COMMENT OF THE DAY: LIKE THE BAYOUS, HOUSTON OIL DEVELOPMENT FLOWS WEST TO EAST 
“. . . First, low oil prices are absolutely TERRIBLE for upstream (Schlumberger, Baker Hughes, Fluor, etc). However, it’s not necessarily terrible for downstream. Expensive or cheap, oil has to be refined and there has been no reduction in the demand of downstream products (gas, polymers, aromatics etc). If you know the Houston energy market then you know that Upstream is located heavily in Katy and Sugarland. Downstream is located primarily on the East Side of Houston, with some exceptions (like the EM woodlands campus). More central or (to a degree) eastern housing markets should still see significant demand.
Second, understand that some oil companies move very slowly. Capital expense budgets are planned years in advance. Those don’t necessarily just get ripped up and thrown out the window just because the price of oil has tanked. Yet again, UPSTREAM is definitely cancelling capital left and right, I mean only a moron would drill a new low margin well right now, but Downstream? I believe at least 2 new crackers are coming online this year and a new 500+ kta polymer reactor is as well. Those aren’t stopping, and low oil prices wouldn’t stop them anyways.” [MrEction, commenting on Downtown Foreclosure Auctions in Their Final Year; Bramble’s Debut; Krispy Kreme’s Opening Date] Illustration: Lulu
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uh, what? there is so much wrong with this comment i dont even know where to begin….
This comment seems a bit confused between corporate and operations, and between oilfield services, E&P, and integrated companies. Schlumberger is an oilfield services company, not an E&P company. Oilfield services gets hit first when prices drop, as there are fewer new wells. Workers for E&P companies are slightly more insulated, as existing wells generally continue to be operated when the prices drop. It’s true that downstream is much more insulated, but only the actual refineries are on the east side. The corporate offices are still going to be downtown, or in the galleria. Integrated companies like Exxon have exposure to both upstream and downstream, but are generally more resilient due to their sheer size and inherent diversification.
Excellent comment of the day. Well thought out and on the money.
In the end, Houston isn’t as reliant on the energy industry as once was the case. Oil slumping will have an effect, but nothing like the disaster of the 80’s. I’ll let others argue over this comment and it’s accuracy (seems logical to me, but I don’t (thankfully) work in the oil industry). The price of oil is so manipulated and the industry lies and officiates to such an absurd level who ever knows what the truth really is. I just fill up my car like a lemming and am relieved when prices are low.
Well, I definitely oversimplified the nomenclature and concepts but I’ll stand by the basic point. Also corporate doesn’t count. The only thing they produce are powerpoint presentations.
US crude production is still well over 9 mil barrels a day even though the rig count has fallen by ~1000 rigs since the peak last year. The US oil industry has been adapting rapidly to the new price environment and has made significant gains in efficiency of fracing operations. International demand has been strong in response to lower prices. Yes, the Eurozone and China could tank the world economy and send Houston into a death spiral. But we went through that in 2008 and came out just fine a few years later.
Things could certainly be much better but for the Saudis manipulating the oil market. However, a lot of bad things need to happen before Houston’s real estate market takes the dive that so many on Swamplot think is going to happen or is happening.
And even if things go wrong in Houston, lower prices will lure a lot of buyers into the market who have been all but shut out of the boom due to high prices. At best, the market will flatten out for a period of time, but will still be very healthy. In fact, the alternative–a continuation of the boom–would have eventually been bad for Houston by negatively affecting the city’s competitive cost of living.
I agree with Heightsresident (and Mike)– that the comment confuses up/mid/down- streams and the diversification practices (“integrated”) of various companies from Exxon (EM) to Schlumberger. Refineries are near the ship-channel (and many pipelines) for distribution reasons; E&P “brainiacs” are tucked away in cubicles in cheap-yet-sexy A+’ish square-foot locations (predominately the West side). Oil field service companies are highly reactive to the market (Schlumberger, Cameron, Hughes, and on and on– and they diversify, too: contemplate varco). The love/hate they have, though, is interesting: on the one hand they have more work, on the other they have to endure significant cost-savings to compete for that work– because the barrel is so low. Exxon and Chevron and.. (and marathon and daniels and so on).. STILL need to hire and retain local resources to meet the demands of the competitive market: demand that OFS companies complete.
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I will agree with the E/W aspect (and the North exception). Consider that OFS companies’ personnel are virtualized in the sense that they are scattered state-wide; while the E&P brainiacs making 100k’s are centralized and buying homes close to where they work; and that refineries need so little attention (!). Downstream is an entirely different beast and probably what most *think* energy+houston means (it’s not, not entirely). Houston has tons of up- and mid-stream companies, and especially 3rd parties to all of that (OGSes).
