Monday, February 27, 2012

No Rest for the Fast

Explosive growth has occurred in the United States shale oil and gas industry. This latest cycle began in 2008 in places like North Dakota and South Texas when numerous revolutionary technological innovations came together to unlock oil and gas in places and in volumes no one had imagined were possible.

It has been widely publicized that US oil patch is where economic growth is occurring.  Oil and gas development is leading the US in income growth according to a study by Sentier Research, an Annapolis, Md., firm. The US may well on its way to energy self-sufficiency because of the increased production of shale oil and gas.

Drilling oil and gas wells is time sensitive, expensive and must be completed quickly to be an economical and profitable enterprise. Supplying housing to oil industry workers where there is limited or no infrastructure is the challenge.

Eagle Ford Shale: A Very Brief History of the Most Recent Boom in South Texas

“The Eagle Ford Shale is a hydrocarbon producing formation of significant importance due to its capability of producing both gas and more oil than other traditional shale plays….The shale play trends across Texas from the Mexican border up into East Texas, roughly 50 miles wide and 400 miles long with an average thickness of 250 feet.”

“Petrohawk drilled the first of the Eagle Ford wells in 2008, discovering in the process the Hawkville (Eagle Ford) Field in La Salle County (District 1)….The wells in the deeper part of the play delivers a dry gas, but moving northeastward out of District 1 and updip, the wells produces more liquids.  One of the fields discovered in District 2 is actually an oil field (Eagleville).    The major operators joining Petrohawk in drilling the Eagle Ford Shale Play are Anadarko, Apache, Atlas, EOG, Lewis Petro, Geo Southern, Pioneer, SM Energy and XTO….” (courtesy of the Texas’ oil and gas industry regulator, the Texas Railroad Commission)

After first successful well was drilled in 2008 production has ramped up exponentially. There were only 40 producing oil leases in 2009, 72 producing oil leases in 2010 and there were 368 producing oil leases on schedule in 2011. The growth rates of natural gas has been even steeper with 67 producing gas wells in 2009, 158 producing gas wells in 2010 and 550 producing gas wells on schedule in 2011.

As of the end of 2011 255 active rig units are operating in the Eagle Ford play (from virtually none in 2008). Horizontal wells account for 238 of active rigs.  The leading Eagle Ford rig count by county is Karnes County with 37 rigs followed Webb (36), La Salle (34), DeWitt (28), McMullen (22), Gonzales (20), and Dimmit (18).

The question for those in the commercial real estate business is how do firms craft commercial real estate solutions that can ramp up residential and commercial capacity almost overnight to meet the industry's exponential demand growth curve and yet remain flexible and fluid enough to respond to an industry prone to unpredictable and rapid busts?  In other words how does a developer protect against a risky real estate ‘long position’ in highly cyclical volatile commodities such as oil and gas?

Just One Word: “Logistics”.

Each rig employs directly and indirectly 200 workers.  To go from 0 to over 250 rigs in under four years means 20,000 to 40,000 workers descended upon once sleepy towns unprepared to absorb the rush of new employment.

Logistical discipline by its very nature is about responding to dynamic market demand with fast, flexible mobile cost-effective solutions.  The winners in this hyper-competitive space are the most agile and the fleetest of foot.

Texas however has just such an expertise. Houston, Texas, for example, is home to the oil services industry that provides the wide array of logistical support for oil and gas production. These oil services companies have superior industry and market intelligence on activity such as current rig counts, oil and gas production forecasts, and employment growth by location as well as detailed oil industry worker profiles that inform workforce and workforce housing demand.

Housing Solutions:  The Evolution of Much Maligned “Man Camp”

First on the ground are the most mobile units that can be moved in and assembled overnight. The companies are accustomed to operating in remote and harsh environments that lack local resources and infrastructure.  They are the first responders in situations when insufficient local support is available.

Fast 'first solutions' may be as basic as RV camps. Or skid-mounted modular units (assembled like legos) into instant multi-story dormitories, lodges or hotels that can sleep thousands of workers (sometimes referred to as "man camps").  Logistics firms construct infrastructure in remote sites from scratch. Arrangements are made to import necessities and, when often necessary, truck out waste.

