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Oil! New Texas boom spawns riches, headaches

Rick Jervis , USA TODAY Published 4:05 p.m. ET Jan. 15, 2014 


THREE RIVERS, Texas — Not long ago, Richard Dockery was a real estate and insurance broker in this town of 1,800 residents, putting together small land deals and cobbling together a nest egg for retirement.

Today, Dockery, 47, lives in a new, 2,400-square-foot home that he bought with cash and will have his 23-year-old daughter's medical school bills covered before she steps into her first classroom. Once a month, a six-figure check in his name arrives in his mailbox from an energy company — royalties earned by leasing his property to oil companies and co-owning wells. It's one of several that appear in his box each month that, added up, equal roughly the annual salary of a midlevel NBA player. "It's crazy," Dockery says. "And I'm small fry. There are literally thousands of people out here who are millionaires, and some who are going to be billionaires. It's the wild, wild West."

Dockery and this small city, 75 miles south of San Antonio, are at the epicenter of one of the biggest oil booms ever to hit Texas — and possibly the USA. A vast oil and gas reservoir in South Texas known as the Eagle Ford Shale, along with another in West Texas known as the Permian Basin, is driving the boom and could make Texas one of the leading oil producers on the planet. Advanced drilling technology, such as hydraulic fracturing, or "fracking," and horizontal drilling are unlocking huge reservoirs of oil previously deemed impossible to reach, doubling the state's crude oil production the past two years. This year, Texas is projected to produce more than 3 million barrels a day — moving it ahead of Kuwait, Mexico and Iraq to become the eighth-largest oil producer in the world.

The U.S. still imports far more oil than it exports, due in part to a law restricting crude oil exports. Last year, the U.S. imported about 7.5 million barrels a day, while exporting only about 100,000 barrels a day, according to the U.S. Energy Information Administration. The exports ban, dating to the Arab oil embargo of 1973, is now being challenged by lobbyists and lawmakers because of the huge amounts of oil being produced, primarily in Texas and North Dakota.

Energy companies are likely to invest more than $100 billion in Texas in the next few years to extract oil from the shales. In 2011 alone, the boom created more than 38,000 jobs in South Texas and poured more than $500 million into local and state coffers, according to a report by the University of Texas-San Antonio. It's not just oil companies and counties profiting. Ranch owners who previously had only scrub bush and white-tailed deer on their property are leasing their land for millions of dollars a month. Schoolteachers lucky enough to have oil beneath their yards have left their jobs to travel the world or open boutiques. Small-town real estate brokers, like Dockery, have become overnight millionaires by selling plots of land that once sold for $2,000 an acre for 100 times that much.

This is the latest in a string of Texas oil booms — and perhaps one of the biggest — since Anthony Lucas punched a hole in Spindletop Hill near Beaumont in 1901, thrusting the country into the modern petroleum era, says Eric Potter of the Bureau of Economic Geology at the University of Texas at Austin. The Spindletop discovery and another one in East Texas in the 1930s at the time made Texas the largest producer of oil in the world, he says. This one is far bigger.

"It's as significant as the discovery of oil itself," says David Arrington, a Midland, Texas, oil executive who made nearly $900 million plumbing for natural gas in North Texas eight years ago. Today, he's investing "every penny of it" in the Permian Basin.

In the meantime, wildcatters, residents and ranchers of South Texas are cashing in. When the oilmen came calling, David Martin Phillip, a former mining executive and cattle rancher in Karnes City, refused to let them drill on his ranch. Instead, he leased them his mineral rights that allowed them to drill on neighboring ranches and reach the oil beneath his property horizontally, he says. Using royalties from that transaction, Phillip, 64, recently bought a restaurant and two local radio stations, which he plans to use to broadcast oil news. One of the stations, in nearby Kennedy, will have its broadcast booth encased in glass inside his new restaurant, so that patrons can enjoy a beer and a steak while watching the live broadcast. "We're sitting on Mecca here," Phillip says. "It's real exciting."

