Latest Texas Petro Index shows ‘economic disconnect’

July 29, 2015
The Texas Petro Index (TPI) for June indicates that crude oil and natural gas production and jobs estimates in the Lone Star State increased from May despite the unfavorable economic climate.

The Texas Petro Index (TPI) for June indicates that crude oil and natural gas production and jobs estimates in the Lone Star State increased from May despite the unfavorable economic climate.

The composite index, based on a comprehensive group of upstream economic indicators released by the Texas Alliance of Energy Producers (TAEP), measured in at 255.7, down 18% compared with June 2014.

Before the current economic downturn, the TPI peaked at a record 312.0 in October 2014, marking the zenith of an economic expansion that began in December 2009 when the TPI stood at 187.7.

Crude output, jobs rise

Texas crude production during June totaled 107.6 million bbl, up 17.2% from June 2014. The value of Texas-produced crude totaled more than $6 billion, up 35.2% from June 2014. Gas output was more than 722.4 bcf, a year-over-year monthly increase of 1.3%. With gas prices in June averaging $2.69/Mcf, the value of Texas-produced gas decreased 40.4% to more than $1.93 billion.

TPI indicators illustrate the apparent economic disconnect between oil production and wellhead prices in Texas. During the past year, the average wellhead price of crude has declined 44.7% to $56.24/bbl from $101.68/bbl in June 2014. Yet, in that same 12-month period, crude production in Texas gained 15.8 million bbl, a 17.2% increase.

Baker Hughes Inc.’s count of active drilling rigs in Texas during June averaged 363, compared with 891 in June 2014. Drilling activity in Texas peaked in September 2008 at a monthly average of 946 rigs before falling to a trough of 329 in June 2009. In the most recent economic expansion, which began in December 2009, the statewide average monthly rig count peaked at 932 in May and June 2012.

At the low point of about 360 drilling units in the current contraction, the weekly rig count was down 60% compared with the recent cyclical peak of 904 in the fourth week of November 2014.

During the first half, the Texas Railroad Commission issued 5,564 drilling permits, compared with 11,860 permits issued in first-half 2014.

“The decline in the rig count and the number of drilling permits issued, and indeed in the number of wells drilled has yet to translate to a decline in Texas crude oil production, and in fact the rate of growth has yet to indicate a significant slowdown,” explained Karr Ingham, economist and TPI creator. “And in fact, it seems clear at this point that Texas crude oil production in 2015 will surpass its all-time high of 1.263 billion [bbl] in 1972, with estimated annual production in 2015 totaling 1.284 billion [bbl].”

The number of Texans on oil and gas industry payrolls during the month averaged 285,500, down 2.9% from June 2014 and 6.4% from the record of 305,000 recorded in December 2014, according to statistical methods based on Texas Workforce Commission estimates. However, the June total reflects an addition of 4,600 jobs from May, which Ingham believes may be a statistical false-positive.

The nadir of upstream oil and gas industry employment in Texas before the December 2014 record was 179,200 in October 2009. During the previous growth cycle, industry employment peaked at 223,200 in November 2008.

“Oil production simply has not declined in response to the clear market signal of the steep decline of crude oil wellhead prices, and I interpret the reversal in June of declining oil and gas employment in Texas as a methodological anomaly,” Ingham said.

Not out of the woods yet

Noting the recent $10/bbl plunge in oil prices that occurred when agreement on the Iranian Nuclear Accord was announced—fulfillment of which would allow presently embargoed Iranian crude to return to already-oversupplied global markets—Ingham remarked that “the retreat in price caused by the prospect of significant volumes of new oil entering the market suggests we are not out of the woods at this point in terms of the potential for a new round of price decline. If oil prices decline further, the possibility still exists for additional declines in the Texas rig count, the continued loss of upstream oil and gas jobs in the state, and continued deterioration of other economic indicators.”

Ingham said, “Increasingly, the new ‘optimistic’ view is that the industry in Texas stabilizes at roughly current levels of activity. And in fact, if production in Texas and elsewhere in North America continues to grow at any rate over the course of the cycle produced by this price decline, it seems quite possible that the new price norm may be lower than we might have hoped.”

He asked rhetorically: “And if that is the case, where will the stimulus for growth in the Texas E&P economy come from? In 2009 on the heels of natural gas price collapse Texas producers had a place to go—to crude oil-focused drilling and production with crude oil prices recovering to over $100/bbl. If natural gas and crude oil prices remain relatively depressed, we may be looking at a longer term scenario with oil prices in the $50-60/bbl range rather than $75/bbl, $80/bbl, or higher,” Ingham forecast.