The camps may be contracted directly by oil companies but may also be “open camps” available to transient worker traffic at daily rates starting at $100 per night.  Centralized hospitality, food and laundry services are included and in some cases reach the four to five star luxury levels. Rooms may be shared but the trend of late is to program development with larger units, suites actually, catering to the hard working, discerning oil field workforce who craves more privacy and individual space.

The competitive race is on to expand on and beef up amenities that include swimming pools, hot tubs, workout rooms, basketball courts, barbeque pits, restaurants, and other features and social activities that one might find in a luxury apartment or hotel complex. The next step in the evolution of camps is the introduction of separate or individual modular units containing complete kitchens and bedrooms and other extended-stay features that feel much more like a home and may provide enough room to accommodate family.

Developer Beware

Residential development that meets workforce needs is one of rare development opportunities to be found in remote or rural locations that were once forgotten and mostly unknown places just five years ago. Boom towns in North Dakota and South Texas are now even attracting large institutional interest. Sam Zell is talking up the opportunities in North Dakota. Numerous national hotel chains are promoting (by encouraging franchisees to open) new hotel facilities in South Texas.

Conventional real estate developers must be careful.  Recent growth in oil country has been fast and furious but could evaporate overnight.  The concerns, criticism and political influence by those fundamentally opposed to fracking used in shale oil and gas plays are difficult to quantify and will lessen only with much greater industry transparency. As of January 31, 2012 Texas moved in this direction by requiring disclosure of the chemicals used in fracking.

Those who have been around industry awhile will tell you that the only thing that is constant about energy production is change.

The 2012 Natural Gas Glut: South Texas Production on the Move, Shift to Higher Value Liquids

At the time Eagle Ford Shale came on line in 2008 natural gas had peaked at $8 per 1,000 cubic feet with a trend line headed up sharply. The rapid ramp up was predicated on these favorable economics.

Due to the success of producing shale gas from sources located across the US and another warm winter the market has become oversupplied and the price of natural gas has reached a 10-year low and is expected to remain there ($ 2.50 per mcf).

There is a chance that wholesale gas prices may drop below $2 per mcf, a low not struck since September 2009. Prices are so low companies are storing natural gas not selling it. Storage sites are near capacity. The overhang could crash prices later in 2012. Citigroup has estimated the tipping point for high-cost producers is about $1.80, 27% below today's price.  At prices so low and storage costs high producers may forced by unfavorable market conditions to give the gas away.

Big natural gas producers such as Chesapeake are cutting back on gas production. The company is moving half the drilling rigs it uses for dry gas wells into wells that produce both wet and dry gas. Wet gas or NGL’s (such as ethylene, propylene and butadiene are chemicals used to make plastic or textiles) commands higher prices. WTI oil prices remain firm at around $100 per bbl. Optimism about US economic growth and global supply-chain uncertainty provide strong support at the $100 level.

In 2011, over a third of North Dakota's gas output (too costly to produce given limited current transmission infrastructure) has been burned off as production growth outpaced pipeline capacity. Nationwide the flaring is less than 1% of production. At some point North Dakota gas will be added to natural gas oversupply.

Oil and gas production (and employment) never stands still. It is always on the move.

Creative Strategies

The temporary glut of natural gas highlights the fact that communities and oil service firms must think hard about what happens as growth matures.  Planning is required.

Williams County in North Dakota (with nearly 10,000 temporary housing units) has instituted a moratorium on temporary, skid mounted housing.  Williams County is not alone as other jurisdictions too have clamped down on temporary housing until more comprehensive resource plans can be drawn.

It is not the skid mounted housing per se that is the problem but the explosive growth and strain on infrastructure and local resources that has moved cities and counties to restrict or block large-scale, resource intense, dense man camps.

Unperturbed, some companies see the resource constraints simply as opportunities to meet a new needs.  Late in 2011 Target Logistics has addressed one of the big infrastructure concerns by constructing a $3.1 million waste water treatment plant in Tioga that not only takes care of its own camp needs but can handle requirements in the fast growing communities. Instead of having to ship waste water to Minot to be processed waste is processed on site and the cleaned up waste water can be used for fracking, a definite win-win that recycles and saves valuable water resources.

