Oil and Gas: Slippery Slopes
To much of the world, Texas still means oil and money, not necessarily in that order, even though the days of Spindletop and Santa Rita #1 are long behind us.
Petroleum production was once the mainstay of many a small Texas town. Rural counties accounted for 75 percent of the state’s 1999 oil and gas production. In 1998, the state’s rural counties accounted for just 13 percent of all Texas jobs, but over 22 percent of jobs in mining (virtually all of the mining jobs in Texas are in oil and gas production).
Ninety-seven Texas rural counties as well as 17 metro ones have above-average employment in oil and gas production; USDA classifies 30 Texas rural counties as mining-dependent. Many mining-dependent counties are counties with small (some of them extremely small) populations. Loving County, for example, is the least-populous Texas county, with only 116 residents in 1998, and of these, 66 worked in the mining industry. (See Exhibit 59.)
Beginning the Ride
Many of the events shaping the economies of rural counties originate in the world oil market. Through most of the first half of the century, oil was plentiful, prices were low, and most of the world’s oil was produced and consumed in the U.S.
At mid-century, Texas was the dominant producer in the world oil market; its production was twice that of the Soviet Union and more than the entire output of the Middle East. By the mid-1950s, Texas produced 2.75 million barrels per day from 6,000 fields—45 percent of U.S. production.
In 1950, the “Seven Sisters” oil companies—Exxon, British Petroleum, Shell, Gulf, Standard Oil of California, Texaco and Mobil—controlled 98.3 percent of world oil production. New oil discoveries around the world, however, continued to boost supply above demand, eroding both the Texas Railroad Commission’s and the Seven Sisters’ power over the market. In 1960, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela formed OPEC to try and get more money for member countries through higher taxes and higher oil prices.
During the 1960s OPEC attempted to impose production controls or “quotas” —like the Texas Railroad Commission had during the 1950s, but not as effectively. By the end of the 1960s—a decade of rapid economic growth—oil demand had grown dramatically. In addition, U.S. oil production peaked at the end of the decade, and in Texas shortly afterward, causing the world’s largest energy consumers to increase oil imports.
World oil consumption grew from 15 million barrels per day (bpd) in 1955 to 45 million in 1972, a 200-percent increase. World spare oil capacity—the ability to increase production to meet any increase in demand—was limited to OPEC members by the early 1970s. Saudi Arabia’s production had grown from 1.25 million barrels per day in 1960 to 7.6 million in 1973, an increase of over 500 percent. During this same period, Texas oil production rose from 892,084,000 barrels to its peak of 1,263,412,000 barrels in 1972, and then began its gradual decline as a mature oil field, with both reserves and production dropping off.
For the 30 Texas counties USDA categorized as mining-dependent in 1989, oil production has fallen from a high of 462.7 million barrels in 1972 to only 167.2 million barrels in 1999, a 64 percent decline. Twenty-five of the mining-dependent rural counties have seen their oil production drop since 1972, some almost disappearing, with one-fourth seeing their county oil production fall by more than 80 percent. Five of the mining-dependent counties actually gained in oil production, with Freestone, Stephens and Irion counties gaining more than 25 percent. (See Exhibit 60.)
Mining-dependent Rural Counties
|County||1997 Mining Employment||1997 Mining Share of County Employment||1997 Mining Earnings (thousands)||Mining Share of Non-Farm Earnings|
|Jim Wells County||2,461||13.6%||$85,346||22.6%|
|D—Not shown to avoid disclosure of confidential information regarding individual companies.
Sources: Bureau of Economic Analysis and Texas Comptroller of Public Accounts.
1973—Beginning the Price Climb
Because of the early 1970s shift in oil production capacity from the U.S. and Texas to the Middle East, OPEC was strong enough to nationalize foreign holdings. In 1973, the Arab Oil Embargo was imposed—a major turning point in the world oil market. (See Exhibits 61 and 62.)
