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Texas PetroIndex Continues Sliding

For a good while any chart of oil and gas exploration and production (E&P) activity in Texas looked pretty decent, with steadily increasing drilling, production and prices yielding mounting positive data. But it turned out that on the other side of the data mountain was a cliff from which the industry continues to plunge.

Unusually low natural gas prices, crude oil market volatility and "threats of more punitive legislation from Washington" have led to further declines in the Texas PetroIndex -- a basket of upstream economic indicators -- according to the Texas Alliance of Energy Producers, which compiles the index.

According to the index, natural gas prices in Texas during June averaged $3.20/Mcf, 71% less than they did during June 2008. The number of Texans employed in the state's oil and gas industry at mid-year 2009 declined to 206,200, according to data from the Texas Workforce Commission, the Alliance said. At year-end 2008 there were 240,000 employed in the industry.

The PetroIndex in June dropped to 229.2, the lowest level since May 2007 when it was at 228.8. June marked the eighth consecutive monthly decline since the indicator peaked in September and October 2008 at 285.4, said the Alliance, which sees more pain for the industry ahead due to policies taking shape in Washington.

"Producers -- and consumers, for that matter -- can endure cycles that are driven by naturally occurring economic and market factors," said Alliance economist Karr Ingham. "More economically troublesome are the punitive and dangerous energy policy proposals currently making their way through the U.S. Congress. For example, the repeal of certain long-standing tax provisions, which would result in dramatically reduced E&P activity in Texas, and the cap-and-trade legislation currently under consideration in Congress that would artificially inflate the cost of traditional energy sources, so otherwise uncompetitive renewable sources of energy can compete."

Especially worrisome to the producer group is the potential for rollback of tax policies favorable to producers, particularly the ability to expense intangible drilling costs in the year incurred (see NGI, May 18).

The Alliance estimates that the state's E&P sector would contribute about $20 billion less per year to the Texas gross state product in the early years of the current version of cap-and-trade legislation, with annual losses steadily increasing over time. Twenty billion dollars in lost upstream oil and gas activity would translate to a statewide $60 billion per year loss in Texas economic activity, it said. The Alliance's estimate excludes losses in the state's downstream oil and gas sector, including refining, processing and petrochemicals, which would amount to tens of billions of dollars more, it said.

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