Industry economist sees headwinds" inhibiting Texas U.S. upstream expansion in 2nd-half of 2019
AUSTIN Texas (Texas Insider Report) The oil and gas industry is facing numerous headwinds in 2019 including weaker crude oil prices compared to 3rd Quarter 2018 peaks steel tariffs which are directly increasing costs to operators and broader trade issues that are spooking markets and stunting global economic growth. And the Texas Alliance of Energy Producers Economist Karr Ingham says natural gas issues in West Texas Permian Basin are becoming an observable hindrance to further crude oil development.
The wild card right now is pipeline capacity and what its doing to West Texas Intermediate prices" said Ingham calling the constraints the issue of the day.
While Texas contribution to U.S. total crude oil production continues to increase with Texas daily production now in excess of 5 million barrels per day and comprising 42 of total U.S. daily crude oil production according to Ingham the crude and natural gas prices the statewide rig count the number of drilling permits issued and industry employment figures have all lost ground since their October peaks.
Yet the sheer volume of Texas crude oil and natural gas production continues to increase.
According to Ingham the creator of the Texas Alliance of Energy Producers Texas Petro Index the Texas oil and gas economys upstream sectors of exploration and production have entered into a mild state of contraction through mid-year 2019.
The Texas Petro Index declined for six of the last eight months (ending in July) including four straight monthly declines through June.
That signals a slowdown in statewide E&P activity" said Ingham noting that the TPI peaked in October 2018 and has lost about 3 of its value since then.
The June 2019 Texas Petro Index of 207.1 is down from the May TPI of 210.2 and is down 2.9 from the recent cyclical peak of 213.3 in October 2018.
About 70 of Permian-produced natural gas is associated gas" or gas production from crude oil wells and if the market had its way no additional gas production would be added in the region for the foreseeable future he said.
Virtually all growth in Permian gas production is by accident as a byproduct of drilling for crude oil and the prices for natural gas in the region often negative bear out this reality" said Ingham.
The increasing difficulty in disposing of unwanted natural gas is clearly cutting into crude oil development activity levels he said.
And the Permian Basin is driving Texas statewide trends.
Some 73 of the rigs working in Texas in June were drilling in Railroad Commission districts 7C 8 and 8A (the Texas Permian.) And about 64 of rigs at work statewide are operating in District 8 (Midland) alone.
The rig count has fallen steadily since November and the number of drilling permits issued statewide is on the decline as well.
Crude oil production itself continues to climb up by close to 20 through June compared to the first six months of 2018. The rate of increase is on the decline however with June monthly production posting an estimated 15 year-over-year increase down from over 30 in August and September 2018.
Statewide natural gas production is nearly 10 higher midway through 2019 when compared to the total through June of a year ago. (These estimates may be adjusted upward next month.) The increase is clearly driven by natural gas production growth in the Permian which incredibly continues to post 25-30 year-over-year increases even though virtually 100 of the rigs at work in the Permian are drilling for crude oil.
Industry employment has declined modestly since peaking at year-end 2018 dropping about 2200 jobs since then through June. Prior to that direct upstream oil and gas employment had grown by about 46000 jobs in the post-downturn expansion during which employment declined by about 115000 jobs Ingham says.
Oilfield economic activity including industry employment is not falling catastrophically in 2019 because crude oil prices are not falling rapidly. But there is no doubt upstream industry activity is presently contracting rather than expanding.
That seems likely to continue through the second half of the year as theres no apparent quick solution to the headwinds currently facing the industry" said Ingham.
The Amarillo economist who prepares the Texas Alliance of Energy Producers Texas Petro Index says its unlikely the index will approach its previous highs anytime soon barring an increase in crude prices beyond their current levels.
If they had the ability to get to market all they were producing that area would grow great guns for the foreseeable future. But market constraints influence the decisions made by companies day in and day out.
In this case were talking about pipeline constraints. Its the same with employment. This is what will rein things in a bit" he said.
What producers are receiving for their crude is not equal to the West Texas Intermediate posted pricing Ingham said.