Oil, gas growing into key piece of Austin’s economy

A lot has changed since Bud Brigham moved his oil company to Austin in 1997.

Back then, he was one of a few working oilmen in a town that was blossoming into the high-tech center it is today.

While Austin started to boom, oil and gas companies like Brigham’s quietly went about their business. And under the radar, the industry that has become synonymous with Texas spread its roots throughout the state’s capital.

“It’s on the map now,” Brigham said. “It’s on the map, and people are starting to think about Austin as a place to come to potentially relocate or network with other oil and gas companies.”

With new technologies for both drilling and communications loosening the ties between engineers and the wells they drill, the industry’s employment base in Austin surged by almost one-third from 2009 to 2012.

The industry’s employment base here remains much smaller than those of the area’s high-tech firms, government agencies and universities. But a massive influx of money pouring into local energy firms, combined with the industry’s ripple effect through the region, is drilling oil and gas deeper and deeper into the Austin economy.

No deal stamped Austin as a potential landing spot for oil and gas firms more than Brigham’s sale of the exploration and production company he brought to the city: Brigham Exploration. Statoil, the Norwegian national oil company, paid $4.4 billion for Brigham in 2011.

That deal added a degree of imprimatur to Austin’s oil and gas ecosystem, industry officials say, noting that Statoil could eventually base all its North American onshore operations at its offices overlooking Lake Austin and the Loop 360 bridge.

Yet the lifeblood of the industry’s presence here remains the smaller, independent production companies and manufacturing firms. Brigham, for example, has recharged with Brigham Resources, a new company of 31 employees, and, flush with $650 million of private equity, expects to have as many as 50 workers by year’s end.

“Small firms with growth potential are the lifeblood of the Austin economy,” said Brian Kelsey, principal at Civic Analytics, a local economic consulting firm. “Eighty-two percent of firms in Austin have fewer than 20 employees, and collectively they account for nearly 1 out of every 5 jobs. … Eighty-three percent of firms in the mining and energy sector have fewer than 20 employees.”

From 2010 through the first half of this year, private equity invested in Austin-area energy companies has outpaced similar investments in local information technology companies by almost $770 million, almost 27 percent more, according to PitchBook Data Inc., a Seattle-based research firm that tracks private equity and venture capital deals.

Local exploration and production firms have accounted for much of the energy investments. Executives at Three Rivers, who last year sold their first incarnation for $1 billion to Concho Resources Inc., have reloaded with hundreds of millions of dollars in private equity funding for another turn. Other firms, including Venado Oil and Gas, which has raised $275 million since 2011, have pulled in similarly large investments.

And then there’s Jones Energy, a long-standing family-owned Austin outfit that went public last month in a $172 million initial public offering.

Technology has fundamentally changed the industry. Gone are the days of wildcatters drilling 10 holes in hopes of hitting one. With horizontal drilling and hydraulic fracturing, decent drillers hit on more than 90 percent of their efforts.

But each of those wells is much more expensive, on the order of $8 million apiece, officials said. Optimizing each well and cobbling together holdings large enough to attract the attention of the major oil and gas companies requires hundreds of millions of dollars.

That money has gushed into the Austin economy in recent years. Remove all the oil and gas companies, their employees and their economic ripple effect from the Austin metro area, and you’d shrink the regional economy by more than 5 percent, according to a data model compiled by Economic Modeling Specialists International, an Idaho-based economic consulting firm.

“It’s not purely an employee count thing,” said Jonny Jones, who brought Jones Energy to Austin in 1993 and built the firm from 10 employees to 80. Local oil and gas firms “don’t employ a tremendous amount of people, but they do employ high-skilled labor that makes a lot of money that flows back into the economy.”

‘Leverage our strength’

David Honeycutt remembers the oil boom of the early 1980s, when people cut deals on napkins in Houston restaurants. He also remembers the subsequent bust, which changed the industry forever.

“If you were going to be in this business, you suddenly needed to have more responsibility around what you were doing from a financial standpoint,” said Honeycutt, head of Texas American Resources, an exploration and production company headquartered in the Frost Tower.

