SHALE Featured May June 2019 1

The Shifting Landscape in Texas Oil and Gas Production

For most of the nation’s oil and gas production history, the state of Texas has been the epicenter of activity, providing a far greater share of total US production than any other state. Over the entire decade of the 2000s, Texas crude oil production comprised about 21 percent of US production and stood at about 20.5 percent just 10 short years ago in 2009. In 2010, those numbers began to change dramatically. In 2018, the state of Texas contributed a whopping 40 percent of total US crude oil production.

Daily and monthly crude oil production in Texas moved into all-time record territory early in 2018. When all was said and done annual production in the state exceeded 1.6 billion barrels in 2018, shattering the previous record of 1.26 billion barrels in 1972. In December 2018, monthly production in Texas exceeded 150 million barrels for the first time, and the numbers continue to increase with first quarter 2019 crude oil production up by over 25 percent compared to the first three months of 2018. For the first time ever, Texas daily crude oil production surpassed five million barrels in the first quarter of this year.

Under virtually any price scenario over the balance of the year, Texas production will increase by a sizable amount once again in 2019. With generally favorable crude oil pricing — and current pricing falls into that category — Texas production stands a chance of surpassing 2 billion barrels in 2019, which would be a 25 percent increase over the 2018 annual total (which in turn was up by 27 percent compared to 2017).

The Eagle Ford was the original game changer as the Texas share of total US crude oil production began to increase. Scarcely a barrel of crude oil was produced in this South Texas region until 2008; by early 2015, Eagle Ford crude oil production swelled to some 1.7 million barrels per day before beginning to decline in response to the collapse in crude oil prices that began in July 2014. Even though Eagle Ford production fell significantly as a result of the 80 percent decline in crude oil prices, Texas still boasts the largest two production regions in the country in the Permian and the Eagle Ford, with the Bakken a close third.

While Permian production increased steadily from 2010-2014, it was in the post-downturn period in 2016 that the Permian really began to flex its muscle, once again reasserting itself as the nation’s premier production region in terms of production volumes and growth rates. According to the US Energy Information Administration, Permian Basin crude oil production, already deep in record territory, surpassed 4 million barrels per day in March 2019. The March Permian monthly estimate of 4.137 million barrels per day makes up an incredible 34 percent of the US crude oil production total — which also achieved a new milestone in March, surpassing 12 million barrels per day for the first time.

A significant part of Permian production is in New Mexico, of course, but the lion’s share is in the state of Texas. The Texas Alliance of Energy Producers’ Texas Permian Basin Petroleum Index tracks crude oil production in Railroad Commission districts 7C, 8, and 8A, the three districts in which the Texas Permian is principally located. Total crude oil production in those three districts surpassed 3 million barrels per day for the first time in Feb. 2019, and current production from that region makes up about 26 percent of total US production (and about 62 percent of Texas statewide production).

While production declined in the US, in Texas, and in most producing regions of the country including the Eagle Ford in response to the sharp price drop from July 2014 to Feb. 2016, production in the Permian was barely affected at all. In fact, incredibly, production continued to climb sharply even in the face of a 75 percent decline in the rig count and a 70 percent decline in drilling permits wrought by the 80 percent decline in crude oil prices. Notably, crude oil production in those three RRC districts continued to increase, seemingly unabated, posting a 33 percent year-over-year gain even as the now notorious pipeline shortages pinched crude oil takeaway capacity, resulting in deep discounts of Permian crude pricing compared to the posted West Texas Intermediate benchmark prices.

Curious trends are afoot in the Texas upstream oil and gas industry, however. Actually, that has been the case in some respects for some time now, but these trends in 2019 have, in true Carrollian fashion, become “curioser and curioser.”

Even though Permian crude oil production continued to grow during the 2014-2016 industry downturn, statewide crude oil production ultimately declined by about 14 percent and then began to climb yet again, achieving the aforementioned milestones in 2018 and early 2019. While crude oil production itself is now at record levels by far, other measures of upstream activity in Texas are nowhere near the pre-downturn high marks achieved in 2014.

