Index: Texas oil and natural gas production industry on the mend

Paula Dittrick
Senior Staff Writer
HOUSTON, May 19 -- The Texas oil and natural gas production industry has fully recovered from the 2002 recession and is positioned for growth throughout 2003, indicated a newly released Texas Alliance-Wells Fargo Petroleum Index.

The index reflects numerous Texas oil and gas production and exploration indicators incorporating commodity prices, rig counts, drilling permits, oil and gas completions, production volumes, and industry employment. Statistics include figures from the Baker Hughes Inc. rig count and the Texas Railroad Commission.

The Texas Alliance of Energy Producers organized the index, and Wells Fargo Bank NA sponsored it. The alliance is a statewide organization representing 2,000 members. The alliance was created in 2000 with the merger of the North Texas Oil & Gas Association and the West Central Texas Oil & Gas Association.

The index, released at a Monday news conference, has been under development for a year.

"The index typically has a lot of momentum behind it, too, which means growth should continue for at least the balance of 2003, " said Karr Ingham, an oil industry economist who created the index, which will be released monthly. He is president of the Amarillo, Tex.-based Ingham Economic Reporting.

Price cycles
Price instability is the enemy of both producers and consumers of petroleum products, Ingham said, adding the petroleum index has recorded the nature of cyclical price swings in Texas oil and gas production.

The index is based at 100 in January 1995. The state's petroleum economy experienced strong growth through the fall of 1997 when prices began to retreat and oil patch activity rapidly followed. The index topped at 119.6 in November 1997, and then began a 19-month, 30% slide.

"The oil production industry in Texas has experienced some vicious cycles, particularly in 1998 and early 1999. However, the state's petroleum economy has improved over 50% since June 1999, the lowest point of the index (83.7), and some 10% since the most recent downturn was completed in November 2002," Ingham said. The index for March 2003 was 128.1.

The composite nature of the index proved its value in 2002 as prices recovered and stabilized above $20/bbl on the New York Mercantile Exchange. But drilling activity failed to follow last year despite favorable prices.

"Exactly why this occurred is educated guesswork, but it seems apparent that Texas producers, having become more sophisticated about the nature of price movements realized that prices in 2002 contained something of a 'war premium' and were based less on market realities than on speculation about what might happen in the Middle East," Ingham said.

As strong prices held steady late in 2002, activity began to increase, resulting in the current strong upward move in the index, he said.

Index uses
Timothy H. Murray, Wells Fargo executive vice-president and energy group manager, said he believes the index will be "a more insightful index" than others already available because this one compiles so many elements into its composite number.

"It evaluates the risk of investing in this industry whether it's financial capital or human resources capital," Murray said. He said it would be helpful to bankers, particularly smaller community banks.

Producers also can learn about industry trends from the index, said Roy Pitcock Jr., Texas Alliance chairman. Having a family oil and gas business in Graham, Tex., Pitcock said he particularly was interested in the employment figures and the drilling permit statistics.

More emphasis on gas
Ingham said data covered by the index from 1995 until now shows mostly peaks and valleys with very few level periods that lasted for very long. "A gas-driven economy could be the stabilizing factor," he said. Traditionally, Texas has been very responsive to oil prices, but he said he has seen the industry place a greater emphasis on natural gas in the last 18 months.

Murray said he is bullish on gas prices, adding that Wells Fargo predicts that NYMEX gas prices are unlikely to drop below $4/Mcf anytime this year. Some people are saying gas prices are unlikely to drop below $5/Mcf this year, he added.

"Depend on storage levels, we could see a dilemma this fall," Murray said. A gas supply shortage would drive up prices.

"We could see a pretty dramatic drop in oil prices," Murray acknowledged, adding it depends upon what happens with Iraq production.

Ingham said he expects to see "vibrant" industry activity throughout 2003. He said NYMEX oil prices of $20-25/bbl and gas prices of $4-5/Mcf "create a price environment that is good" for both consumers and producers.
Contact Paula Dittrick at paulad@ogjonline.com


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