Panic buying tripled oil prices from $4 to more than $12 per barrel. Gas shortages occurred nationwide with consumers waiting in long lines to fill up their gas tanks. Prices stabilized between 1974 and 1978 as Saudi Arabia adjusted its oil production, while other OPEC countries increased theirs; with Saudi Arabia taking on the role of “swing producer.”
In fall 1978, the Iranian revolution reduced Iran’s oil production by 50 percent, from six million to three million barrels per day. Shortly after, the Iran-Iraq war broke out, and Iranian oil production dropped again. Saudi Arabia increased its production ceiling to 8.5 million bpd, but prices still climbed above $35 by November 1979. The “oil boom” was on.
For rural Texas counties, even though oil production was falling, its rising price more than made up for it. In 1972, the value of oil production in mining-dependent counties reached $1.6 billion. By 1981 with the average oil price more than 10 times higher, even with a 22-percent drop in production, the value of oil in those counties had risen by almost 700 percent to $12.5 billion.
Values of oil and gas production are important to rural income because any royalties paid to mineral interest owners (often, but not always the landowner) are based on the value of the production. Royalty incomes rise with prices—as they also decline over time along with production. For counties with any mineral production, the value of mineral production will be reflected in both property values and any property taxes collected.
Oil and gas values can profoundly affect local government, including school district income, and even more in the 1970s and 1980s when public education spending relied less on the state’s coffers than today.
Drilling worldwide climbed to record highs in response to high oil prices. In 1981, an average of 3,969 rotary rigs operated in the U.S. (1,318 of these in Texas), more than four times the level just ten years before. Consequently, oil and gas field services employment, which rises and falls with drilling activity as workers are needed to operate the rigs, climbed to record levels.
To characterize price fluctuations, attorney James Mann of the Clark, Thomas & Winters law firm gives this rule of thumb: “for every roughneck, there are 5 roustabouts working for associated companies (the mud companies, pipe suppliers, packers, etc.) For every well being drilled, there are 15 roughnecks employed.”
For most of the mining-dependent counties, the 1970s oil boom meant more jobs. Of the 28 counties for which data is available, all but two saw their mining employment growth outpace their total county employment between 1970 and 1982, which was the peak oil and gas employment year. In 19 mining-dependent counties, mining employment more than doubled. Only one county—Winkler County—saw a drop in mining employment over this period. Total county employment also showed healthy growth in all these counties during this period as increased oil and gas activity rippled through the economy.
Mining employment in these mining-dependent counties grew by an average of 109 percent between 1970 and 1982, and total employment increased by 43 percent. Those rural counties that were not heavily dependent on mining, but still had mining jobs in their areas experienced a growth in mining employment of 124 percent between 1970 and 1982, but their total employment growth reached only 33 percent during that period.
Over The Peak and Poised for the Fall
As the world oil supply increased, world oil demand declined in response to the late 1970s high prices. Consumers implemented energy efficiency measures, and Congress imposed fuel efficiency standards on automobiles, phasing out the “gas-guzzlers.”
By 1981, the world oil supply and demand picture began to reverse. Non-OPEC production, spurred in response to the dramatic increase in oil prices, grew and eroded OPEC’s market share. Oil prices continued to fall despite OPEC’s efforts. In 1983, in response to increased volatility in oil prices, crude oil futures began trading on the New York Mercantile Exchange, making it easier for buyers to ignore OPEC’s official prices and to buy oil elsewhere at a cheaper price.
Saudi Arabia continuously cut production to support prices, but in 1985, Saudi Arabia abandoned its role as OPEC’s swing producer. Saudi production was down to almost 2 million barrels per day, and the country could not afford to go any lower. (See Exhibit 65.)
OPEC (given little choice by Saudi Arabia) abandoned its “fixed” prices for contract oil and eliminated production quotas. Crude oil and its products flooded the market. As a result, in January 1986, oil prices started dropping in a free fall.
