shale, saltwater injection wells are themost common method for disposing of produc-tion water.

According to Burnett, the environmental risksof such saltwater injection wells are “more per-ceived, than real.” The Railroad Commission ofTexas and energy companies are designing suchdisposal wells to be dug so deep that they are farbeneath the fresh groundwater supplies used bythe public for drinking and other uses.

“Disposal well operations are inherently safe”when they are monitored and operated accord-ing to permit, Burnett says. A small risk existswhere there may be an old, improperly aban-doned well deep underground and no publicrecord to reveal its location. In these rareinstances it is possible for wastewater to leakinto the fresh groundwater supply until the situa-tion is quickly discovered and corrected.

“Industry is aware of the adverse impact and isworking to cut down on it, but it’s going to takea while,” he says.

The best solution is for localities to centralizetheir injection well disposal operations in industri-al areas so that the operations can run 24 hoursa day with minimum disruption to nearby com-munities.

Ed Ireland is executive director of the Barnett ShaleEnergy Education Council. On the Web:www.bseec.org.

ER

Research continues on water use

For information about water use in the BarnettShale and recycling visit:

Texas A&M’s Global Petroleum Institutewww.pe.tamu.edu

Argon National Laboratorieswww.anl.gov

Railroad Commission of Texaswww.rrc.state.tx.us

Barnett Shale Energy Education Councilwww.bseec.org

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SMALL BUSINESS OF THE YEAR

CELEBRATING 25 YEARS OF BUSINESS


Don Woodard’s ‘Black Diamonds! Black Gold!’Rediscovering a classic examination of Texas’ volatile energy history

By MICHAEL H. PRICE


Perhaps the most steadfast reciprocalvoice in the Fort Worth Business Press’20-year relationship with the communi-

ty has been that of Don Woodard – frequentcorrespondent and occasional columnist,accomplished full-time business-man and perceptive historian andsocial-political critic.

Woodard’s book bears rediscov-ering in its own right as a vividaccount of a crucial period inTexas’ development as an energy-producing state – essential read-ing, for anyone with a stake inthe business and a desire tounderstand its historical under-pinnings.

The book is Black Diamonds!Black Gold!: The Saga of TexasPacific Coal & Oil Company (TexasTech University Press, 1998;$29.95). Woodard employs thoseexclamation points for more thanfacile dramatic effect – they serveto suggest an epic telling that theauthor comes fully prepared toprovide. More than a corporatehistory, Black Diamonds! BlackGold! lives up to its Homeric titlewith an enthrallingly lifelikeaccount of the volatile economicclimate in which Texas PacificCoal & Oil evolved from a mod-estly positioned mining outfitwith a brick-making sideline intoa predominant corporate pres-ence.

Woodard draws upon companyarchives, newspaper coverage and old-timers’first-hand testimony to trace the beginningsfrom the late 19th century. He offers sharpinsights into the struggles between manage-ment and the dawning of organized labor,and into the tremendous influence that BigIndustry, and its captains, exerted upon Texas’political scene. The examination of economicgrowth at a time of upheaval – the state’stransformation from an agricultural economyto an industrial power – is most revealing.

The style is conversational, generously sprin-kled with anecdotes and digressions. Wheremany authors of institutional or corporate his-

tories content themselves with a narrativelaundry-list of happenings – founded in such-and-such year, promoted so-and-so to thepresidency, dealt with X-millions of dollars inprofit and loss – Woodard provides a big-pic-ture perspective. A context of global historyanchors the TPC&O story against events of

real-world recognizability, such as Charles A.Lindbergh’s ocean-crossing flight of 1927 andthe bombing in 1941 of Pearl Harbor, withoutmissing a beat of the closer-to-home pace.

Nor is Woodard hesitant to offer some tan-talizing suggestions. Might a ceremonial visitto Fort Worth from ace aviator Lindbergh,later in 1927, have inspired TPC&O honchoEdgar J. Marston to take a plunge into thegasoline market? Certainly, the once-preva-lent TP Aero petrol franchise began spreadingsoon thereafter through North-by-NorthwestTexas and into Oklahoma.