Down the road in Three Rivers, 18-wheelers and tractor-trailers rumble through town, hauling sand or enormous engine parts to drilling pads. West of town, Texas Highway 72, once lined with acre after acre of scrub bush, today is populated with oil supply companies, RV parks and "man-camps" housing oilmen, and drilling wells alighted with gas flares stretching to the horizon.

Dockery, the real estate broker, says he sniffed out the rush in 2009 when out-of-town researchers began showing up in the local courthouse, looking up property titles. He quickly started buying land he thought would be useful to oil companies. Developers built two man-camps on one of his lots and an oil company drilled a water well for a fracking pond on another of his properties, for which he gets monthly royalties. Dockery used money from those ventures to buy a stake in four wells. The monthly royalties — "mailbox money," he calls it — started pouring in. "I was this sleepy broker in this small town," Dockery says. "Then, all of a sudden, the world drops a bomb on us, and we explode."

Tax revenues from the oilfields have built Three Rivers a new high school and state-of-the-art football field. Four new hotels sprouted up in town and four more are in the works. But the army of workers and supply trucks are taking a toll on the small town, Garcia says. Traffic accidents are a daily occurrence, and he counts at least one traffic fatality in the region since the influx. In May, a truck crashed into the Chevrolet Lumina driven by his wife, Katherine. It took multiple surgeries and a metal plate to repair her shattered right arm, he says.

The city's 10-man police force is struggling to keep up with traffic calls, break-ins and an influx of prostitutes from San Antonio looking to strike up business with the new residents, he says. Another concern: oil companies tapping out the city's water supply. "Water's a big issue right now," Garcia says. "It's as valuable as the oil." Water is a top concern amid all the drilling of the Eagle Ford Shale, especially in a state still weathering a historic drought, says Scott Anderson, an Austin-based senior policy adviser with the Environmental Defense Fund. Each well uses between 3 million and 7 million gallons of water, and then workers dispose of the wastewater — known as "flowback" — in disposal wells, he says. There is a risk of contaminating drinking aquifers if the disposal wells are not made or maintained properly, Anderson says.

Oil boom creates millionaires and animosity in North Dakota




From the cab of his combine 10 feet off the ground, Doug Kinnoin sees acres of barley scrawnier than last year's bumper crop but good enough to fetch top dollar as malt for beer instead of cattle feed. What he can't see, as the amber stalks give way to the combine's rollers, is the black gold 2 miles below. "There's oil all around," says Kinnoin, 37, who says an oil company staked a claim here in March. His father owns shares in 10 new wells. So does that make Kinnoin and his family millionaires? "I guess so," says the laconic bachelor, who plans to stay in his double-wide mobile home with the deer trophy head and gun safe in the living room. "It's not something we talk about."

The gently rolling hills here speak for Kinnoin and other new or soon-to-be millionaires who live at the edge of the nation's breadbasket. Cold War missile silos have been joined by drilling rigs, oil wells, natural gas flares and pipeline trenches.

Geologists first discovered oil here in 1951, but it took the recent spike in gas prices and new technology to make drilling economical. Now, after decades of watching their children flee the prairie for brighter futures elsewhere, North Dakotans in the state's sparsely settled west find themselves sitting atop the largest contiguous oil deposit in the lower 48 states. There are an estimated 4.3 billion barrels of recoverable oil in a deposit under parts of the Dakotas, Montana and Canada — about half what the USA uses in a year. "It's bigger than Texas," says Herb Geving, 75, of Parshall, a former landfill owner who has two oil wells on his land. "It's unexpected, a blessing," says Larry Lystad, 57, of Stanley. He is among the descendants of Scandinavian and German homesteaders now looking to reap as much as $1 million a year per well from oil leases and royalties. "These people have been farming rocks for generations," he says. "It's like winning the lottery." Or the booby prize.

Some who own only the surface of their land because forbearers sold off the mineral rights beneath complain about traffic and trucks chewing up their roads. Restaurants, motels and hospitals helplessly watch employees leave for higher-paying oil jobs. A nursing home recently offered $1,000 signing bonuses for housekeepers.