Posted crude oil prices (which are typically $3-4 below futures prices) averaged over $104 in June 2014 but have only reached a monthly average of just over $67 a barrel since hitting bottom in Feb. 2016. The statewide rig count, which averaged 904 in Nov. 2014, has reached a monthly average only as high as 534 in June 2018. The number of drilling permits issued in Texas on balance is down by about 50 percent compared to the 2014 high point, and well completions are off by well over 60 percent compared to 2014 numbers.

The March 2019 direct upstream employment estimates (operating/producing companies, drilling companies, and service companies) is off by about 78,000 jobs (25 percent) compared to the Dec. 2014 peak employment level. The Texas Alliance of Energy Producers’ Texas Petro Index itself, at 212.4 in March 2019 is down by some 32 percent compared to the TPI all-time record of 313.9 in Nov. 2014.

Moreover, most of these indicators have declined in the first quarter of 2019, even though crude oil prices have been increasing.

The odd events of the fourth quarter of 2018 could easily be a factor in the lack of direction in some of these metrics. Crude oil prices had steadily recovered since 2016 and the Texas Petro Index posted solid monthly increases for 23 straight months until Nov. 2018. That is because crude oil prices began to decline in October, dipping to a monthly average of $45.31 in December compared to the October monthly average of $67.19. Daily prices fell by over 45 percent from a high of $73 a barrel to $39.25 on Christmas Eve 2018. In response, the rig count began to decline in November and has continued to do so. The Texas Petro Index declined in November and December before recovering modestly in January, marking the first time in its history that even a one-month decline in the Petro Index did not signal the onset of a sustained contraction of significant magnitude.

Crude oil prices have recovered quite nicely since then, averaging over $55 in March and pushing above $60 in April (WTI daily posted). Curiously, though, the rig count has continued to fall, along with drilling permits and industry employment, which dropped by over 6,000 jobs in the first quarter. The Texas Petro Index posted another mild decline in March as well.

Price increases typically bring increases in other measures of activity, even if at a slower pace than has been the case historically. The general expectation would be that recovering crude oil prices would stimulate growth in the rig count to some degree, an increase in the number of drilling permits issued, and more jobs added to upstream industry payrolls.

Whether the events of the first quarter (rising prices but declines in other metrics) are temporary as a result of one or more short-term (hopefully) phenomena — the price events of the fourth quarter, pipeline backlogs, and so on — or represent a momentum increase in the trend of greater production with fewer resources deployed, it is unquestionably the case that 300,000 employees and 900 rigs at work in Texas are no longer needed to produce record (and climbing) volumes of crude oil. The implied efficiencies and cost declines achieved in Texas oil and gas production are beyond impressive, and a couple of numbers help tell that story.

In early 2009, about 166 barrels of crude oil were produced for every direct upstream oil and gas job in Texas. In March 2019, that number climbed to over 700 barrels per industry employee. In 2008, the number of barrels of oil produced per working rig averaged about 39,000; in March of this year, that number exceeded 300,000 barrels produced for each working rig in the state.

The upstream oil and gas industry has always been able to boast of the extraordinary economic impact that comes with higher prices for crude oil and natural gas in the form of rising rig counts, and the addition of tens of thousands of high paying jobs. That may no longer be the case, at least not to the extent that it once was.

But now the industry can boast of something even more important — the immeasurable contribution to the consumer economy and the resulting increase in the standard of living here and abroad. The innovative and entrepreneurial women and men in the US oil and gas production industry have done what the country has long professed to desire, and that is a long term, abundant, affordable supply of energy for literally decades to come.

 

About the author: Karr Ingham is an Amarillo, Texas economist, and is the owner and President of InghamEcon, LLC, an economic analysis and research firm specializing in statewide, regional, and metro area economics, and oil & gas/energy economics.

 

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