Uncertainty dominated the oil market worldwide, and drilling and exploration dropped in response to plunging prices. Stripper or low-producing wells were abandoned and layoffs spread throughout the oil patch, with Texas right in the middle of it.
By July 1986, oil was trading in the $10 range, a level not seen in more than a decade. Drilling activity in the U.S. and Texas dropped to Great Depression levels. As with the oil boom just a few years before, oil and gas employment followed the rig count downward. Jobs evaporated in a hurry throughout the industry, and county unemployment rates skyrocketed, both in rural and metro Texas. On average, the mining-dependent counties saw their mining employment fall by 30 percent and total employment by 7 percent in just five years.
The shakeout of the oil price crash was radical for the Texas economy and its oil and gas industry. As a result of the oil price collapse, between 1984 and 1987:
- The Texas economy stagnated, as real gross state product decreased by $3.5 billion from $275 billion to $271.5 billion. Texas’ average annual growth rate was a negative 0.4 percent, compared to a national rate of 2.9 percent.
- By 1987, Texas per capita income fell to 90 percent of the national average.
- Only 6,000 new jobs were created as state non-farm employment remained at 6.5 million. Over the period, state employment growth averaged only 0.03 percent annually, and peaked at 6.7 million in 1985.
- State oil and gas employment fell by 87,600, or 12.3 percent per year to 181,400.
- State oil and gas severance tax revenues went from $2.2 billion to less than $1.2 billion.
Change in Oil Production for Mining-dependent Counties
|County||1972 Oil Production (barrels)||1999 Oil Production (barrels) Oil||% Change Oil Production|
|Jim Wells County||7,013,642||237,463||-96.6%|
|Sources: Texas Railroad Commission and Texas Comptroller of Public Accounts.|
Since the tumultuous events of the 1980s, a new oil and gas industry has emerged—leaner and more prepared to deal with the ups and downs of a world commodity market. Oil prices rose and fell, but without the high drama of the 1980s—until recently.
Events in the Middle East have shown their potential for disrupting the oil market. The Gulf War in 1990-91 caused a sharp spike in oil prices, but the spike didn’t last. After the Gulf War, oil prices remained rather lackluster, slowly drifting down to the $13-$14 range. In Texas, rig activity, production, reserves and oil and gas employment declined. Demand for oil was slowly growing with world economic growth, and the supply expanded to keep up with it.
In 1996, things began to look up for oil producers as oil prices began to rise again due to weather, Iraqi production restrictions and growing demand in Asia. In 1997, crude oil prices drifted down as world demand was less than expected, and oil supplies began increasing—shifting the oil market from under- to over-supplied. The collapse of Asian financial markets late in the year caused the region’s demand for crude oil to plummet.
The coffin was nailed shut in 1998. By mid-March, oil prices had slipped to their lowest levels since 1988. Though OPEC, as well as some non-OPEC producers, agreed to cut back oil production, high inventory levels and reduced demand made their efforts to push prices back up without success.
By December 1998, brimming oil product stockpiles and slow demand had caused spot market oil prices to fall to $10.72 per barrel, the second lowest all-time level. Wellhead prices were well below spot prices, so producers were receiving even less than $10 per barrel for their oil, with the average Texas taxable price per barrel reaching $9.25 for the month of December 1998.
Oil prices stayed low, hovering in the $11-$13 range on the spot market until well into March 1999. The low prices of 1998-99 hit oil producers even harder than the bust of 1986 because $12 per barrel had a lot more buying power in 1986 than $12 per barrel does today. Looking at oil prices adjusted for inflation shows that $12 per barrel today would only be equal to $7.45 compared to 14 years ago. (See Exhibit 67.)
Because of the higher oil prices seen in 1996, exploration and drilling activity increased in 1996 and 1997. Cautiously optimistic, oil companies began investing in drilling, and the rotary rig count climbed, both in the U.S. and Texas. A shortage of both rigs and the “roughnecks” to operate them occurred because the industry had cut back on personnel and equipment after the disastrous mid-80s.
