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Texas Producers Scrap Drilling Plans, Lay Off Workers

The "punishing economic contraction" and low wellhead energy prices continued to tie Texas producers' hands in August, with many scrapping drilling plans and laying off workers, according to the latest Texas Petro Index (TPI).

The TPI is a composite index issued monthly by the Texas Alliance of Energy Producers (TAEP). Based upon a group of upstream economic indicators, the August index fell to 206.9, which is almost 28% below the peak of September and October 2008, the TAEP said last week.

"Just as the entry into the current downturn was part of a process, exiting from this contractionary cycle will be part of a process, as well," said Karr Ingham, a petroleum economist who created the TPI. "Unfortunately for Texas producers, wellhead prices continue to trail levels of one year ago by substantial margins, so drilling activity remains low by historic standards, drilling permit applications are off, and employers continue laying off workers as they wait for a turnaround."

Natural gas prices in the state averaged $3.36/Mcf in August, which is 60% lower year/year, the TPI reported. The wellhead value of Texas-produced gas in 2009 through August totaled about $18.2 billion, which is less than half the $47.4 billion received through the first eight months of 2008. Meanwhile, Texas crude oil prices averaged $67.55/bbl in August, up from a low of $35.87/bbl in February. The wellhead value of Texas crude oil produced through the first eight months of 2009 totaled about $13.76 billion, or less than half the $30 billion received over the same period of 2008.

The combined value of oil and gas produced in Texas between January and August was less than $32 billion, versus more than $77 billion for the same period of 2008, according to the TPI.

Using Baker Hughes Inc. data, the TPI reported that the count of active drilling rigs in the state averaged 366 in August, down from a peak of 958 rigs at the end of August 2008. The rig count "reached a low point of 320 rigs in the second week of June 2009 before rebounding to 340 rigs by mid-July," the index noted. Drilling permit applications for August totaled 1,043, which brought total permit filings for the year to 7,770. By comparison, producers had applied for more than 16,300 permits through the first eight months of 2008.

A lot of energy jobs also have been lost in the past year. Workers employed by the state's energy industry at the end of August totaled 202,700, compared to a peak of more than 240,000 in December 2008, according to the Texas Workforce Commission.

Lower commodity prices eventually will help spur oil and gas demand, helping to alleviate the supply glut that is keeping prices low, particularly for natural gas, said Ingham. As demand for oil and gas increases, "various measures of industry activity" will recover. For now, however, "the industry remains in decline and jobs continue to be shed."

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