Sunday, November 23, 1997

Natural gas boom sweeping South Texas

By ANNE REIFENBERG and MICHAEL TOTTY

The Wall Street Journal's Texas Journal

FREER, Texas -- There's a boom sweeping across the plains of South Texas, and it has nothing to do with Nafta.

Home to a geologic formation known as the Lobo trend, which holds trillions of cubic feet of natural-gas reserves, the region is raking in the benefits of the biggest onshore gas play in the state. Activity had been on the upswing for a couple of years when Conoco Inc. sent it soaring in June with its purchase of $1 billion of acreage and other assets in the area. The launch of Conoco's five-year plan to invest more than $1 billion and drill nearly 200 wells annually is bolstering the fortunes of towns from Alice to Zapata.

"Energy is back," declares David Puig, deputy director of the Laredo Economic Development Foundation. "We didn't think it would be this big."

The signs are everywhere in recently sleepy communities in Webb, Duval and Jim Hogg counties. Restaurants boast waiting lists, and motels regularly post "no vacancy" signs. The roar of the 18-wheeler truck traffic is so loud that some folks have trouble sleeping.

"Kids aren't used to having to look both ways before they cross the street," says Veronica Gonzalez, an accounts-payable clerk in Conoco's field office in Freer.

While the reinvigoration of the energy industry has certainly made its mark over-seas and in the Gulf of Mexico, and in energy-intensive corporate headquarters like Houston, the domestic onshore hot spot is around the Lobo trend.

In the Texas Railroad Commission's 15-county South Texas district, applications for drilling permits are the highest in the state. For the past three years, the district has led all others in the number of completed gas wells. The 818 wells finished off so far this year represent a 10 percent increase over the same period in 1996, and account for 22 percent of the state's total gas-well completions.

Some 1.3 billion cubic feet of natural gas were produced in the district in 1996, the last full year for which figures are available. Commission officials say the direct economic value of that activity was about $3.1 billion. But they figure the actual contribution to the local economy, considering the multiple effect of every dollar expended, was about $8 billion.

"There's nothing like this in this part of the world," says Railroad Commission Chairman Charles Matthews of South Texas.

How do those impact numbers break down? One Laredo Western-wear shop owner sold 130 work boots to a rig crew - the biggest sale he can remember making in one day, even one week. A waitress at La La's restaurant in tiny Marindo City is now earning more in tips than she has in a decade.

Or take Eddie Aguero. After 10 years as a foreman for a Laredo heavy-equipment company, energy-services firm Weatherford Enterra Inc. hired him away in July and trained him to be a sales representative. When he first heard about the gas boom, he had wondered what it might mean to him, and now he knows: a 20 percent pay hike and, for the first time in his life, health insurance and a 401(k) plan.

"It's the best thing that's happened down here in a long time," says Aguero, a 39-year-old father of three, as he drives through the territory he serves.

"Everybody's talking about what's going on in the gas fields, and hoping they'll get one of the next jobs."

Adds Tano Riojas, district manager for Weatherford: "We've tripled our work volume. It's wild."

There are those, in fact, who think that the business of looking for, producing and transporting natural gas might be of more local significance than the commerce created by North American Free Trade Agreement. Puig of the Laredo Economic Development Foundation shies away from making that prediction, but reckons that "it could be close. It's definitely having a domino effect."

P.R. Arguindegui Jr., president of Arguindegui Oil Co. in Laredo, agrees. "It's going to be a close battle. -1/8The gas boom-3/8 will snap at the heels of what Nafta is doing."

To be sure, people here know better than to lay big odds on this boom's longevity. They remember as well as any in the state how quickly the last burst of prosperity fueled by oil and gas bit the dust, and how badly that hurt. And, around Laredo, memories of the devastation wrought by the peso devaluation in 1994 are even fresher.

"Everybody's talking about -1/8the boom-3/8 lasting five years," says Riojas. "But everybody has heard them cry wolf too many times before."