Schools started the fall short of teachers priced out by a housing shortage that has seen rents double as oil companies snap up whole apartment buildings for their workers, says Tom Rolfstad, economic development director in Williston.

"It's the good, the bad and the ugly," Mountrail County Extension agent James Hennessey says. "The good is the guy with seven wells who's a millionaire in 24 hours. The bad are those who own the land but not the minerals underneath, and whose roads are tore up and they're not getting anything. And the ugly is the disparity, which creates a lot of animosity."

Many hope the new millionaires — Bruce Gjovig of the University of North Dakota's Center for Innovation calculates two are made each day — will follow the lead of another hometown boy made good. Ray Rude, inventor of the Olympic diving board, donated millions to this town of 1,300, including an aquatic center.

At Joyce's Cafe, the regular breakfast crowd compares notes: Who hit oil and who is still waiting. Who inked an oil lease and who got their signing bonus. Who is collecting royalties and who is spending their windfall. At Stanley Equipment, owner Roger Gjellstad had a customer plunk down $90,000 for a heated tractor, the rancher's first after 50 years of freezing each winter as he fed his cattle. In New Town, Kenton Onstad knows several locals who have retired their mortgages in one payment. Some have started college funds. One family visited Norway. On the Fort Berthold Reservation, the 10,000-member Indian tribe that sheltered the Lewis and Clark expedition in 1804 hopes to parlay its initial $91 million in lease money into self-sufficiency. Council member Judy Brugh, 62, of the Mandan, Hidatsa and Arikara Nation, or Three Affiliated Tribes, said a $160,000 oil bonus check paid for her travel to a breast cancer treatment program in Illinois. Most here say they don't expect oil money to change their lives. News accounts may compare the new millionaires to TV's Beverly Hillbillies, but few want to move away from here. "I don't have a lot of wants," says Lystad, a retired science teacher with a well on his property. "I don't want a lake cabin in Minnesota. I don't want to travel to Tibet." His biggest splurge: a new two-car garage.


"These are cautious, conservative people who are used to having good years and bad years and know you have to save for the bad years," Gjovig says. "They're not spending money wildly." Derald Hoover worked for the rural electric company for 42 years. He receives royalties from three wells that pumped 22,000 barrels of oil in May alone. "It's not very hard to be a millionaire nowadays," he says as he stops by Prairie Outfitters Clothing on Main Street to buy shoelaces for a pair of old boots. Hoover, 62, traded in his Buick for a Lincoln with 20,000 miles on it. He can afford a new car but couldn't see the sense in paying $25,000 more. "We have nobody we want to impress," Hoover says.


New drilling techniques


A record 80 rigs were drilling in North Dakota in August, part of an oil boom that began mid-2006. The rigs are tapping the Bakken Formation, a West Virginia-size oil deposit that spreads 24,000 square miles. The U.S. Geological Survey estimates that new horizontal drilling techniques may allow up to 4.3 billion previously inaccessible barrels of oil to be recovered from the 10,000-foot-deep Bakken. North Dakota geologist Julie LeFever says as long as oil prices stay above $75 a barrel, companies will continue to drill into the concrete-hard deposit of siltstone and sandstone between layers of shale and use water and sand to fracture loose its oil. Figuring who will share the wealth is nearly as tricky. When the U.S. government gave away land at the turn of the last century, most deeds included the earth above and below. But farmers hard up for cash during the Dust Bowl 1930s or after World War II sold their mineral rights, often for a dime or 50 cents an acre. Such rights now are worth up to $1,500 an acre or more. "They pretty much thought it was free money," says Marlene Gunderson, 60, one of dozens of oil company "land men" who jockey hunch over yellowed land records at the county courthouse each day. Their job is to follow decades of complicated transactions to find mineral rights owners, sometimes dozens per acre, and sign them to drilling leases before competitors do. "Back then, guys needed money. Nobody ever thought there'd be oil," says Doug Kinnoin's father, Dwayne, 71, whose father owned a "hamburger joint" in Stanley and bought up mineral rights in the 1950s and '60s. Dwayne won't say how much they're worth but is working with a financial planner so it "won't be eaten up in taxes" when he leaves it to Doug and his two sisters. Even in families that kept their mineral rights, shares have been diluted through inheritance. And many who will profit left North Dakota years ago, part of an exodus that National Geographic magazine featured in a January article, "The Emptied Prairie."