Designs for Re-use

Another concern expressed by communities in North Dakota is that if (when) the oil boom fades cities and counties do not want to be left with unsightly, abandoned camps. Logistics companies are obligated to remove what they have brought in but are also looking ahead and anticipating the evolution of housing needs in oil and gas shale areas as growth driven by energy matures.

Capital Lodge in Tioga ND (maxing out at 2500 units) had programmed flexibility and re-usability into their modular camp units so that when the boom wears off housing units can become four bedroom homes by moving or removing walls.

Target Logistics is thinking of next steps too. They are formulating long term plans to convert temporary housing to permanent solutions by redeveloping and reusing structures. In the beginning this may look  like extended stay facilities that include kitchen and room to accommodate families. It could evolve into multifamily development and assisted living facilities as well by building on the existing infrastructure of provisions, kitchens, laundry and other services baked into the bones of man camps.   The trick is to address the needs of the ongoing staff of support workers who will remain long after the drilling rigs are gone.

The answer to what happens after the boom is to design units from at the start of it that can be plugged in, unplugged, moved, reconfigured and reused in support of the community and permanent workforce needs of an evolving oil economy.

Thursday, November 17, 2011

Chasing Growth

Long Term Challenges and Opportunities Inside the North Dakota Energy Boom

North Dakota and its economy have gotten a whole lot of good press in the past year. Though a sparsely populated state (it is the third least populous, with 672,591 residents according to the 2010 census) and relatively small economy in the greater scheme of things, the state has been a star economic performer in an anemic US economy hungry for stars. An oil boom has sprung up in the western part of North Dakota. The western part of the state is located over multi-state oil reservoirs known as the Bakken and Three Forks.



Almost overnight over 20,000 challenging, physical, good paying drilling-related jobs (with lots of overtime) arose in North Dakota. Over 40,000 jobs may have been added to the region in total due to the industry’s multiplier effect. Unemployed and opportunistic workers flocked to the upper Midwest. Official statistics have not caught up to tally and measure accurately the growth and many jobs in western North Dakota remain unfilled.

High oil wages have revived and re-inflated once sleepy locales. Support services and housing supply have lagged behind this huge surge in demand. Meanwhile local workers drawn into the industry have left a vacuum in the lower wage employment base of the state affecting, adversely, the economics of smaller businesses. Labor is short, there is no room at the inn. Real estate developers too have descended on the communities to try to capitalize on the boom and an address an extreme housing shortage.

Is This What 21st Century Growth Looks Like?

North Dakota oil exploration started in the early 50’s and experienced numerous booms (and busts). The biggest such expansion and sudden collapse occurred in the late 1970's and early 1980’s

New technology has energized the North Dakota oil industry once again (and this one many believe may have legs). Superior deep lateral drilling techniques and the ability to loosen up tight oil pockets in shale and recover once difficult to reach oil though the high pressure injection of specialized (and sometimes controversial) fluids means almost all wells yield and initial well production levels are high. North Dakota oil extraction is profitable at $50-60 per barrel prices even as North Dakota Sweet well head prices have been discounted for distance and transportation costs to refining locations. Rail and pipeline operators are re-configuring their systems to get Midwestern oil to market cost-effectively.

Daily production is exceeding 450,000 barrels per day. North Dakota is the fourth biggest oil producing state, rising fast and may surpass (number three) California soon.

Roughly 200 drilling rigs are operating in the state creating approximately 2000 new wells per year, a level that may soon surpass the levels established in the 1980’s boom.  The North Dakota well count will soon hit 7000. Estimates of recoverable oil (depending on who you talk to) are from 4 billion barrels on the low side to all the way up to 24 billion on the high in an extraction process that might span decades.  Again, depending on the point of view, anywhere from 20,000 to as many as 50,000 wells may be drilled ultimately in a field that could play out over 15 to 20 years or longer.

The immediate economic impact has been huge. Drilling wells is extremely resource and labor intensive and time sensitive. Each new well can cost up to $10 million to complete and is a costly race against the clock. But the tech advances of inventive, independent oil producers dominating the North Dakota play continue to make the process more and more efficient.

