By Mella McEwen – Midland Reeporter-Telegram – What had been a significant contraction in the Texas oil and gas industry was magnified as the COVID-19 pandemic spread around the globe.
“The industry was already in contraction, had spent 2019 in contraction before COVID-19 came along,” said Karr Ingham, petroleum economist with the Texas Alliance of Energy Producers as he unveiled a mid-year update of the association’s monthly Texas Petro Index.
The index fell to 157.5, the lowest monthly index value since February 2017 when the industry was recovering from the downturn of 2014-2016. The June Texas Petro Index is down by over 24 percent compared to the June 2019 TPI and is down by over 16 percent since February.
During a virtual press conference to discuss the index, Ingham said the industry’s strong growth got knocked off track in the fourth quarter of 2018, “went along sideways, and then from February 2019 we began losing rigs, losing employees, though production itself continued to climb. Then COVID takes hold and what was a significant contraction falls off a cliff.”
The index’s decline recorded the largest decline in its history in April, dropping 12 points, he said.
Crude oil prices declined sharply beginning in March, along with the rig count, drilling permits and upstream (exploration and production) 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.
“In 2015-16 as a result of the price collapse beginning in 2014, Texas daily crude oil production declined by about 13.7 percent over an 18-month period of time,” said Ingham. “Since March 2020, crude oil production in Texas declined by over 13 percent in just three months.”
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. Starting in late May, 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 state’s rig count ended weeks of declines, and was up one last week for a total of 104.
In the third week of November 2014, there were 906 rigs in Texas, Ingham said. By May 20, 2016, the Texas rig count had plunged 81 percent to 173 before recovering to an average 533 rigs in October 2018.
“Texas could drop below 100,” he said. “It could happen, but there’s anecdotal evidence of rigs being stood up again. We’re really in extraordinary times.”
He said 250 drilling permits were issued by the Railroad Commission in May, “the lowest I can find. They bounced back just a touch in June, but again we’re at an extraordinary low in drilling permits.”
Oil and gas employment, already in decline for all of 2019 after reaching its recent cyclical peak in December 2018, 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 percent, with over 41,000 of those losses coming since February of this year. More than 25,000 jobs were shed by the industry in the month of April, the largest one-month industry employment decline on record. It’s more than double the previous record.
Employment has been under extraordinary pressure the last few months, Ingham said, and though energy jobs continue to be lost, he said those losses are tapering off.
“The hope is at least we’re arriving at some trough in these numbers, somewhere, and this would suggest we’re getting there. Employment will still be lousy, but it’s better than losing another 6,000 to 10,000 jobs a month.”
Crude oil prices have bounced back to around $40 and Ingham said gasoline demand has made a significant recovery as economies begin to reopen. “The first thing, as we open again, is people getting into their cars and going somewhere, even if it’s just around town, then short road trips,” he said.
He said he expects the rig count to reach its bottom in the next week or two while the recovery in employment may still be a few months out.
“This is a set of dominos, and that’s how it goes,” Ingham said. “The price goes first due to whatever caused that event, up or down; permits and rig count and then employment. That’s not the last domino to fall; production is typically the last to fall. In terms of recovery, it’s like standing dominos back up. We’ve stood the price domino up, not quite all the way. The rig count, maybe we’ve reached the bottom; we will soon. Employment, I think that’s a little ways out — a couple, three months out. I hope that’s all there is. Even when we hit bottom, we’re still at extraordinarily low levels.
“What’s the scenario to where we get back to close to normal? Who knows what that is? Who knows when we’ll have a rig count of 300 in Texas. When will we add employees back in good chunks? All that has to do with the nature of recovery from COVID-19. … Until we have certainty, it’s virtually impossible to answer those questions.”