That meant bringing in a much higher caliber professional, he said, on both the financial and the engineering sides.

While local oil and gas firms had just 4,277 full-time, part-time and self-employed workers in 2012, less than 1 percent of the Austin-area job base, those jobs paid far more than median wage in the area, according to EMSI data. Mike Wichterich, the head of Three Rivers, said his 45 employees take home an average of $130,000 or more a year.

That income helps fuel the industry’s far-reaching impact on the Austin economy, and it has some wondering whether local business and government leaders ought to do more to encourage more growth.

“Austin is already at the forefront of smart grid and consumer energy research with Pecan Street Inc.,” Kelsey said. “Why not leverage our strength in technological innovation to work toward a more sustainable future in partnership with other types of energy companies?”

From IT to oil

The same IT revolution that transformed the Austin economy opened the door for oil and gas companies to move here. With real-time communications, advanced drilling equipment and the ability to remotely monitor wells 24/7, the geographical ties to the oil basins have been loosed.

“These guys can sit there in their flip-flops and shorts, like the technologists used to in the Internet boom, geosteering wells off their iPad — anywhere the drilling is going on,” said Mike Bengtson, a partner at the Baker Botts law firm and one of the few Austin attorneys focused on oil and gas clients.

Those technological advancements have allowed entrepreneurs, engineers and most professional workers to live where they want. So, given the choice between Austin and, say, Midland, Tulsa or even Houston, more oil and gas professionals are choosing Austin.

When Three Rivers posted a few job openings on his website, Wichterich said, the company got more than 100 résumés within days.

“People are saying, ‘The technology works. Where do I want to live?’ ” he said. “And then they start picking the best cities in the countries to live in. … Austin is a great place to live.”

Gary McKinney always thought so. McKinney grew up in the Hill Country but, as head of Reliance Energy, now spends most of his time in Midland. He’s hoping to change that.

The company has already moved most of its accounting and financial operations to Austin — about 25 of its 170 employees. Within the next year, he’d like to move the rest of the financial operations. The company might never be “based” in Austin per se, he said, but it will have a notable presence here.

More attractions, less competition

The Austin lifestyle has been a key recruiting tool, industry officials said, but the fact that Austin is not an oil and gas hub offers other benefits. Local companies don’t have to fight tooth and nail with dozens of similar firms for the same talent.

Texas American Resources pulled several of its key engineers from major firms, Honeycutt said. The big companies do an excellent job of training workers and moving them along to the second stage of their careers, at which point many of them want to take a more active role and see the tangible fruits of their labor.

“They don’t want to just be a widget in a giant company, doing all this work and just passing it to a middle manager and not really knowing what happens with it,” Honeycutt said.

And, given that many of the leading oil and gas professionals come out of the cutting-edge programs at the University of Texas and Texas A&M, Central Texas has a strong allure both for graduates and for companies looking to tap into the schools’ expertise.

The research at UT provides a particularly strong draw for many oil and gas companies as well. The school’s department of petroleum and geosystems engineering is home to more than $21 million of external research, said Tad Patzek, the department chair. The UT Bureau of Economic Geology is clearing $30 million a year, Patzek said.

“We are a big magnet for all the major oil and gas and chemical companies that work with the petroleum industry to come to Austin and establish research projects,” he said.

Downstream services

The mention of oil and gas exploration conjures many an image, but few as iconic as the flare — that bright flame of burning gas off the top of a derrick or the side of an offshore oil rig.

Ironic, perhaps, that one of the leading manufacturers of those flares isn’t located in Houston, but in Austin.

Flare Industries is one of about a “dozen or so serious competitors” for technologies designed to burn off excess gases as cleanly as possible, said CEO Michael Hainsworth. The company, based in North Austin, has about 200 customers around the world, and about 170 of its 300 employees work here.

Flare isn’t alone, and other Austin-based companies have made headlines outside the industry in recent years. Paul Deere, the CEO of Tolteq, a Cedar Park company that makes cutting-edge drilling tools, is an Austin finalist for this year’s Ernst & Young Entrepreneur of the Year.