Each well needs a huge volume of supplies:

“Fresh water is needed to frac a well in order to create clean fractures which allow oil to best flow from the rock to the wellbore. Three million gallons of water and two to three million pounds of sand or proppant are needed per well."

Drilling-related truck traffic has spiked in the race to get drilling supplies in and product and waste materials out. Trucks have torn up North Dakota’s county road systems unprepared for the level of activity. Counties are racing to keep up with repairs and find sources to pay for upkeep of the overburdened road system. Road materials are in short supply. Further constraining the ability for infrastructure to catch up to demand is the region’s limited construction season. Road work and construction halt for at least half of the year. The winters on the plains are severe.

As many as 100 employees are required per drilling rig (or 20,000 in total on the 200) and temporary housing has sprung up for workers. Much of this housing has been constructed by logistics firms and paid for by oil companies. An estimated 20,000 workers are housed in “man camps” in 17 western North Dakota counties.  These dense camps provide high levels of service and convenience to workers working long hours in the field.  Yet the camps are straining rural infrastructure. In some cases large amounts of waste water had to be trucked to nearby cities for treatment. One resourceful logistics firm has constructed a regional waste water treatment plant to process and recycle camp waste water so that it can be reused in the "field" for fracking fluid or agriculture.

For hundreds of incoming workers not lucky enough to be housed in the company or private camps there are insufficient permanent housing solutions; temporary answers are found in RV and mobile home parks that have filled up as quickly as they were put into service though these alternatives may not be ideal given North Dakota’s extreme winter conditions. Some workers live in their cars.

Cities and counties are also dealing with the strains of explosive growth on medical, social and educational infrastructure. They are needing to staff up. It is hard to know where they should begin.

The effects of labor and resource scarcity are being felt in nearby and not so nearby MSA’s. Obviously Minot and Bismarck ND are in the line of fire but the cities of Fargo, Billings and Rapid City are feeling the effects of rapid growth occurring hundreds of miles away.

Housing Evolution

In the short run drilling occurs at a frenetic pace to establish productive leases and create long term units of production. Over time, as drilling activity matures and gradually winds down, drilling is replaced by the significantly less labor intensive resource extraction and maintenance.

The key for housing is to meet labor intensive short term needs and at the same time anticipate the evolution of the Bakken/Three Forks play as the extraction cycle matures. And word is that the workers want out of the man camp's constrictive spaces in the worst way. Employee retention is becoming a problem.

Staffing new construction is a chicken and egg problem as well. Imported construction labor needs housing too.

To aid cash strapped local communities North Dakota is facilitating residential development in the western part of the state by providing $100 million in impact grants that communities can use to fund extension of sewer and water services, street construction and the expansion of water treatment plants.

The residential development pipeline in western North Dakota has expanded dramatically. More than 2,300 new housing units will become available in Dickinson; the city is in the process of annexing additional land as well. In Williston more than 1,750 new housing units are in development.  An additional 2000 units are planned for smaller communities in the region bringing the total potential housing units (single and multifamily) to 6000-7000 to be delivered in the next 3-5 years. This may be enough supply to house 10-15,000 people. This is a good start.

Thursday, October 20, 2011

Ground Force

It was three years ago when I ran into Kenneth Neatherlin in New York at the Museum of Modern Art (MoMA). It was less than a month after Lehman Brothers had filed bankruptcy and the financial crisis was reaching a noisy crescendo. Like being in the eye of the hurricane, at the center of global finance, most of us were still unaware of the eventual fallout and great extent of the economic destruction that was to follow.

I was drawn to the calm island of MoMA (hidden within the chaotic island of Manhattan) by, among other things, “Home Delivery:Fabricating the Modern Dwelling”, an exhibit that ran in 2008. The exhibit included “eighty-four architectural projects spanning 180 years” and illustrated “how the prefabricated house has been… a critical agent in the discourse of sustainability, architectural invention, and new material and formal research.”

