After brutal slide in state’s upstream sector, Texas Alliance looks toward market bottoming out

By Kurt Abraham, Editor-in-Chief on 7/31/2020
Texas Alliance of Energy Producers Executive Vice President and Economist Karr Ingham
Texas Alliance of Energy Producers Executive Vice President and Economist Karr Ingham

During second-quarter 2020, COVID-19, as a global economic event, laid waste to energy markets, and due to the resulting economic lockdown and deep contraction in energy demand, “dealt a gut-punch to the Texas oil and gas industry, which continues midway through the year.” That is the assessment of the Texas Alliance of Energy Producers (Alliance), and it is borne out by the numbers coming from the association’s Texas Petro Index (TPI). The numbers were presented Thursday morning during a twice-yearly media briefing on the state of the TPI.

The TPI is a cyclical measure of the health and vitality of the Texas upstream oil and gas economy. In chronicling the 2020 contraction, the TPI posted a one-month record decline in April and has recorded the continued fall in activity levels through June. “Petroleum energy demand dropped off the cliff, sharply and rapidly, at the same time crude oil production was peaking, particularly in Texas and the U.S.,” said Alliance Executive Vice President and Economist Karr Ingham. The TPI was created and is maintained by Ingham.

TPI levels. “That would have been bad enough,” continued Ingham, but “throw in a market share temper tantrum between Saudi Arabia and Russia at the worst possible time, and you have a thoroughly devastating impact on energy markets.” Indeed, the TPI fell to 157.5, the lowest monthly index value since February 2017, when the industry was crawling out of the 2014-2016 downturn. The June TPI is down by over 24%, compared to the June 2019 level of 207.6, and is down by over 16%, just since February of this year. While this 157.5 figure is not as low as the 146.6 level of November 2016, for example, the decline has come a lot faster.

Oil prices. Ingham noted that in tandem with the Saudi/Russian overproduction, crude oil prices declined sharply in March, along with the Baker Hughes rig count, drilling permits, and upstream direct employment. Crude oil production in Texas peaked in March 2020 and has declined at a record pace since then, falling by over 710,000 barrels per day in just three months.

“We started the year with oil prices (futures prices) at about $60/bbl, and on March 19, we started to see the wheels come off,” observed Ingham. “Crude prices already had been worse in 2019 than in 2018.” Meanwhile, natural gas prices have not been better, said Ingham. “Gas prices have been pitiful for a long time. We’ve been producing so much of it (in Texas), and much of that has been by accident, as in associated gas output that comes from oil wells in the Permian.”

Oil production. Back to oil output, Ingham noted that “production is typically the last domino to fall.” Indeed, most upstream industry indicators in Texas were falling already during 2019. Yet, oil production continued to rise during last year before peaking in March 2020. “In 2015-2016, as a result of the price collapse beginning in 2014, Texas daily crude oil production declined by about 13.7% over an 18-month period of time,” said Ingham. But, in contrast,“ since March 2020, crude oil production in Texas declined by over 13% in just three months.” One overlooked factor that he pointed out is the phenomenon over the last several years, where “Texas oil production was averaging about 2 MMbpd over consumption.” Texas oil production averaged 4.72 MMbpd in June, down from 4.99 MMbpd in June 2019, a drop of 5.5%, and way down from the peak of 5.4 MMbpd earlier this year. By contrast, natural gas output was down 5.1% in June 2020 from a year earlier.

Drilling numbers. To no one’s surprise, “the contraction has taken a deep and sharp toll on the statewide rig count, and the number of employees working in the oil and gas production industry in Texas,” said Ingham. Starting in late May, he explained, the Baker Hughes rig count in Texas and the U.S. fell to its lowest weekly and monthly levels since the company began tallying weekly rig counts in 1944. “The Texas rig count averaged just 113 in March, down from over 400 at year-end 2019. The rig count has continued to decline each week, falling to 103 on Friday, July 24.”

And, in tandem, the numbers of drilling permits applied for by operators, and granted by the Railroad Commission of Texas, have fallen dramatically. “Somewhere around 250 drilling permits were approved in May (2020),” noted Ingham. “And this is as low a figure as I can find, with a bit of an uptick in June.”

Employment levels. Naturally, the massive downturn being chronicled has had a devastating effect on Texas upstream employment. Already, in decline for all of 2019, after reaching its recent cyclical peak in December 2018, employment began to fall at a much faster rate beginning in March. “From December 2018 to June 2020, direct upstream oil and gas employment in Texas has fallen by over 66,000 jobs, a decline of nearly 30%, with over 41,000 of those losses coming since February of this year,” said Ingham. “Incredibly, over 25,000 jobs were shed by the industry in the month of April, alone, easily the largest one-month industry employment decline on record, more than doubling the previous record.”

Indeed, the industry had added a whopping 127,300 jobs between October 2009 and December 2014 to a total of 297,100, only to lose 115,500 of those jobs by September 2016. But then, between September 2016 and December 2018, the E&P sector had gained back roughly 47,000 jobs, to a peak of 228,500. But by June 2020, that figure was down to 162,250.  

Bottoming out and moving forward. Despite all the negative factors, Ingham said he thinks the industry “is sputtering back to life,” encouraged by the recovery in crude oil prices since April’s low point. “Crude oil prices recovered to over $30/bbl in May and $40/bbl in June after falling below $10/bbl in April, including the notorious  minus $40/bbl on Monday, April 20,” said Ingham. “While that is well short of the $60/bbl range observed in late 2019 and early 2020, it points to a quick price response to the re-opening of the economy, and suggests that along with continued economic recovery and the accompanying growth in energy demand—as production continues to decline—that prices will respond accordingly.”

Asked by one media member whether he thinks the second Covid-19 wave afflicting much of the country at present is hurting the industry’s recovery, Ingham admitted that the virus “has stalled some of the improvement in demand components. The speed of economic reopening leads to the pace of improving oil demand.” He did voice “concerns about the long-term viability of some small independents, but we’ve still got a lot of them.”

As to whether technological improvements have helped the industry to weather the downturn better, Ingham said, “There is no doubt that these improvements have made the industry much more efficient. It is obvious that the industry has been quite good at this, and we’re (conducting) activity with significantly fewer rigs and employees.”

On the matter of when E&P employment will bottom out, Ingham said, “In terms of the number, itself, we’re in that 160,000-ish timeframe now. I don’t know a reason that we’d pick up from that number by then (three to four months). So, we might land at about 150,000 or so, and we haven’t been at that level since 2006. It will be just fine by me, if I’m completely wrong about this (and the figure is higher).

Asked by World Oil if he thinks the recent write-downs by the larger oilfield service companies signal that the upstream market is about to bottom out, or whether this is just a random occurrence, Ingham replied, “I tend to think that there are no random occurrences. I’m hopeful that what you suggest will happen. There probably is some element to that."

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