One derives from Black Gold!, too, a senseof understanding of not only the executive

brass, but also of the hardscrabble minersand oilfield workers – and of the tense andoften combative symbiosis between factions.Woodard’s observational and descriptive pow-ers are at a peak in his discussion of thechronic labor disputes. These began duringthe early coal-company days when the influ-

ential Knights of Labor, flush with organiza-tional successes elsewhere during the 1880s,landed in right-to-work Texas without muchheed of the established corporate policies. ALaborite strike might pose a challenge withan idled mine, but Texas Pacific had legions ofstrike-breakers ready and willing to step in –and legions of Texas Rangers poised to putdown any uprisings.

TP persisted as an anti-union outpost untilthe arrival in 1903 of the United MineWorkers, which infiltrated the workingmen’sranks, staged a massed shut-down, and then

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deployed the membership to discourage scablabor from accepting the company’s invitationto take up the slack. The UMW’s actionsproved sufficiently persuasive to convert TP to aunion shop. Woodard tells the story with notonly a passionate interest in these freewheelingand hard-bitten times, but also a dedication toa fair balance between the clashing interests.

Woodard’s account of the rise and fall ofThurber, Texas, a Texas Pacific company town,

is just as engrossing. A prototype, in a sense,for the later but similarly extinct Panhandle-area burg of Phillips, Texas (as in PhillipsPetroleum Co.). Thurber was a pure-bred com-pany town of some 10,000 souls, heavy on theimmigrant population.

A famous line from the Southern songwriterMerle Travis, “… I owe my soul to the compa-ny store…” (from the ballad “Sixteen Tons”),owes its own soul to such townsites as

Thurber, which Texas Pacific equipped withhousing, schools, churches, a library and a con-cert hall – and comprehensive electrical wiring,at a time when many “real” municipalitieswere not yet thoroughly electrified.

TP also made it inconvenient, if not necessari-ly forbidden, for the denizens of Thurber totransact household business outside the com-pany stores – a policy that the locals resisted, inpart, through the mail-order catalogues ofSears & Roebuck and Montgomery Ward.

The mysterious lapse of Thurber to ghost-town status is amply well explained by a simplefact of economic reality: The company’s aban-donment of its coal-mining operations left nofurther need for a townsite strictly for miningfamilies.

Oil represented the larger future, heralded bya gusher in 1917 at TPC&O’s Ranger Field –which helped to transform Fort Worth to anoil-boom outpost, linked by the Texas & PacificRailroad (a customer in whose honor the coalcompany had christened itself) to the TP oil-fields. The assertion of the automobile industryas an economic force in its own right, thoughdependent upon oil, cinched the company’sprofitability, assuring survival through the GreatDepression of the 1930s.

Threats of consolidation were staved offapace during the post-World War II years, butby the 1960s Texas Pacific had become a sta-tionary target for an eventual mega-corporateabsorption. The defiant old-line companyfound itself gobbled up in 1963 by FrankfortOil, a branch of the liquor-distilling firm ofJoseph E. Seagram & Sons. Woodard devotes arevealing coda of Black Diamonds! Black Gold!to a concise biography of TP’s Last ManStanding, H.B. Fuqua, and his political manipu-lations during the period following thattakeover of Big Oil by Big Booze.

Woodard excels at placing the vital econom-ic-social-political role of TPC&O in a historicalperspective. He illustrates in particular the com-pany’s influence upon Texas-wide multicultural-ism – immigrant labor is a big factor – even infull view of the company’s preference that themulticultural masses be kept decisively “in theirplace.”

Woodard also demonstrates TPC&O’simmense capitalization of both industry andgeneral commerce, as a class, and thestatewide tax base. As a bustling componentof a larger engine that generated vast socialand economic progress, TPC&O also helped to dictate a statewide political course – leaningnaturally toward economic and social conser-vatism. Woodard’s book, in this sense,proves as provocative and ironic in tone as it is informative.

Contact Price at [email protected]

ER




Analysis of 20 Barnett Shale Counties by Tier

Charts courtesy of Powell Barnett Shale Newsletter. www.barnettshalenews.com

Documents

Fort Worth Business Press - Energy Report