Index: Texas oil and gas production volumes down slightly in 2003 vs. 2002

By Paula Dittrick
Senior Staff Writer
HOUSTON, Jan. 19 -- The volume of oil and natural gas produced in Texas declined slightly in 2003 compared with 2002, but the value of that production rose dramatically, said the December 2003 Texas Alliance of Energy Producers-Wells Fargo Energy Group Petroleum Index.

Oil and gas production levels each declined 2.8% last year compared with the previous year, the index said. But commodity prices were strong last year, helping the industry thrive financially despite the lower production.

Texas oil production was worth nearly $10 billion in 2003, 19% more than it was worth in 2002, index statistics showed.

"Over $28 billion worth of Texas natural gas was produced in 2003, the most in recent history by a long shot. Gas production value in 2003 outpaced year-ago levels by a whopping 60%," petroleum economist Karr Ingham said at a Monday news conference.

Ingham, president of the Amarillo, Tex.-based Ingham Economic Reporting, calculated the oil production value averages using average West Texas Intermediate postings. For gas production values, he averaged first of the month prices from the Waha Hub and the Houston Ship Channel.

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.

Price cycles
The monthly index is based at 100 in January 1995. For December 2003, the index was 141.3, which is the highest since August 2001 when the index was 142.8.

"I expect that, in the next couple of months, we will surpass that," Ingham said. "It's not possible that levels of activity are going to keep going up," he added. "We can only hope that we see some stability in '04, but we may not."

The nature of cyclical price swings in Texas oil and gas production is not necessarily a good thing, he said.

For instance, Ingham said a fairly constant index level of 130-140 would be better for both producers and consumers than an index that swings drastically between peaks and valleys, as has been the case previously.

"Texas is solidly in the midst of a transformation from an oil-producing state to a gas-producing state," he noted, adding that might help smooth out the cyclical nature of the business.

He called for an "equilibrium price" that is high enough for producers to thrive but not so high that consumers begin to feel "pinched" or so high that politicians begin calling for hearings on what caused the price swing.

Upon questioning from reporters, he suggested $25/bbl for WTI posted oil prices and $4/Mcf for spot gas prices as equilibrium prices.

Rig counts
Rig counts and drilling permits responded strong commodity prices last year, Ingham said.

"The 477 rigs operating in December represent the highest year-end rig count since the inception of the index. In general, though, rig counts were slightly less than in 2001, averaging 449 in 2003 compared to 462 in 2001," he noted.

TRC statistics showed 12,664 drilling permits were issued in 2003, a 5-year high. The number of permits issued late in the year was high, suggesting continued strong drilling activity well into 2004, Ingham said.

Employment levels
Oil and gas employment continued its mild decline in 2003 because Texas producers, service companies and drilling contractors remain "in a very austere and conservative mode," Ingham said.

"Stable and high prices will help to turn petroleum-related employment around, hopefully resulting in the addition of some of the state's highest paying jobs," Ingham said.

Meanwhile the number of independents as tracked by the TRC is declining, said Alex Mills, president of the Texas Alliance of Energy Producers.

TRC figures show the state has lost 1,500 net "operators of record" in 2 years. Statistics from December 2003 showed slightly more than 6,500 operators in Texas, he said.

"There is no clear indication as to why people got out of the business except that it is much more expensive to do business in the state of Texas in 2003 than it was in 2001," Mills said. "We are in a worldwide competitive business. It's a world economy."

Of special concern are the difficulties that small independent operators encounter in obtaining bonds or other financial assurance needed to cover future well abandonment costs to comply with TRC regulations, Mills said.

Roy T. Pitcock Jr., Texas Alliance chairman, blamed increased regulations for the declining number of operators.

"I've talked to several former operators who simply say that they don't want the hassle anymore," said Pitcock, vice-president of operations for his family's oil and gas business, Pitcock Inc. of Graham, Tex.

Timothy H. Murray, Wells Fargo executive vice-president and energy group manager, said that the average US consumer does not understand that additional oil and gas investments do not necessarily mean higher oil and gas production levels.

"Everybody has got a manufacturing mindset," Murray said, adding that the risks involved in oil and gas exploration and production are unique compared with other industries. "People don't understand that the investment is going into the ground."
Contact Paula Dittrick at paulad@ogjonline.com

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