Optimism was quickly replaced by pessimism, however, when prices fell off, and drilling activity quickly ceased. Nationally, the number of rotary rigs operating in the U.S. fell to an all-time low of 488 rigs in April 1999, 382 rigs less than just one year before, far below the lowest 1986 level of 663, and one tenth the all-time peak in December 1991 of 4,530 active rigs.
In Texas, the state rig count reached an all-time low of 171 rigs in April 1999 compared to the previous low of 201 in 1986. In only one year, state permits for new drilling were cut by 60 percent, while monthly oil completions in March for newly drilled oil wells in Texas plummeted from 491 to only 91.
Production rates also declined sharply as well drilling ceased and wells were idled, shut-in or abandoned. The Energy Information Administration (EIA) reported that by May 1999, domestic crude oil production averaged 5.8 million barrels per day, the lowest average for the month in 47 years. Texas’ monthly oil production in May 1999 had fallen by over 6.6 million barrels to under 35 million, a 16.5-percent drop from December 1997.
In the 30 rural Texas mining-dependent counties, by May 1999 monthly oil production fell by almost 15 percent from December 1997 levels to 13.9 million barrels. In non-mining-dependent rural counties, the drop was even greater—more than 18 percent. Mining-dependent counties include some of the larger oil fields, which have more stable production. Two of the mining-dependent counties—Loving and Scurry—actually increased their oil production. (See Exhibit 68.)
Mining-dependent Counties with Drops in Oil Production from December 1997-May 1999 Price Collapse over 20 Percent
|County||December 1997 Oil Production (barrels)||May 1999 Oil Production (barrels)||Change in Oil Production (barrels)||% Change in Oil Production|
|Jim Wells County||23,932||17,334||6.9598||-27.6%|
|Sources: Texas Railroad Commission and Texas Comptroller of Public Accounts.|
Massive layoffs and cutbacks occurred throughout the oil industry from December 1997 to May 1999. The industry responds more rapidly to an oil price drop than to an oil price increase. The volatility of the market makes industry players wait to invest money and add jobs when prices go up to see if the price rise will last. But without any fat to cut since that was stripped away in the 1980s, oil companies cannot afford to postpone cost cutting too long when oil prices decline. Ben Sebree of the Texas Oil and Gas Association (TXOGA) sums it up: “Low prices mean costs have to be cut.” And, as attorney James Mann states “when oil companies talk about cutting costs, they usually mean laying people off.”
In December 1997, 162,400 people were employed in the oil and gas extraction industry in Texas, compared to the peak of 313,700 in January 1982, when it represented 5 percent of total Texas employment. By May 1999, that total was down to 135,400 jobs, a decline of nearly 17 percent from the end of 1997, representing just 1.5 percent of all the non-farm jobs in the state. (See Exhibit 66.)
The Texas Workforce Commission (TWC) stated in the February 1999 Texas Labor Market Review that those counties that have a less-diversified economy and small-to medium-size populations were seeing the biggest effect. TWC reported that Andrews, Ector and Scurry counties were the biggest losers with their number of unemployed workers more than doubling.
The oilfield services companies, many of which are small, private companies were hit particularly hard by price fluctuations. Grant Billingsley, with Wagner & Brown in Midland, remarks that “drilling companies were in trouble early on, but as time went on, maintenance was being minimized and deferred. Many service companies moved on to find a living wage elsewhere.” Ben Sebree notes that “as far as rural oil and gas labor is concerned, they are usually the first to come and the first to go.”
Not surprisingly, the majority of the 40 counties with increases in unemployment rates of more than 2 percent between January 1998 and January 1999 were located in the Permian Basin, which has traditionally been economically dependent on the fortunes of the oil and gas industry.
