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Texas Energy Industry Sees Downturn

Buoyed by the Barnett Shale's output, the Texas oil and natural gas economy rose for six years straight, but all of that came crashing down late in 2008, according to the Texas Alliance of Energy Producers.

The 2008 late-year economic recession "undercut demand" and the falling wellhead prices discouraged the state's exploration and production (E&P) companies from applying for drilling permits or digging new wells, according to the December 2008 Texas Petro Index. The index is done on behalf of the alliance, which is the nation's largest state association of independent oil and gas producers.

"The Petro Index reached a record high of 282.3 in September 2008, and literally every indicator of the Texas E&P industry's economic health ended 2008 with a higher annual average than in 2007," said economist Karr Ingham, who created the Petro Index in 2003. "However, leading indicators -- such as wellhead prices, rig counts, production values and drilling permits -- all have suffered severe drops since the Petro Index peaked."

A composite index based upon a comprehensive group of upstream economic indicators, the Texas Petro Index in December 2008 declined to 271.8, down from 278.6 in November and a record 282.3 in September. The Petro Index in December 2007 came in at 244.6.

The December 2008 Petro Index, he said, "found that petroleum industry employment declined for the second straight month, indicating the Texas oil and gas industry is firmly in the grasp of the U.S. and global economic downturn and really picking up negative momentum. Clearly, the Texas oil and gas industry is only beginning to work through this downturn. We shouldn't be lulled into thinking we will escape without notable industry job losses that typically come with such a cyclical decline."

Ingham said he could not predict the depth of the Texas E&P economic contraction or how long it would persist. However, "an especially severe downturn of oil and gas activity could set the stage for a spectacular resurgence of commodity prices when economic recovery does begin," he noted. "If the oil and gas industry slowdown sidelines a lot of drilling and development capacity, when the economy begins to recover, increasing energy demand will run up against diminished exploration and production capacity, thereby causing a rapid price increase."

Alliance President Alex Mills said policymakers in Texas and Washington, DC, "must recognize that danger. They must understand the harm that unnecessarily high energy prices would inflict upon both consumers and economic recovery. They must act quickly to help producers preserve domestic oil and gas production capacity; it has become more important than ever in the current economic crisis."

The number of Texans employed in the state's oil and gas industry peaked in October and declined the next two consecutive months for the first time since 2002, according to the Texas Workforce Commission (TWC). The TWC reported industry employment dropped to 221,200 in December from 226,300 in November and from 226,800 in October. Industry employment in December 2007 was 213,400; in September 1995, the base year of the Petro Index, that same number was about 149,300.

Meanwhile, the Baker Hughes rig count in Texas declined about 6.6% year-over-year in December to average 826 rigs, a low point for 2008. The December count brought the year-long average of active rigs in Texas during 2008 down to 898. In 2007, an average of 834 drilling rigs was active in Texas on any given day.

In December natural gas first-of-month spot index prices in Texas averaged $5.94/Mcf, up from November ($4.95/Mcf), but well below monthly averages reached earlier in the year, according to the index. The average price of natural gas sold in Texas during 2008 was $8.20/Mcf, compared with $6.42/Mcf in 2007. Natural gas production in the state totaled more than 632.6 Bcf, or 20.4 Bcf/d, in the last month of the year. The output was 3.8% higher than in November and 3.5% higher than in December 2007. For 2008, Texas gas output was close to 7.4 Tcf, or 20.15 Bcf/d, which was 7.3% higher than in 2007, when output reached 6.87 Tcf (18.80 Bcf/d) in 2007. In 1995, Texas gas output was 5.7 Tcf, or 15.6 Bcf/d.

Crude oil prices continued a precipitous decline during December, falling to $37.69/bbl from an average $54.04/bbl in November, the index noted. The average wellhead price of Texas crude in June 2008 was $131.08/bbl; in December 2007 it averaged $88.12/bbl. Oil production in Texas jumped during December to more than 33.9 million bbl, or 1.094 million b/d, up from about 29.2 million bbl (975,952 b/d) in November, bringing year-long crude output during 2008 to a preliminary total of 397.8 million bbl (1.087 million b/d). In 2007, Texas producers recovered about 389.9 million bbl (1.068 million b/d) of oil; in 1995, the base year of the Petro Index, Texas produced about 552.2 million bbl (1.513 million b/d).

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