Texas Petro Index declines 15 percent

The Texas petroleum economy during the first six months of 2015 declined in every category, except in crude oil and natural gas production, according to the Texas Petro Index released today.

The TPI has declined 18% since peaking in October 2014 at 312.0 and is off 17% compared to June 2014.

"Virtually all components of the TPI are posting deep year-over-year declines, with the notable exceptions of crude oil and natural gas production, which continue to expand, and industry employment estimates in June," said Karr Ingham, the economist who developed the TPI and updates it monthly. "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."

Crude oil trends in Texas:

TPI indicators illustrate the apparent economic disconnect between oil production and wellhead prices in Texas.  According to the June 2015 TPI, in the past year the average wellhead price of crude oil has declined 44.7%, to $56.24 per barrel from $101.68/bbl in June 2014. Yet, in that same 12-month period, crude oil production in Texas grew a little more than 15.8 million bbls, a 17.2% increase.

"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," Ingham said. "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 barrels in 1972, with estimated annual production in 2015 totaling 1.284 billion barrels."

Natural gas trends in Texas:

Though dramatically less pronounced, natural gas production and pricing in Texas also are trending inversely.  According to the TPI, the gas wellhead price during the first six months of 2015 averaged $2.70/Mcf, 44 percent less than the average of $4.62/Mcf through the first six months of 2014. Meanwhile, Texas gas output this year through June totaled 4.3 billion cubic feet, 3 percent more than in the same time last year.

Growth in Texas natural gas production remains driven by "casinghead gas", or gas that is produced from wells drilled with the primary intent of producing crude oil.  "For most of the last five years, less than 10% of rigs at work in Texas were drilling primarily for natural gas, and yet Texas natural gas production has continued to increase over that period of time," Ingham said.

June employment anomaly

Ingham said estimated oil and gas industry employment in Texas during June of 285,500 may reflect a statistical false-positive by adding an estimated 4,600 jobs to the May (2015) estimate. "That increase makes little sense," Ingham said, especially considering that through May upstream oil and gas employment rolls had declined by about 24,000 from the December 2015 peak—roughly half the 50,000 direct job losses Ingham predicted at the outset of the economic downturn. "I suspect that increase is a temporary estimation phenomenon, because the Texas Workforce Commission bases monthly estimates on sampling data that will not reconciled with other employment reports until sometime in early 2016. According to the preliminary June data, roughly 20,000 jobs have been trimmed from upstream oil and gas payrolls in Texas.

"So if the employment numbers seem more favorable than expected in this cycle of contraction, it may well be that the final employment outcome won't be known until early next year, when the annual revisions take place."

The new 'optimistic' view

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 oil to return to already-oversupplied global markets—Ingham said, "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.

"Increasingly, the new 'optimistic' view is that the industry in Texas stabilizes at roughly current levels of activity," said Ingham.  "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 said.

"And if that is the case, where will the stimulus for growth in the Texas E&P economy come from?" Ingham asked rhetorically.  "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 said.

The Texas Petro Index

A composite index based upon a comprehensive group of upstream economic indicators, the Texas Petro Index in June was 255.7, 17% less than in June 2014.  Before embarking upon 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.

Among leading TPI indicators during June:

  • Crude oil production in Texas totaled an estimated 107.6 million barrels, about 15.8 million barrels (17.2%) more than in June 2014. The value of Texas-produced crude oil totaled more than $6 billion, 35.2% more than in June 2014.
  • Estimated Texas natural gas output was more than 722.4 billion cubic feet, a year-over-year monthly increase of about 1.3%. With natural gas prices in June averaging $2.69/Mcf, the value of Texas-produced gas decreased 40.4% to more than $1.93 billion.
  • The Baker Hughes count of active drilling rigs in Texas averaged 363, compared to 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 to the recent cyclical peak of 904 in the fourth week of November 2014.
  • The number of Texans on oil and gas industry payrolls averaged 285,500, according to statistical methods based upon Texas Workforce Commission estimates, about 2.9% less than in June 2014, but nearly 6.4% less than the record of 305,000 Texas oil and gas employees recorded in December 2014. 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.

Texas E&P Highlights during first-half 2015:

  • The statewide working rig count averaged 504, 42% less than during first-half 2014.
  • Texas Railroad Commission issued 5,564 drilling permits, compared to 11,860 permits issued in first-half 2014.
  • Producers recovered an estimated 622.6 million barrels of crude oil, a 17.8% year-over-year increase.
  • Crude oil wellhead prices declined 48.8% to average $49.81/bbl, reducing the value of Texas-produced crude oil by 39.6% to about $31.1 billion.
  • Natural gas wellhead prices decreased 44% to $2.70/Mcf, while gas production increased 3% to 4.3 trillion cubic feet, reducing the estimated value of Texas-produced natural gas to about $11.64 billion.
  • About 291,365 Texans on average were employed in the oil and gas production, drilling and service sectors, about 1.5% more than in first-half 2014.

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