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The 'bloodbath' ends: Index shows Texas oil, gas industry on upswing

The oil and gas industry in Texas has started to recover after two years of strong contraction, according to an index measuring the sector's activity in the state.

Amarillo economist Karr Ingham, who created the Texas Petro Index, told a small gathering at a Texas Alliance of Energy Producers luncheon Jan. 25 that job losses in the upstream sector finally ended in November 2016, joining rig counts and pricing in heading in the positive direction. The index reversed course in December after 24 consecutive down months.

"This is the news of the day: recovery," Ingham said. "Prices turned around in the first quarter of 2016, the rig count bottomed out in May and it looks like from the best set of numbers we have we bottomed out in terms of production in the second half of 2016."

Ingham's Petro Index increased to 150.6 in December, up from 148.0 in November but down more than 21% from 190.9 in December 2015.

The numbers detailing the collapse of the oil and gas business in Texas during the downturn are striking: nearly 104,000 jobs lost, or 34% of Texans on the payrolls of production, drilling and well servicing companies, between December 2014 and October 2016; a rig count that dropped from 903 in November 2014 to 173 in May 2016; 68% fewer drilling permits issued in 2016 than 2014 and a 70% and 60% drop in oil well and gas well completions from 2014 to 2016.

"We've got a long way to go to get back to where we were," Ingham said. "It's been a bloodbath, frankly, but better days are ahead in 2017."

Ingham noted several positives, including a near doubling of the state's rig count from May 2016 to December 2016. More than 1,000 drilling permits were issued in Texas in December, nearly 40% more than December 2015. Job losses have also stalled over the past two months. "We're not hemorrhaging jobs like we were," he said. "Essentially all we've done is stop the bleeding, but it beats still bleeding."

Ingham described the production boom from 2012 to 2014 as an "oil driven expansion" as natural gas prices remained low through the entire period. He said the recent uptick in gas prices has caught the attention of producers, however. "We're starting to see an increase in activity in response to gas prices. It's not a huge shift, but a noticeable shift," he said. "[Gas] is still a huge part of the revenue picture. Adding $1[/Mcf] to the gas price does a great deal to help keep expanding the industry."

Despite the positive outlook for prices, production is still headed down, Ingham said, because of the decline in associated gas production.

The oil and gas industry in Texas, Ingham said, dodged a bullet when OPEC decided to cut production late last year by approximately 1.2 million barrels per day. Without that move, he said, it was likely the recovery would have gone stagnant last fall. "In essence, they've blinked and ceded some market stake to us," he said.

The fact that oil production is on the rise in Texas, Ingham noted, may not be entirely good. Instead of allowing prices to rise to $60/bbl or higher, strong supply numbers are keeping the average price of West Texas Intermediate Crude below $50/bbl. "We may have troughed in terms of production in Texas in October. And this may have implications. The market was telling us: 'send less of this stuff,'" he said.

The primary source of the rebound is the Permian Basin, which Ingham called "ground zero" for Texas production. "It's so big and so much is out there," he said. "It's a global behemoth now. It could be on its way to being the largest oil field on the planet."

While the recovery is imperfect and will likely take time to repair the recent damage done, Ingham said the industry is now taking an optimistic approach to the next few years.

"There's going to be growth in 2017," he said. "Something bizarre would have to happen to stop it."