If demand for oil and natural gas continues to decline, damage to the energy industry could be significant and the downturn may last up to three years, according to several energy experts.

“We could be at $70 oil much faster than we predict, but I think we’ll be at $30 if demand is down again in 2010,” said Dan Pickering of Tudor Pickering, Holt & Co. Securities Inc. He spoke at the Offshore Technology Conference (OTC) in Houston earlier this month.

Most of the U.S.-based independent exploration and production (E&P) companies should be able to make it through the recession without having to consolidate, but debt-ridden gas-heavy companies will struggle, he said.

“You will see some guys overstretched and not make it through this natural gas downturn, but most independents will remain healthy…although they’re limping along now,” Pickering told an audience. “It will be tough in the back part of the year, but service costs are coming down, which should help, particularly on the drilling side.”

J. Marshall Adkins and William Eagan of Raymond James & Associates Inc. came away from the OTC with a view that the industry’s focus has shifted from “adding capacity to implementing numerous cost-cutting measures (or survival mode) for what could be a multi-year downturn” in the energy sector.

“Last year, we came away from the single biggest oilfield conference thinking that we didn’t expect investment in the oilpatch to slow down anytime soon thanks to robust commodity prices and solid E&P economics,” said Adkins and Eagan. “A year later, the industry has undergone the most rapid and massive meltdown in modern history. What happened? The global economy collapsed, credit markets seized up, crude and natural gas prices were cut in half, and the U.S. rig count dropped 55% from its peak.”

A common theme for “hundreds of companies” at OTC “was that business was bad, but everyone was hoping for a rebound,” said the duo. “Unfortunately we don’t expect that rebound to happen anytime soon as we may be in the early stages of a multi-year down cycle for the industry, eerily similar to the early 1980s.

“Many companies have yet to truly feel the pain because pricing for equipment hasn’t dropped dramatically yet. The lack of any ordering activity is creating a mirage where prices appear to be holding up as equipment and services priced a year ago flow though the earnings statements. In reality, prices will fall and fall sharply, once ordering activity resumes.”

Until service costs drop dramatically, the Raymond James analysts said they expect that “some companies, especially smaller players, will continue to be too optimistic (think ostrich burying its head in the sand). All in [all], the conference highlighted the fact that the industry is starting to brace itself for a downturn, though some companies (and investors) are likely to underestimate the magnitude of this decline.”

A slowdown in the energy industry may have a big impact on Houston’s economy, said University of Houston’s Barton Smith. The economics professor offers an annual economic forecast for Houston, and he said the city should prepare for a no-growth period for two to three years.

Up to 60,000 jobs may be lost in Houston over the next two years, with many of those lost jobs coming from the energy industry, Smith predicted.

The downturn in Houston, the fourth largest city in the United States, may not be as bad as it was in the 1980s, when 225,000 jobs were lost following the oil bust, said Smith. But a lot of people may be looking for work.

“We went through the tech bust, 9/11 and Enron, and we didn’t see this type of job loss,” Smith said of Houston’s looming layoffs. “This will be the greatest job loss Houston will experience since the 1980s.”

In the “last mini energy bust of 1998 to 1999, Houston lost almost 25,000 energy jobs, but continued to grow because of the strength of the national economy and, hence, the energy-independent portion of Houston’s economy,” Smith said.

The nation’s self-proclaimed energy capital has taken a circuitous path in the global recession, and so far has not suffered too many ill effects, he noted. However, the decline in gas and oil demand led to a dramatic fall in prices, which in turn led to reductions in exploration — and ultimately, that means Houston job losses.

“Last year was a pretty darn good year for Houston,” Smith said. Almost three-quarters of the city’s economic growth was attributed to energy exploration, he said. “But now that is gone.”

The upstream sector will take a big hit, jobs-wise, predicted Smith. Around 9% of the upstream jobs will be lost — and that follows a big push to bring new people into the industry over the past few years.

However, Smith said the energy sector decline will only be a “temporary setback” in Houston. “We will see a massive need for Houston and its energy business in two or three years,” he said.

Exploration and development in Texas continued to decline through March for the fifth consecutive month, energy economist Karr Ingham said last week. Ingham based his findings on the Texas PetroIndex (TPI), which he created. The TPI dipped to 258.7 in March, down from 264.6 in February. The index in March remained slightly ahead of the year-ago index at 0.4%, but it is “poised to post a year-over-year negative in April,” said the economist. A composite index based upon a comprehensive group of upstream economic indicators, the TPI peaked last September and October at 285.4.

“Five months into this cycle, deep negatives in oil and gas wellhead prices, the rig count, drilling permits and production values suggest that the current recessionary trend will continue to pick up steam in the coming months,” Ingham said. “Considering the depth and rapidity of the slowdown, there’s no reason to believe it will be shorter than the past two economic cycles chronicled by the TPI. That places recovery well into 2010, even assuming a rebound in the U.S economy later this year and the resulting increase in demand for energy products.”

The first Texas oil and gas industry downturn recorded by the TPI lasted 19 months, from November 1997 through June 1999. The second slump lasted about a year, from August 2001 until August 2002. Employment in the state’s oil and gas industry remained relatively strong during March, with about 226,000 employed. Texas oil and gas industry jobs peaked last December at more than 240,000. Similarly, Texas wells produced about 34.7 million bbl of crude oil during March, up about 1.5% compared with March 2008, and about 619 Bcf of natural gas, a 1.9% decline from a year ago. In March 2008 gas production in the state jumped 10% from March 2007.

“As the downward cycle picks up steam in the coming months, it will not be possible for the industry to escape without losing a significant number of jobs,” Ingham said. “Ultimately Texas oil and gas production will decline, possibly curtailing energy supplies just as demand is beginning to respond to economic recovery. In such a scenario, at that point energy prices may well skyrocket.”

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