Oil and gas industry contracts, production still increases in Texas during 2019

According to the Texas Alliance of Energy Producers (TAEP) Texas Petro Index (TPI), 2019 was a year of contraction in the Texas upstream oil and gas economy. This is the key finding enunciated by TAEP Executive Vice President and Economist Karr Ingham during a briefing for industry media in Houston on Tuesday.

According to Ingham, the index achieved its cyclical peak in February 2019 and declined for 10 straight months to finish the year at 193.6 in December, down 9.1% from the December 2018 TPI figure of 213.1. Through December, the TPI has lost 9.4% of its value since the February cyclical peak.  “The TPI was actually first knocked off its growth track in the fourth quarter of 2018, with sharp declines in crude oil prices,” explained Ingham. “But then, it recovered in early 2019 before embarking on a sustained decline for the balance of the year. Ingham is the creator of the TPI.  

The year was characterized by lower wellhead prices for crude oil and natural gas compared to 2018; a declining rig count; decreases in drilling permits issued; and lower numbers of oil and gas well completions. Total statewide industry employment is down as well, to 212,300 people during December 2019, with 14,400 jobs lost since October 2018. However, oil and gas “extraction” employment—employees on the payrolls of operating and producing companies—continued to increase through year-end, reaching 83,200 in December. The really sharp employment declines came in the “support activities” sector, which includes service companies and drilling contractors.

Price behavior. “Unlike the previous two contractions,” continued Ingham, “crude oil prices actually stabilized in 2019, helping to sustain higher levels of E&P activity than would otherwise be the case in a sharply declining price environment. And this helped to sustain industry employment on the operating/producing side of the industry employment ledger.” Ingham noted that during 2008-2009, crude oil prices peaked and then fell by over 70% in just eight months. In 2014, the crude oil price peaked in June before entering into a 20-month, roughly 80% decline.  In 2019, the annual average WTI posted price was down about 13%, compared to 2018, but following the sharp decline in fourth-quarter 2018 prices, it recovered to above $50 and was steady for the balance of the year. “It was simply a year of stable $53-54 oil,” explained the association analyst, “and while that’s obviously not the recipe for industry expansion, one can easily imagine a scenario much worse, because we’ve seen it the past two downturns.”

Activity levels increased steadily through October 2018, with crude oil prices climbing to over $67 on average that month (and over $70 for daily pricing early in the month). Oil prices in 2019 were effectively $15-20/bbl lower, compared to those peaks, and that will always push the rig count lower, along with permits, completions, and industry employment, said Ingham. Other factors weighed on activity levels as well, he said, most notably associated gas issues that only worsened in 2019, as operators struggled to find disposition solutions for the undesired natural gas. In some cases, that simply meant that oil wells were never drilled in the first place, pushing activity levels yet further downward.

The Texas statewide rig count averaged 463 in 2019, down about 10% from the 2018 annual average of 514.  The December monthly average of 406 was down more than 23%, compared to 531 rigs on average in December 2018.  The number of drilling permits issued was down over 12% for the year, while crude oil well completions were off some 18%.

Increased production. “At the heart of the issue are petroleum markets that are simply well-supplied, negating the need for higher prices that would in turn push activity levels upward,” commented Ingham.  “Even as prices, the rig count, and well completions have declined, production has continued to increase,” he said, noting that Texas crude oil production grew an estimated 15%, on top of a 26% increase in 2018.  Crude oil production in the state continued to set records, surpassing the 5.0-MMbpd mark in July, and exceeding 1.85 Bbbl for the year. Operators in Texas supplied some 41% of U.S. national crude oil production in 2019, with daily output at year-end comprising about 42% of U.S. total production. Furthermore, Texas set an all-time natural gas production record during 2019. The old record had been set in 1972, the same year that the oil output record originally was set, until it was shattered in 2018. Indeed, Texas oil production grew 668,000 bpd during 2019, which is roughly the equivalent of all the oil output in Egypt or Malaysia.

“Declining prices and activity levels will surely affect Texas production, and in fact have already done so by slowing the rate of growth in statewide crude oil production,” said Ingham. “But will production peak in the near term and decline by a significant degree, which is the implied outcome necessary to move crude oil prices higher?  Recent history says ‘no’.”  In the 2014-2016 downturn, continued Ingham, Texas daily production ultimately declined by 13%-14% in the face of 75%-80% declines in the price of crude oil; a 75% decline in the rig count; a 70% decline in the number of drilling permits issued; and the loss of over 115,000 industry jobs in the state. Current conditions are not nearly so severe, and $50-plus crude oil pricing, he said, suggests the maintenance of high production levels for the foreseeable future.

In conclusion, said Ingham, this means that Texas and U.S. consumers will continue to benefit from plentiful, affordable energy.  “The remarkable efficiencies achieved by the upstream oil and gas industry in Texas mean record and growing production with fewer employees and rigs,” he noted.  “The implications of this changing scenario are altering the connection between the industry and the statewide economy.”  However, he pointed out, that connection is still strong; the upstream oil and gas economy remains an economy-moving component of the broader statewide economy, and that will not change anytime soon.