There are still dozens of ghost towns, but oil is starting to populate the prairie again. Ten oil-patch counties have grown as workers stream in or natives stick around for jobs that pay an average $79,624 annually, more than double the non-industry wage, according to the state employment agency. The Palermo Bar & Grill, the only restaurant in the nearly deserted town of the same name, is often packed.


Mark Nesheim says the furnace-like roar of a gas flare piercing the country quiet near his Palermo farmhouse, and the constant whoosh of traffic on the gravel road outside, is a small price to pay. "My grandfather broke this land with oxen" in 1894, says Nesheim, 61, driving his Chevy pickup by a cleared patch with nine oil holding tanks. Last year, it sprouted Durum wheat. Nesheim points down a rutted prairie trail that an oil company widened with gravel to bring in hundreds of truckloads of water and sand to crack loose the crude below. After months of waiting, he and his wife's first royalty check arrived in August. Representing six months of drilling in four wells, "It was quite large," says Nesheim, whose three siblings on the West Coast received similar payouts. "It was three times what I make farming in a year."


A noisy prosperity


Yet at a time of record-high commodity prices and with tourists returning to nearby Lake Sakakawea as the waters rise after an eight-year drought, not all feel oil lifting their boats.

"They say it'll trickle down," says Jay Mackey, 75, who owns a crop-dusting company and sees more corporate jets at Stanley's airport. "The only way it'll trickle down to me is if I get a tin cup and stand on the highway."

That could be dangerous. Three people have died in accidents involving oil trucks this summer. Roads built for farm tractors buckle under 75-ton tanker trucks. The county plans to tear up one 10-mile stretch of paved road because it's easier to let it go back to gravel than to keep filling car-size potholes. "I enjoy the nice, quiet, out-in-the-country type of deal," says Bert Hauge, 43. "You can't do it anymore." Hauge owns a cattle ranch in New Town and says the few mineral rights he shares with relatives aren't worth the disruption oil has wrought. His cattle suffer from dust pneumonia from the gravel "fog" kicked up by trucks. He's tired of non-English-speaking "strangers" in his yard. Pipeline crews tore down his fences and dug a trench through his pasture. He suspects oil workers stole his two golden retrievers. "Before, it was unheard-of to take your keys out of the car or to lock your doors," Mountrail County Sheriff Ken Halvorson says. "That's starting to change, and I don't think people like it." Ruth Zacher, a high school science teacher in Parshall, doesn't like how neighbors assume that the rig 400 yards from her house means she owns the minerals it's mining. She doesn't. "People are rude. They say, 'Why don't you buy your own school supplies?' " says Zacher, 45. "I don't appreciate them just assuming that because the well is on property we farm, that I was getting rich the easy way." Zacher worries that oil is warping community values that stress hard work as the route to riches. "There are people banking on death," she says. "I have overheard adults and kids in school say they'll be rich as soon as someone dies." Those who have oil often tut-tut the complaints. Dwayne Kinnoin says he's read the "bellyaching" about traffic and "riff-raff on the rigs" in letters in the local newspaper and calls them overblown. "Jealousy," he says. "They don't say anything to us but … you can just tell there's something irking them." Hennessey, the extension agent, knows of "people you have not talked to in 30 years who want financial help" from newly minted millionaires. And the oil boom is just beginning. On the Indian reservation, where more than one in three live in poverty, natural resources director Annette Youngbird says oil checks sent so far to the tribe and its members are "not the real money. The real money is when they start drilling and the royalties come in." In the meantime, many wait for the limited number of drilling rigs to set up near them. "A lot of people are hoping, crossing their fingers," says Karen Heinzen, former editor of the New Town News. But "you still have to get up each day and go to work as if you won't be hitting it big tomorrow."

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