From MoMA to Navasota

Neatherlin founded a company called Ground Force Building Systems located in Navasota TX. If you were trying to boil down what his company does in a investment or sales pitch, like one you might make to a venture capital firm, it might go like this:

“Ground Force Building Systems manufactures, off-site, residential, commercial, medical and educational structures incorporating proprietary concrete foundation systems and patented structure delivery technology that produces high quality, flexible, permanent (and reusable) building structures delivered to, and completed on-site, in shorter time frames than site-built structures thereby reducing construction waste and cost-related risks.”

Neatherlin is one of the entrepreneurs carrying the century’s long torch of prefabricators profiled in the 2008 MoMA exhibit. It is a small specialized group who has persevered in a world dominated by site-built production and a group who, at the same time, have an aversion to the lack of perceived durability and quality of traditional mobile homes.

A quixotic quest? Maybe. But in 2011 Ground Force is rolling dozens of units off its Navasota factory production line; these are completed buildings and building modules on engineered concrete foundations. This is respectable activity given the sad state of the economy and housing industry. I visited the factory in September 2011. It was the first time I had been back to Navasota since the Lehman project Neatherlin and I were working on (located in Austin TX) had halted as a result of Lehman’s bankruptcy.

A Family History of Moving the Immovable

You could say that the concept for Ground Force was born about 10 year ago after Neatherlin sold his Texas site built homebuilding operation (to an affiliate of Lehman Brothers I believe). As Neatherlin tells it, while he was a conventional home builder, he was bothered by the inefficiencies of site-built techniques and technology. He wondered if there was a way to get production out of the weather, to cut cycle times and at the same deliver foundation systems superior to those site built homes offered.  The tweaking of the home building model had begun.

Many Texas markets have expansive clay soil that wreaks havoc on conventional foundations. He dug into how a builder could eliminate the movement and cracking of slabs and started down a very long R&D road that focused on coming up with a cast concrete slab and structure that could be transported, handled and delivered without using a crane or any other type of lifting equipment. Ground Force constructs homes or commercial buildings or building modules (in a factory) and delivers nearly complete structures, in their entirety, on concrete foundations.

But the real story of this particular technological convergence starts farther back in Neatherlin’s past.

Rising to the challenge of moving the immovable runs in the Neatherlin family. His grandfather moved the first concrete structure in Houston, Texas back in the late '40s (a store, the story goes, moved with the stock left on the shelves, undisturbed).  His dad perfected the hydraulics of the transportation system and moved countless large structures. His great uncle was in the business with his grandfather. Neatherlin and brother and grew up moving houses and structures with their dad and grandfather. As kids they crawled and tunneled underneath slabs and set jacks and raised foundations and loaded structures and trucked them across town or across the state.

Looking back Neatherlin says there was nothing glamorous about moving the unmovable in the Texas heat and dirt.  But growing up in the building moving business and research pursued over the last decade led to the idea of marrying the moving of structures with the building of structures. Ground Force now has a broad-based utility patent on just such an integrated building system.

Puzzling Physics

The Ground Force System enables them to handle, hold and transport a completed structure or module in compression. The system’s appearance and functionality is often quite puzzling to the public.

Concrete is strongest when in compression. It cannot be attached to or rest on a surface because it will stress, twist and crack. The Ground Force transportation system consists of a compressive strut that grabs the unit at each end tightly and suspends it over the road. There is no trailer underneath the slab.  There is a front end with wheels and back end with wheels. These are parts of what we think of as the normal trailer one sees traveling down the highway. The middle of the trailer is missing, however. Hydraulic cabling pulls together the front and back. The building unit itself makes up the middle of the truck’s “trailer”, like magic.

As the unit is transported down the highway and inevitably bounces the system creates greater compression with the computer-driven hydraulics that offset the transport stresses that maintains equal pressure into the floor of the slab.

The Ground Force patented carrier keeps the structural load in compression without the customary stress and also allows delivery without loading the structure on top of a trailer or needing a crane system. As a building or module moves down the highway at 60 miles an hour (or faster), bouncing does not cause cracks or fractures in the structure. In most cases the buildings arrive without a single stress crack in the drywall or the sheetrock of the building.

Equally important to the Ground Force system is the way Ground Force creates slabs.