Still, early signs are that the renewed interest in the Lobo trend has staying power. For one, the dozens of companies active now in South Texas have made substantial investments in the Lobo trend.

There aren't any "fly-by-night" outfits operating these days, says Mike Flores, safety and personnel manager for Grey Wolf Drilling Co. in Alice.

"It isn't crazy like it was the last time," he says. "Everything was pretty well overinflated back then, but now there's a tighter rein, tighter control. Sure, it could all shut down tomorrow, but I don't think that's going to happen."

Ted Davis, Conoco's vice president for exploration and production in North America, says natural-gas prices "would have to go awfully low" for the DuPont Co. subsidiary to change its strategy.

Energy companies learned after the price crash of 1986 how to be profitable even when gas is selling for well under $2 per thousand cubic feet - it's trading for more than $3 now on the New York Mercantile Exchange - and advancements in technology have cut many costs to the bone.

"We'll meet our drilling goals, and then some," Davis says.

The company's goals are ambitious. The purchase of acreage and assets, including 1,100 miles of pipeline, from Trans-Texas Gas Corp. marked Conoco's largest-ever acquisition; the company says it wants to use the purchase to double its natural-gas production in the U.S. to two billion cubic feet a day by 2002.

Whether the company meets that goal or not, its efforts will have a big impact on the region. Conoco's spending over the next five years is expected to have an economic impact of $700 million annually.

Consider that the company forks over some $11,000 every month to a local cellular-phone company, and that it spends $250 every other day to buy water in Laredo and truck it to its Freer field office.

And all that doesn't take into account the money already flowing into the economy from Enron Corp., Texaco Inc., Coastal Corp., Chevron Corp. and others.

"What Conoco is doing creates a certain synergism," says William Fisher, a geology professor at the University of Texas at Austin. "It creates more activity."

That, in turn, creates jobs -- vital in a region where the unemployment rate is over 10 percent. Houston-based Producers Assistance Corp., which finds workers for energy companies looking for staff and then contracts the employees out, has already hired 70 people for Conoco. The payroll is around $1.5 million, and more hires are to come.

"It's a fairly large concentration of business in a relatively small geographic area," says Gary Dean, vice president of marketing for Producers Assistance. "It is really having a significant impact on people's lives."

That is in part because Conoco, the producer with the most aggressive regional drilling program right now, relies heavily on outside contractors, while TransTexas sought to perform most of its well-completion, perforation, wire-line and other work on its own. And TransTexas lacked the financial muscle to invest the money experts say is needed to flush out the gas reserves in the 215,000 acres of leases acquired by well-heeled Conoco.

For companies like San Antonio-based Dawson Production Co., that has been a boon. Employment at its yard in Freer is up two-thirds to 75 workers, and the company is running as many as 14 completion rigs at a time in South Texas now, a 75 percent hike from a year ago.

To keep up, Dawson is taking rigs out of mothballs and moving some into the area from as far away was Northeast Texas. Even so, demand is such that Dawson could put more rigs to work if the company could only find enough skilled workers to operate them.

"One of the most critical shortages facing the industry right now is experienced or trainable people to work in the oil fields," says Jim Byerlotzer, Dawson's chief operating officer.

Before the Conoco purchase, spurts of activity would be followed by periods of little or no work, Byerlotzer says, making it hard to keep skilled workers around. "We were pretty much on a roller coaster," he says. "Now there's some steady employment."

That means a good deal to people like Aminta Falcon and Helen Lozano, payroll clerks in Conoco's Freer office. Before Conoco's big acquisition, Ms. Falcon was working as a secretary on a contract basis for a local public school and Ms. Lozano was a student at Laredo Community College, about to graduate with an associate degree in computer sciences.

Ms. Lozano was worried that she would not find work, and Ms. Falcon was never certain that her contract would be extended.

Now both have full-time positions with health and retirement benefits. "Jobs like these were unheard of before, absolutely unheard of," says Ms. Lozano. "You just can't imagine the difference it's made for so many people. ... We thought our little towns were dying, and now they're not."