In all, 129 Texas counties saw some increase in their unemployment rates during the year. (See Exhibit 69.) Winkler County had the largest jump, from 6 percent to 18.8 percent, followed by Reagan County with a rise from 4.1 percent to 11.9 percent. In Ector, Midland, Webb and Andrews counties, oil and gas unemployment claims either doubled, tripled or quadrupled.Alex Mills, executive vice-president of North Texas Oil & Gas Association (NTOGA) in Wichita Falls, notes that “when toolpushers lose their job, they don’t have very marketable skills and probably won’t come back into the business once they leave.” So not only do many oil and gas workers have a hard time finding alternative employment, but when a recovery is made in the oil and gas industry, there are fewer experienced workers available.
The detrimental effects of the rise of unemployment from any oil and gas downturn is felt by the whole local community. The TWC pointed out that the impact of this last price collapse included “not only the obvious effects of idled rigs, businesses cutting back, and people being laid off and filing claims for unemployment insurance benefits or public assistance, but other not-so-obvious consequences... local tax revenues... independent school districts (some in West Texas were estimating losses of more than $5 million)... rural hospitals supported by county budgets... city and county governments... private individuals... will suffer losses of revenue from oil leases and royalties.” In rural Texas, it hurts all over.
Hard Times in the Oil Patch
Crane County covers 786 square miles of West Texas. The Texas Almanac describes the economy of this county with only one phrase: “oil-based.” The phrase says it all for one of the most petroleum-dependent counties in the state. In 1998, energy-related employment accounted for nearly a third of the county’s jobs.
Oil production in the county, however, peaked in 1971, with production reaching 45.7 million barrels. By 1998, the county produced only 13.9 million barrels of oil. Many of the county’s wells are marginal, producing fewer than 10 barrels of oil per day. The cost to keep these wells pumping frequently exceeds their production value.
A spring 1999 survey during the oil price collapse by the Comptroller’s office indicated that Crane County at that time was expecting to suffer an estimated school tax revenue loss of $3.9 million in 1999 due to the declining value of its oil and gas properties. The revenue loss would have forced the county’s school districts to cut back; teachers who left might not be replaced. Even though oil prices recovered during the last half of the year, Crane ISD realized an actual loss of $2.5 million in school property tax revenue between 1998 and 1999.
At that time, Charles Blue, the Crane County Judge, said that the economy was down about 20 percent from years past, with layoffs in the oilfield and related industries. In 1999, two oilfield service companies closed their doors. Other oil-related businesses, such as oilfield electricians, said that business was down 75 percent from past years. In May 1999, the county’s unemployment rate stood at 8.5 percent, nearly double the state average of 4.6 percent.
Crane County has no significant industries to replace oil and gas. Many residents moved away to find other well service jobs, or commuted to jobs in towns such as Odessa, 32 miles away. During spring 1999, 105 children left Crane schools.
The county real estate market also suffered; the owner of a local real estate company said she couldn’t remember ever seeing more houses for sale and rent. Houses renting in the $300 range had remained vacant for about six months. In 1998, houses with more than 2,000 square feet of space were selling for only $25 per square foot, about $50,000.
Climbing Back—Slower Ride
Since the 1986 oil price crash and industry shakeout, oil prices have been determined more by the amount of oil supplied to meet demand than artificial events pushing prices up or down. OPEC learned that if prices get too high, drilling in non-OPEC parts of the world will increase supply while demand will slack off, pushing prices down. In case OPEC needed a reminder, 1998-99 provided one.
By spring 2000, OPEC was announcing production increases to bring prices back down. Oil prices rose again with a vengeance. In 12 months, oil prices went from under $12 per barrel on the spot market to over $34 on March 7, 2000, a level not seen in a decade. Demand for oil once again outweighed its supply. Instead of producers marching on the Texas State Capitol looking for severance tax relief because of low oil prices, last year witnessed truckers marching on the nation’s capitol protesting sharply higher gasoline prices.