The company casts and pours the concrete and has tweaked the composition and slab designs to create a lightweight type aggregate with twice the pressure PSI that most concrete has.

The average thickness of the floor is around three and a half to four inches at it thinnest point. The Ground Force slab incorporates cabling, steel, fibers and aggregate mixtures that translate into the strength that allows buildings to be constructed, handled and delivered on foundations that do not crack. The foundation technology is more closely related to a concrete parking garage deck (in compression) than it is to the flimsier site-built home foundation. It is similar to an engineered concrete section of a bridge overpass.

The smallest building footprint Ground Force produces is 12’x20’ and the largest as big as a 15’x60’. The sizes of a section max out as the weights and widths of transport are managed. Larger buildings are made by joining and tying together multiple sections to create commercial and institutional structures of up to 15,000 square feet.

Each module is placed on drilled piers, one at each corner. The delivery truck simply drives over building site and lowers the module in place. The drilled piers eliminate movement in the foundation.

Production  occurs in the 250,000 square foot factory Ground Force occupies in Navasota. The company repurposed a shuttered mobile home plant, using, modifying and improving on an existing production line.  The specially trained Ground Force production team is integral to the implementation of a Japanese-inspired continuous improvement process and just-in-time production strategies. Through this production model Ground Force continues to develop and enhance valuable “tribal knowledge” of its processes and system.

Amazing New Apps

Neatherlin believes the system has potential to revolutionize the building industry.  First and foremost he maintains that the building system is true ‘flex’ space.  His buildings look site-built but the design and engineering of the structure or module means that they can be moved again easily, if needed. Modular design allows the building to be added to or subtracted from or, as in the case of a hybrid structures, combined with site built structure(s). There is residual value to the flexible structures and modules.

Because the foundation system resembles a bridge the structures are natural for coastal and wetland installations where flooding is an issue. Ground Force’s finished products are engineered to be positioned on elevated stilts well above the flood line.

Earthquake prone California is also a potential market for the system. Units placed on engineered drilled piers can incorporate seismic shock absorbing caps that neutralize the effects of the West Coast’s destructive ground movement.

Neatherlin is sure that architects, engineers and designers, once familiar with the system, will create new construction applications that he and his team have not even thought of.

Signed, Sealed and Delivered

Neatherlin does not believe there are any competitors that can do exactly what Ground Force does.  It is the company’s holistic approach of handling and delivering structures that distinguishes the firm.

Many sites cannot be accessed by a crane or it is too expensive to deploy a crane to set a 1,500 square foot house that is located in the middle of nowhere.

With these advantages and numerous construction applications Neatherlin hopes to take his unique family of building and transportation technologies on the road.

Ground Force plans to market its technology and processes to modular manufacturers in other parts of the country. Ground Force’s experience at repurposing an idled mobile home plant may also be useful in revitalizing unused industrial capacity located across the US.

The company has perfected the equipment, perfected every system in the factory to be able to handle and deliver the extremely flexible structural applications.

Where To From Here?

Memorialized in the MoMA Home Delivery exhibit was the story of architects, inventors and entrepreneurs that do not let the gloom of the present get the best of them but instead, in the darkest times, derive solutions to problems that may eventually dispel the malaise.

It has been over three years since the economic and financial meltdown has crushed housing markets. We have had plenty of time to look back across the devastation wrought, particularly to the damage done by the housing and finance industries to themselves.  A moribund housing sector is generating new home sales at an annual rate of roughly 300,000 per year, down from the 2006 peak of one million homes.  Nothing seems to indicate that housing market conditions will improve soon.

Three years after the meltdown Neatherlin pushes ahead with his decade long adventure, ever the optimistic entrepreneur taking on a challenge that few see and even fewer could solve.

How big is his technology?  How disruptive? What will be the impact on conventional construction methods?

It remains to be seen.

But what can be seen is that despite the harsh and hostile economic environments in which we operate there are those that keep grinding away, producing one new type of house, one flexible commercial structure, one technological  breakthrough, one software application at a time in an attempt to get industries back to working again and to work even smarter this time.

The housing and housing finance industries are a long way from finding new formulas to revive themselves. Eventually they will be restored, slowly and steadily gaining ground.