USA Compression, which provides gas compression products and services, made a splash in January with its $198 million initial public offering. Eric Long, who founded the company in 1998, said about 30 of its 270 worldwide employees work in Austin, mostly executives and managerial staffers.

“It takes a lot of money to buy our gizmos,” Long said, “so what (the IPO) allows us to do is to really tap the public marketplace, have stability with our financing structure and grow our business in the future.”

The ripple effect

Before he founded Drillinginfo Inc. in 1999, Allen Gilmer spent the better part of a decade exploring for and producing oil and gas. And while he wouldn’t call his Austin-based company an oil and gas firm, it has filled an increasingly critical role for the industry, taking reams of vital land data and records and putting them online.

“Our whole concept here was to go out and create a system in which you had very broad access to information so you could make better decisions,” Gilmer said.

Like those at Drillinginfo, the 900 people who work for Emerson Process Management in Austin don’t show up in the oil and gas employment numbers, but the bulk of their work goes directly into the central nervous system of hydrocarbon production.

From their two buildings in Round Rock, the company produces the technologies that govern anything moving through a pipe, said Jim Nyquist, president of Emerson’s systems and solutions business. Of the unit’s $7.9 billion revenue in its last fiscal year, about 40 percent came from oil and gas companies.

“If you look at a statistic, I guess we show up in a technology or manufacturing segment,” Nyquist said. “We don’t show up as oil and gas. Yet we feel as much a part of the oil and gas as we do technology and manufacturing.”

Nor do those jobs show up in the larger sphere of what EMSI defines as “extended proprietors,” essentially people who draw income from an industry. For the oil and gas extraction niche alone, adding in the extended proprietors boosts the area employee base more than tenfold—to 15,775 from 1,315, according to EMSI.

The massive extended proprietor class, which would include owners of oil and gas trusts and others who receive royalties from drilling activities, illustrates the broad impact of the industry on Austin.

“People who make some portion of their income from oil and gas — Tarrytown would be about two-thirds gone without it,” Gilmer joked.

Through its portfolio of oil and gas trusts, one of the largest in the country, Frost Bank handles about 800 accounts and about $170 million to $180 million of revenue annually, said Baker Duncan, senior vice president of oil and gas trusts. That’s an average of roughly $200,000, income that has been “life changing” for many people in the Eagle Ford play, which stretches south and west of San Antonio, Duncan said.

“We had people who were getting no income at all making a million dollars now,” he said.

The Statoil effect

Statoil won’t change many lives in Austin, but its presence here could help lift the area’s reputation in the oil and gas industry.

“To me, the Statoil transaction might have been an inflection point; it might have been a real step-change,” Brigham said. “I’m thinking they may be showing larger companies, ‘Hey, this isn’t just a community of small independents and promoters. This has become a real oil and gas community.’ ”

The industry has noticed the Statoil deal, as well as the success of other midsize upstream companies in Austin. And while no one expects Central Texas to come close to competing with Houston on oil and gas terms, there’s no longer any particular disadvantage to being here.

“It’s no longer important for vendors to be in the same city,” said Jim Rebello, a Houston-based managing director of Duff & Phelps, an investment bank and advisory firm. “Now, companies are of mindset that, if it’s quality product, they can’t afford to care if it’s in their backyard or not. They just need to source the best quality.”

Nor does an Austin headquarters pose a barrier to the massive amounts of capital that firms need. Money finds its way to respected management teams, said Mark Welsh, a partner at EnCap Investments, an $18 billion private equity firm that focuses on the oil and gas industry.

Welsh said many of EnCap’s investors live in Austin, so they always paid close attention to activity in the area. And that expanded with the $150 million the firm invested two years ago with Austin’s Venado Oil and Gas.

“There’s no stigma for being here anymore,” said Bengtson, the Baker Botts attorney. “The money understands you don’t have to be in Houston. … Houston’s the hub, but being in Austin or Dallas or Oklahoma City or Tulsa is kind of the same at this point.”

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