EnergyTexas’ Oil and Gas Industry Facing Uncertainty Amid Coronavirus Pandemic, Stabilizing as Election Looms

Texas oil and gas has taken a hit during the pandemic, but the industry has stabilized some since the initial downturn.
October 22, 2020
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Texas’ energy sector began the year with nothing but prosperity on the horizon. And then the pandemic slammed the brakes on America’s roaring economic engine, bringing society, the industry which powers it, to a screeching halt.

Travel demand cratered, supply flooded the world oil market, and prices dropped to subzero levels. In a matter of months, the talisman, in many respects, of America’s economic prosperity became one rampant with job-shedding, abrupt facility shuttering, and frantic uncertainty.

But signs of improvement, however slight, are showing.

Total oil production, according to the Railroad Commission of Texas’ (RRC) data, has declined over 20 percent since the beginning of the year. The number of producing wells has declined a modest two percent.

Data from the Texas Railroad Commission

But production modestly recovered lost ground in June and July.

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When the initial price drop hit due to an oversupply and depreciating demand, producers continued to produce at or near pre-pandemic levels in an attempt to bring in pre-pandemic revenue levels. Many producers are also awash with debt they took on when ramping up operations during good economic times to meet the demand of a flourishing economy.

That, coupled with price hedging, is the reason production levels remained relatively consistent through April before the significant drop thereafter.

Crude oil was trading at or near $50 to $60 per barrel before the dramatic April drop. The price has since recovered to about $40 per barrel, but that is still significantly less than the projections by which producers used to chart their immediate and near-future business operations.

Natural gas has remained steadier in large part because it hasn’t faced the same dramatic demand fissure as oil. Consumers being confined to their homes has preserved much of the natural gas demand that fell off from commercial drop-offs.

Data from the Texas Railroad Commission

Natural gas production from the beginning of 2020 has decreased 13.7 percent while the number of producing wells declined roughly three percent. Because natural gas can be pulled from oil wells, too, the plugging of those also plays into the natural gas production levels.

June and July’s natural gas production made very slight recoveries from the May low.

Chairwoman of the RRC, Christi Craddick, told The Texan, “There is no denying that this year has been a challenge for the oil and gas industry. However, we are starting to see promising indicators with rig counts slowly increasing, production numbers climbing, and the price of WTI rebounding from April.”

Jason Modglin, president of the Texas Alliance of Energy Producers and a former staffer with Commissioner Craddick, pointed to one main theme he and the producers he represents are watching going forward — the November election.

It is no secret that the oil and gas industry at large prefers to see President Donald Trump win a second term, as he has rolled back numerous costly regulations affecting the energy industry. Critics argue these moves will be detrimental to the environment.

A study by Life:Powered, the energy project of the conservative Texas Public Policy Foundation, found that “the U.S. has achieved robust economic growth while dramatically reducing emissions of harmful air pollutants.” Study authors Kathleen Hartnett White and Brent Bennett state that from 1970 to 2017, total emissions have declined by 73 percent.

According to the Environmental Protection Agency, that figure has climbed to 77 percent as of 2019.

Another study by Texans for Natural Gas states that since 2011, while production increased 210 percent, flaring intensity — the amount of methane flared per barrel of oil produced — decreased 64 percent.

Modglin emphasized this, stating, “Even with the regulation rollbacks, the industry has made great strides thanks to innovation in reducing its emission output.” And so, the outcome of the election, especially given how much power the administrative state holds, is one of great interest to Texas’ oil and gas producers.

It’s not just Trump’s affability for oil and gas that has producers wary of November 3, but Democratic nominee Joe Biden’s relative antagonism in his desire to reconfigure the industry in 15 years.

Modglin emphasized, “Should [Biden] win and reimplement the former regulations, or implement his new proposed changes, then not only will the industry be hurt, but consumers will end up paying more for their energy.”

In contrast to the active federal regulatory state of the Obama administration, Craddick emphasized the role of stakeholders in the energy sector. 

“Leaders in the oil and gas industry know the best way to manage their businesses,” she asserted. “Our job is to provide regulatory certainty to allow operators to make the best decisions possible and I am proud of the work our agency has completed during this trying time.”

“The commission has been ready to assist industry throughout this unprecedented time. From administrative waivers to a responsive staff in a work-from-home environment, our team has continuously achieved our goals and maintained our quality of service throughout the pandemic,” Craddick added.

The industry has undergone a trend of consolidation in the wake of coronavirus’ heavy impact on the market. ConocoPhillips just agreed to purchase a shale rival Concho for $9.7 billion and Pioneer Natural Resources looks keen on acquiring Parsley Energy. The latter combo paired up to push the RRC to prorate the state’s oil production.

Modglin sees in this trend companies trying to cut costs and streamline their operations. “Some smaller producers who amassed a lot of debt are looking for an exit strategy, and other producers both big and small, are purchasing their assets, and it can be a benefit for both parties,” he added.

Craddick, meanwhile, looks at another factor in the quest to alleviate the industry’s incontrovertible demand barrier.

“While there is no single metric that can solve the demand problem, one indicator that I often point to is increased transportation rates. From increased flights to increased cars on the road, there is a direct correlation to increased production numbers for the oil and gas industry when Texans travel,” she concluded.

Moving forward, Modglin sees a long road to recovery. While stipulating that Texas energy can weather the storm better than other states, he added, “2019 was a banner year for the Texas oil and gas industry, breaking records from the 1970s, and it’s going to take a while to get back to that.”

Editor’s Note: This story has been updated to include the EPA’s latest figure of declining emissions.

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Brad Johnson

Brad Johnson

Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.