Oil prices have been $25 or higher since December 1999, actually rising to over $38.50 per barrel on the spot market in September 2000. But Texas drilling rigs did not reach anywhere near their November 1997 level of almost 400 until October 2000.
The impact of higher oil prices has not been felt in oil and gas employment either. Despite rising oil prices, more than 25,000 jobs are still missing from the oil and gas industry compared to December 1997. (See Exhibit 70.) Moreover, oil production once again dropped off rapidly, due to the fall off in drilling activity and has yet to regain its pre-crash level.
Technology Gives Leases New Life
New technologies in oil and gas over the last decade have greatly increased the efficiency of Texas’ oil and gas producers. Since the 1980s, a once-suspicious practice—“slant-hole” or horizontal drilling—has improved yields and helped open new gas fields in South Texas. Recent advances allow drilling bits to not only be tracked but directed along horizontal routes, resulting in increased production through underground production zones as well as proper accounting information, so that the revenue from leases and production royalties can be allocated fairly.
Seismic surveys, too, have advanced far beyond black lines on a white page. Today’s computers can produce three-dimensional formation imagery that can be rotated or manipulated to find the best areas for drilling—commonly known as ”3-D seismic.” Other improvements, such as a drilling practice known as “geosteering”—essentially a below-ground version of above-ground systems guided by geopositioning satellite systems (GPS)—have allowed producers to drill with unprecedented precision and effectiveness.
Such oilfield technologies have reduced the number of wells drilled while increasing their accuracy in finding reserves. According to the Texas Railroad Commission (RRC), of 674 new Texas wells drilled in January 2001, only 76 reported as dry holes, a 11 percent failure rate. Historically, failure levels more typically ran from 20 to 30 percent. James Mann notes that “the main problem with technology in the oilfield is the scarcity of 3-D rigs. Producers would love to use them but can’t always find them when they need them. 3-D is expensive, but not as expensive as drilling a dry hole.”
Other technologies are extending the lives of mature Texas fields. Initially, geophysical pressures on underground oil and gas deposits may push heavy oil and lighter-than-air natural gas to the surface. But when these pressures are being bled off by production, other means must replace them. The most common method, known as secondary recovery, is water injection. Water, either briny, fresh, or brackish, is forced into the ground in strategic locations to drive underground petroleum toward a producing well. As oil and gas become harder to produce, a less-common and more expensive method of recovery, “tertiary recovery,” calls for injecting carbon dioxide gas in the place of water. CO2 is used extensively in Panhandle fields.
A measure of the relative health of a field, and by extension, the industry, is to determine how widespread is the use of secondary and tertiary recovery methods. For example, while Texas leads the nation in its number of producing wells, only 6 percent of these produce oil and gas on their own, without enhanced recovery techniques. In the early years of Texas’ fields, by contrast, half or more of their wells flowed without artificial lift.
Clever new production methods, however, have not helped the oil industry avoid a pervasive decline. For example, according to the American Petroleum Institute (API), Texas’ production of 536 million barrels of crude in 1997 was the state’s lowest since API’s records began in 1947, when Texas produced more than 900 million barrels. Even in the industry slump year of 1985, production was 890 million barrels.
Annual oil production for 2000 is on track to reach somewhere in the neighborhood of 400 million barrels. But as Alex Mills with NTOGA notes, “One of the main reasons [our production has been declining since the 1970s] is we don’t have the technology to get all the oil and gas out of the ground that’s down there. We probably leave 50 to 75 percent. Huge reserves are still in the ground. Any research or technological or economic advances that can help industry get those reserves out of the ground is a benefit to the state and the citizens of the state. Anything that would enhance [help] enhanced recovery would help.”
Many marginally producing wells across the state, moreover, are being capped or “plugged”—taken permanently out of production—simply because they are no longer cost-effective to operate. When a well is plugged, all equipment and most pipe is removed from the wellbore, which then is filled with cement to prevent leakage or contamination. This procedure often takes the well out of production permanently, since the cost of re-opening plugged wells is extremely high.
