HOUSTON ─ During the first six months of 2015, the Texas petroleum economy declined in every category except crude oil and natural gas production, according to the latest statistics from the Texas Petro Index (TPI), which was released July 28. Furthermore, the TPI has declined 18% since its peak in October 2014, and is down 17% compared with June 2014.

According to Karr Ingham, the economist who developed the TPI and updates it monthly, the index illustrates an economic disconnect between oil production and wellhead prices in Texas. According to the June 2015 TPI, the average wellhead price of crude oil has declined 44.7% in the past year to $56.24 per barrel (bbl) from $101.68/bbl in June 2014. However, in the same 12-month period, crude oil production in Texas grew a little more than 15.8MMbbl, 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.” He estimates annual production in 2015 will hit 1.284Bbbl.

Texas’ Natural Gas Trends

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 per thousand cubic feet (Mcf). That’s a 44% decline from the $4.62/Mcf average through the first six months of 2014. Meanwhile, Texas’ gas output this year through June totaled 4.3Bcf, 3% more than the same time last year.

Texas natural gas production, Ingham said, remains driven by "casinghead gas,” which is produced from wells drilled with the 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,” he added.

Employment Anomaly

Ingham said the estimated oil and gas industry employment figure in Texas during June─285,500─might reflect a statistical false-positive by adding an estimated 4,600 jobs to the May 2015 estimate.

"That increase makes little sense," Ingham said, citing that through May upstream oil and gas employment rolls had declined by about 24,000 from the December 2015 peak. He had predicted 50,000 job losses 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 be reconciled with other employment reports until sometime in early 2016.”

He continued, “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.”

Not Out Of The Woods Yet

Noting the recent $10/bbl plunge in oil prices that occurred when agreement on the Iranian nuclear accord was announced, 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.

In summation, TPI indicators for June are:

Crude oil production in Texas totaled an estimated 107.6MMbbl, about 15.8MMbbl (17.2%) more than in June 2014. The value of Texas-produced crude oil was more than $6 billion, 35.2% more than in June 2014.

Estimated Texas natural gas output was more than 722.4Bcf, a year-over-year (yoy) 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 with 891 in June 2014.

The number of Texans on oil and gas industry payrolls averaged 285,500, according to the Texas Workforce Commission. That’s about 2.9% less than in June 2014, but nearly 6.4% less than the record of 305,000 recorded in December 2014.

Texas’ E&P highlights for the first half of 2015 include:

The statewide working rig count averaged 504, 42% less than during first-half 2014.
Texas Railroad Commission issued 5,564 drilling permits, compared with 11,860 permits issued in first-half 2014.

Producers recovered 622.6MMbbl of crude oil, a 17.8% yoy increase.

Crude oil wellhead prices declined 48.8% and averaged $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 4.3Tcf, reducing the estimated value of Texas-produced natural gas to about $11.64 billion.

The TPI is a composite index based on a comprehensive group of upstream economic indicators.