Published: June 12, 2009 03:53 pm      

Weak natural gas markets lead sustained decline of Texas oil and gas economy, despite crude price rally

HOUSTON – Drilling activity in Texas continued declining steadily through April, reflecting weak natural gas markets and defying a crude oil price rally. Employment in the state’s exploration and production (E&P) industry has dropped to its lowest ebb since January 2008, according to the latest Texas Petro Index (TPI).

“The Texas oil and gas industry remains in cost-cutting mode, idling rigs, reducing capital spending, and laying off employees as economic contraction continues,” said Karr Ingham, the economist who created the TPI for the Texas Alliance of Energy Producers. “The oil-price recovery that has occurred since the first of the year is benefitting producers in some regions of the state.

“But make no mistake about it. Texas is a natural gas state, in terms of the primary E&P focus, with 80 percent of the rigs still actively drilling for natural gas. As long as natural gas prices remain at current levels, producers in a lot of Texas gas plays will be unable to turn a profit on new gas wells.

“If wellhead prices would double from the current range of $3 to $4 per thousand cubic feet ($/Mcf), gas producers across Texaswould be able to recover their finding and development costs.

“Sustained gas prices of $6/Mcf or more would drive a turnaround of gas-related E&P activity in the state.”

A composite index based upon a comprehensive group of upstream economic indicators, the Texas Petro Index in April dropped more than 5 percent to 249.0, marking the sixth consecutive monthly decline since the indicator of the Texas oil and gas industry’s health peaked in September and October 2008 at 285.4. Among leading March indicators:

· Natural gas prices in Texas during April averaged $3.28/Mcf, 63.4 percent less than the same month of 2008. As a result of low prices, the value of Texas gas production during April was $1.9 billion, down from $5.5 billion in April 2008, despite a volumetric decline of only 2.6 percent.

· The Baker Hughes count of active drilling rigs in Texas dipped to monthly average of 393 in April, nearly 500 fewer rigs than the April 2008 monthly average.

· The number of Texans employed in the state’s oil and gas industry declined to 219,500 during April, according to the Texas Workforce Commission, from 240,000 in December last year, effectively wiping out job growth last year since 219,500 Texans were working in the industry in January 2008