The contraction of the oil and gas economy in Texas finally began to loosen its grip as 2009 ended, according to the latest Texas Petro Index (TPI). The improvement was largely due to an oil-price rally. But questions remain about the future of the state’s E&P industry as long as the oversupply of gas prevents a stronger recovery of gas wellhead prices.

In December 2009, an uptick in drilling and employment showed that the economic contraction was beginning to bottom out.

"The rig count in Texas clearly is on the rise," said petroleum economist Karr Ingham, author of the TPI and consulting economist for the Texas Alliance of Energy Producers, speaking to an audience at a Houston media luncheon.

"Another important indicator, seasonally adjusted industry employment, has increased for two consecutive months, suggesting it has reached bottom as well. If that is the case, it certainly is beginning to happen several months sooner than I had expected," he said.,

The TPI has declined more than 32% from the peak of 285.4 achieved in September and October of last year. At year-end 2009 the TPI was 188.4, or 34% less than the high in 2008. Following that peak, the index fell for 14 consecutive months. The good news? The decline is finally starting to slow down.

"We’re beginning to see the proverbial light at the end of the tunnel," Ingham said.

"The hope is the resurgence of oil-directed drilling will be enough for the economic contraction to continue to ease. But how far a recovery of oil prices can take us is an open question, when natural gas accounts for most of the value created by Texas producers."

Ingham said gas prices have improved since midyear 2009, but in December they still averaged only $4.48 per thousand cubic feet (Mcf), almost 25% less than the previous year. By contrast, oil prices in December 2009 averaged $71.08 per barrel, compared with $37.69 per barrel posted in December 2008.

The TPI indicates Texas oil prices in 2009 averaged $58.29 per barrel, down from $96.14 per barrel in 2008. Though Texas oil production fell just 2.5% in 2009, lower wellhead prices caused the value of that oil to total $23 billion, nearly $15.9 billion less than in 2008.

Ingham noted that, in addition to the loss in value, in many mature areas Texas producers now face another hurdle—the need to use more advanced, expensive technology to tap existing oil resources.

Meanwhile, gas prices in the state averaged $3.63 per Mcf in 2009, 55.7 cents less than in 2008. Following a pattern similar to oil, while gas output in Texas dropped just 4.8% in 2009, the wellhead value of the gas during the period fell by more than half to $28 billion, from $64 billion in 2008. Ingham cautioned that it’s still early in the gas production-decline curve.

"2010 will be a year of even greater decline," he said. "There’s been some recovery in gas prices but not enough to boost activity with producers."

Alex Mills, president of the Texas Alliance of Energy Producers, added that legal issues and contractual drilling obligations are affecting producers’ gas production curve as well.

"But there are indications out there that we’ve turned a corner on gas," according to Mills. "We’re still in contango, but people need that gas right now, which is a good sign of demand. We just have to keep the supply there."

As for the rig count, Baker Hughes’ 2009 tally of drilling rigs in Texas averaged 432, down by almost 50% from 898 in 2008. Drilling in Texas peaked in August 2008 at 958 rigs.

In spite of last year’s lower industry figures all around, Ingham remained positive in his 2010 outlook.

"It’s extraordinary bullish. There are many reasons to be optimistic about the coming year. Alternative energy will play a role and I’ll be excited to see it happen, but there will continue to be a demand for things fueled by oil and natural gas—especially gas," he said.

The composite index was established in January 1995 to track growth rates, cycles and trends in Texas’ E&P industry. The TPI is calculated using a comprehensive group of Texas E&P indicators, including oil and gas prices paid to producers, rig count, drilling permits, well completions, volume and value of oil and gas production, and industry employment.