Oil In “Mild State of Contraction” with Headwinds, But Texas Strong, Passing 5m Bpd: TAEP’s Ingham

Texas breezes past production milestones; small gains in E&P employment while the service sector suffers; the huge imbalance between oil and natural gas in overall Texas production value; the Texas Petro Index up even as crude prices fall — and then there’s the well completions anomaly

 

July 31, 2019

The US oil industry faces some economic headwinds as a mild state of economic contraction continues, but growth remains strong in Texas with the state’s daily crude output likely higher than 5 million barrels a day, according to analysis by Karr Ingham, economist for the Texas Alliance of Energy Producers (TAEP) and an originator of the Texas Petro Index.

The headwinds include the continued volatility of oil futures prices, steel tariffs and US protectionist trade policy along with natural gas issues including the price, associated gas production and pipeline constraints, Mr. Ingham said during TAEP’s Midyear Update in Houston on Wednesday.

But he emphasized that growth momentum remains, with Texas currently in the process of smashing the all-time record for crude production and, overall, daily oil output standing at 42% of total US production.

Permian Basin output is at 25% of all US oil production, he added — an astounding number when remembering that time  15 years ago when most thought the Permian to be in permanent decline.

And Texas crude production continues to breeze past milestones.

Beyond just besting the 1972 production record of 1.263 billion barrels, Ingham said, “I expect the state to produce something close to 1.6 billion barrels during 2019.”

And he said it appears Texas passed the daily production mark of 5 million barrels per day last month (if it didn’t happen in June, then it will any day now, he added as a qualifier, and it’s likely as high as 5.09 million barrels per day).

Also on the growth side, while oil and natural gas prices drop the value of Texas oil production, in actual value, is up more than 3% simply because oil production has increased by nearly 20%.

 

The Texas Petro Index

 

Karr and the TAEP are the originators of the Texas Petro Index, a composite index based on factors such as oil prices, drilling permits issued, number of rigs and oil and gas employment figures.

The index has a baseline of 100 based on January 1995 figures, and the June 2019 index figure was 207.1, up from 203 a year ago at this time.

The index reached its all-time high of 213 just last October, with declines in six of the past eight months and steady declines in each of the past four months, Ingham said — indicating a mild economic contraction now underway in the O&G industry — with a decline in overall value of 2.9% since October.

 

Declines But Increases Too

 

Among other declines, Texas drilling permits issued during the first six months of this year were down about 13%, but when compared to June of 2018 that figure increases to 18%, and the number of drilling rigs may be down only 0.01% this year, but for June year-over-year the drop is more than 12%.

And then there’s direct O&G employment which, according to state figures, reached its zenith at about 300,000 but, Ingham noted, had lost about 120,000, with a low point reached in 2016.

About 43,000 jobs have returned — but more than 2,000 jobs were lost since just last October, many in the oil and gas service sector, with “a tiny gain in E&P,” Ingham said.

Direct employment in O&G makes up between 2% and 3% of overall state employment, but vastly affects the state economy, especially considering the fact that O&G and their related industries pay 27% of state taxes.

Many of the jobs lost over the past few years will probably not return because of increasing productivity and rising technical expertise in the field.

And while US trade policies and steel tariffs are of course political in nature, they’re vexing for O&G companies that depend on steel, which can make up 10% of upstream spending — higher costs for steel and trade disagreements that reduce Chinese imports of Texas LNG introduce unneeded obstacles into industry expansions.

 

Natural Gas and the Big Picture

 

And finally there’s the natural gas glut, which has sent the commodity’s 2019 value down more than 31% so far while prices are down about 37%, Ingham pointed out.

Based on increased output from the Permian and historically considerably-lower gas prices, the actual value of Texas O&G production is about 89% oil and 11% gas, much of it a byproduct of oil E&P.

Associated gas production may be as high as 35% or 40% of total Texas natural gas production, far higher than ten years ago, said Ingham.

And while Texas oil well completions appear to be down considerably — about 12.8% this year — gas well completions are actually up 10% for the year so far, 15% or so since June 2018.

That anomaly uncovered Wednesday during a thorough and passionate Texas Petro Index presentation by TAEP economist Karr Ingham seems to exemplify this period of industry transition as Texas increasingly dominates US E&P, pipeline takeaway capacity slowly catches up with strong production and electricity generation moves toward a natural gas-burning model while demand slows worldwide even as political tensions rise.

— Mike Shiloh