Texas Alliance’s Petro Index shows deep trough in state’s oil and gas economy during 2020
The Texas upstream oil and gas economy suffered a 30% decline in 2020, according to the Texas Alliance of Energy Producers’ Texas Petro Index, largely due to COVID-19 and the resulting “catastrophic contraction” in global oil and gas demand. The TPI posted its 22nd straight month of decline in December 2020, falling to 134.3 for the month, down from 137.0 in November, and down 30.5% from the December 2019 index of 193.2. The Texas Petro Index is a statewide oil and gas activity index based at 100.0 in January 1995. It achieved its most recent cyclical peak of 213.8 in February 2019, and has lost over 37% of its value since then.
“The Texas upstream oil and gas economy was already in a state of decline before Covid-19,” said Alliance Executive V.P. and Petroleum Economist Karr Ingham, in exclusive comments to World Oil. The demand contraction in the U.S. and globally was easily the sharpest demand drop in the shortest amount of time on record, added Ingham. It occurred at a time when production levels were reaching record highs, a recipe for crude oil price declines at an unprecedented pace. The short-lived but devastating market share war between Saudi Arabia and Russia made an already untenable market situation dramatically worse, he explained.
Among the findings of the Texas Petro Index analysis for 2020:
- Monthly posted West Texas Intermediate crude oil prices fell by over 30%, on average, during 2020 compared to 2019; between January and April 2020, posted monthly crude oil prices declined 73% before rebounding in May.
- The monthly statewide Baker Hughes rig count declined more than 60% in 2020, ending the year at 155 in December, compared to 406 in December 2019; between February and August 2020, the rig count declined nearly 75%, falling to the lowest levels since Baker Hughes began tallying the weekly rig count in 1944. The weekly statewide rig count fell to 100 during the second week of August 2020.
- The number of drilling permits issued by the Texas Railroad Commission dropped 46% for the year; between February and May, however, the number of permits issued fell nearly 80%. The number of permits issued in 2020 was the lowest since at least 1960 (the Texas RRC website posts permit and completion data from 1960 forward). A record-low 251 permits were issued in May 2020.
- Nearly 60,000 direct upstream (exploration and production) oil and gas jobs were lost in 2020; however, since the most recent industry employment peak of over 228,000 jobs in December 2018, an estimated 78,000 jobs have been lost, a roughly 35% decline.
In his comments to World Oil, Ingham made some additional, salient points. “Some of the most striking findings are the longer-term trends in Texas rig count and industry employment,” noted Ingham. “For instance, the most recent peaks in February 2019 (Petro Index level), December 2018 (employment) and October 2018 (rig count) were not as high—nowhere near as high—as previous peaks in 2014. The Texas rig count in early December 2014 was in excess of 900, but in October and November 2018, the rig count had recovered to only 533.”
And then there is the matter of shrinking employment. “In December 2014, there were roughly 300,000 people employed in the Texas upstream industry,” continued Ingham. “But in December 2018, it had only recovered to 228,000. That’s stunning, when you really think about it.” Calling the job loss “devastating,” Ingham noted that that the 150,000 estimated upstream jobs remaining in Texas at year-end 2019 are the lowest total since 2005, when Texas crude oil production was only about one-fifth of production levels in 2019 and early 2020. “In addition, wages were pushed down sharply for those who remained on oil and gas company payrolls. The combined effects of lost jobs and lower industry wages only served to worsen the effects of COVID on the statewide economy, and on local and regional economies with strong ties to oil and gas production,” he said.
At the same time, commented Ingham to World Oil, “you have to factor in what was happening in state oil production, which achieved new highs in early 2018, and then continued to blow through those numbers. Texas production reached a final peak during March 2020, exceeding 5.4 MMbopd.” Between March and May, he added, crude oil production dropped sharply, falling an estimated 1.03 MMbpd, a decline of nearly 20% in two months. Since May, nearly 407,000 bopd have been added back to Texas daily production, which finished the year at an estimated 4.81 MMbopd.”
Before the Covid-induced demand plunge, Texas achieved a remarkable feat in production, Ingham told World Oil. “This production as high as 5.4 MMbopd in March 2020 was achieved with a smaller number of workers and rigs, which speaks to the incredible efficiency and productivity achieved by oil and gas operators, equipment and service companies, and drilling contractors. And now, you’ve got an industry suffering from its own successes, but to the great benefit of consumers.”
Indeed, the Texas share of total U.S. crude oil production had grown to about 42% in 2019. While production fell both nationally and in Texas, U.S. national oil output declined at a slightly faster pace. By year-end 2020, the Texas share of U.S. total production had grown to 44%.
A number of Texas upstream indicators have turned the corner from the worst of the Covid lows, said Ingham, most notably crude oil prices and the monthly statewide rig count. A small number of industry jobs were added back in the final four months of the year following the employment low point in August. According to current best estimates, about 2,300 jobs have been added back to company payrolls of the 78,000 jobs lost. “That the industry is adding jobs is encouraging, said Ingham, and it points to at least somewhat better times ahead in 2021,” said Ingham. “The Texas Petro Index is poised to find its cyclical trough, hopefully in the first quarter 2021, and begin to register a long and steady recovery from the ravages of Covid in 2020.”
Ingham offered World Oil some additional, final observations on the Texas E&P market. “The private equity investors have gotten tired of the development merry-go-round in many plays, and they have begun demanding returns on their investments,” he observed. “Also, the problem of associated gas that comes up with the crude oil in some places, like the Permian basin, has put a lid on drilling. So, will we ever, again, have the same number of rigs and employees at work in Texas, as we did in late 2014? The answer to that question is no, we will not!”
Ingham cautioned that all of his analysis merely assumes that the regular market forces are progressing. It does not, at the moment, take into account additional effects from political developments, particularly the rapid flurry of Executive Orders from the Biden administration.