No one expects the midstream companies!
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But seriously, midstream is also a massive part of the Houston economy, and is also fairly well insulated industry, cause no matter how much the product costs it’s still got to be shipped.
If feedstock prices fall ceteris paribus, then the crack spread would broaden, downstream would become more profitable, and MrEction would be spot on the money. It doesn’t work like that in the real world. Commodity prices are related to one another in myriad non-linear ways.
Downstream is strong right pillar of Houston’s economy right now because there are a number of very large construction projects under way. A lot of those were feasible last year, but are no longer feasible given lower commodity prices in general, a stronger dollar, a slower global growth outlook, brewing crises in Greece and China, and a risk-off business environment. Moreover, downstream is not nearly as labor-intensive as it was several decades ago. Once construction is completed and the plants go into operating mode, we shouldn’t actually expect any outsized economic impacts. In the immediate-short-term, you might expect a boost to the property tax base in the affected jurisdictions; in the very-long-term, perhaps, you might expect other plants to be co-located in southeast Texas. But you can also expect that with less construction that there will be vastly FEWER jobs in the region, not more.
@ Old School: Texas rode out the 2008-09 financial crisis more easily than other states for a variety of reasons. Legacy legislation from the S&L crisis prevented the downturn in the housing market from being as severe as it might have been. Fracking had just begin picking up real momentum in 2007, and the effect of the financial crisis on commodities was liquidity-driven and predictably brief. Furthermore, many emerging markets (and China in particular) continued to show strength; the price of commodities became predicated upon an emerging-market growth assumption as well as an attitude by investors that commodities were safer than stocks, bonds, and real estate. By 2011, not only had it become apparent that there were limits to that growth, but also other investments had become much more favorable. The effects were fairly broad, so it didn’t matter whether you were a corn farmer or a coffee farmer or a gold miner, you got hit — but those sectors hadn’t just been subjected to a technological breakthrough. Texas drew the long straw and the boom kept booming. Saudi Arabia’s decision has been to produce an amount of oil that is driven by market prices. Their logic is very very sound, and their costs of extraction are low enough that they can do it. It may feel good to cast blame upon them, but one could argue that Texas’ boom was predicated on the Saudi decision to place a constraint on their levels of production in the first place and that we never deserved it. It was a gift.
@ Toasty: A lot of the midstream action is closely tied to E&P activity. Go look at an aerial map of the Eagle Ford. Its a crosshatching of pipelines. A declining rig count does not bode well for their future.
@ O&G professionals: I’m not an O&G professional, but I’m not a CRE cheerleader like Shannon either. If you feel that I’ve made an error, please call me on it. I’m very pleased to hear your perspectives.
Where is the upstream in Sugar Land? What major companies are out there? Not arguing, just am not aware of any…
Fluor is out there if I remember right. I guess its a services company and not upstream, but I lump all that together.
@MrEction
Regardless of what you think of corporate, the fact remains that corporate employs a lot of highly paid people who help support real estate prices near the office. And while there probably are a good number of people who waste time with silly power points, someone has to file taxes for the company, pay invoices, put together the necessary SEC filings, and work the finances, or the operations side won’t be around for long.
for niche – for the downstream company i work for, the crack spread doesnt matter because they’ve (wisely) moved toward fee-based agreements. and they wouldn’t spend all that capital on massive construction projects to expand their capacity without long term agreements (like 20 years in some cases) locked in and this goes for pipeline and processing facilites both. that way, their profit is locked in. you are right though about the gathering part of the business. obviously less drilling means less wells need to be connected to pipelines and that side of our business is definitely hurting. even though the company i work for had modest layoffs earlier this year, business still seems to be going strong and new projects, acquisitions, and dividend increases still being announced so i suspect the layoffs were probably more of an excuse to prune off less productive members of our workforce than an indication of truly lean times.
I’m in upstream and most of the geologists don’t spend their time on powerpoints. They are tied to a computer evaluating and interpreting data to find O&G, and then running economics to see if their proposed well meets the threshold to drill. With lower prices, the threshold goes up. To do that, they need lots of support – database and computer techs, engineering and geotechs, admins, and health and safety techs. And these people don’t make the big bucks. They need affordable housing near their work or they end up spending a higher percentage of their pay on commuting costs.
And even the service companies diversify. Both Halliburton and Schlumberger have software divisions developing every kind of program you can think of to assist in all phases of finding, developing, and marketing O&G.
@ downstream: That sounds perfectly reasonable and I agree that its wise, but I would expect that that kind of risk can be hedged only to the extent that a counterparty is willing and able to make and keep that kind of a deal. When the economics of a deal are challenged, SOMEBODY has to bite the bullet. And those deals do come at a price, after all.