With any fall in prices, many wells become uneconomical to operate. In Texas, both the number of producing oil wells and the average daily production from those wells is on the decline. By February 2001, Texas had 160,733 regular producing oil wells, compared to 1997’s 175,475. (See Exhibit 71.) That means that nearly 15,000 producing oil wells have stopped pumping since the recent price crash—not including those wells that have been plugged or abandoned. How many ever come back to production remains to be seen. Baker Hughes has estimated that 30 percent of the nation’s stripper wells “are gone for good.”
Natural Gas: Lighter and Brighter
In the early days of petroleum exploration, liquid crude was the sought-after prize. But producers found that crude oil rarely came up the hole alone. Along with the oil came salt water, tarry materials, clear liquids such as kerosene and butane, and a colorless, odorless natural gas.
Liquids could be captured and shipped, but in the early days, natural gas could not. In Texas oilfields, natural gas often was burned away, or “flared,” as a waste product. Not long after the Spindletop field was depleted, however, geologists and engineers realized that natural gas often served as the driving force that brought the heavier hydrocarbons to the surface. This discovery had two major consequences: it promoted the conservation of both oil and gas and gave natural gas economic value.
Over time, as an infrastructure of pipelines grew beginning in the 1930s, natural gas developed into a commercial commodity. In one of the sharpest ironies in the history of the energy industry, natural gas today has surpassed crude oil in both production and value for many major domestic producers. (See Exhibit 72.)
What was happening to the natural gas market during the tumultuous oil years? While natural gas was affected by the events in the oil market, natural gas largely marches to its own drummer. Both fuels are sometimes produced together and they can also be substitutes for each other as energy fuels—but oil and gas operate in different markets, with different influences on demand and supply.
Natural gas cannot be transported all over the world like oil, except for liquefied natural gas (LNG). In the U.S. natural gas market, Texas is the dominant player in a continental, rather than international market. The physical limitation on transporting a gaseous substance means that the market covers only the areas that can be reached by pipelines. Thus the natural gas market has much greater regional differences in supply, demand and deliverability, and each of those factors can affect natural gas prices.
By the time price deregulation came about in 1985, oil prices were headed down, and at the same time, over-supply had moved into the gas market—the so-called “gas bubble.” Producers were hit with sharply lower prices because there was too much gas available. The late 1980s were marked by uncertainty as the gas market moved toward a market-oriented environment after deregulation.
Traditional roles changed for pipelines. In the past, pipeline companies actually bought gas from the producer and re-sold it to users—commercial, industrial or a local distributing company (LDC). Pipelines now became just the transporters of gas, with sales between producers and users arranged by gas marketers and brokers, the newest players in the game.
With deregulation, the Federal Energy Regulatory Commission (FERC) set new rules that required pipelines to ensure open access transportation for everyone: producers, other pipelines, distributors, electric utilities, end-users, as well as brokers and marketers. Natural gas began trading on both spot and futures markets in 1990. Both the open access transportation required of pipelines and greater public access to price information prompted the natural gas market to operate as a competitive commodity market. Gas prices, however, remained low because of the slow departure of the gas bubble.
During the 1990s, gas continued its development as a competitive market while demand caught up with supply. According to the EIA, from 1990 through 1999, U.S. natural gas consumption increased by 16 percent. The EIA attributes part of its greater use as an industrial and electricity-generating fuel to its relatively clean-burning qualities compared to other fossil fuels, such as oil or coal.
Texas is by far the largest consuming state for natural gas, accounting for nearly four trillion cubic feet (TCF) of gas in 1999, or 18 percent of U.S. consumption. In Texas, natural gas is used primarily to produce electric power, although it lags behind lignite coal and nuclear power in this area.
The industrial sector is the largest consumer of natural gas, followed by residential use. The growth of natural gas in the electric utility sector has been limited by competition with coal. Natural gas, however, poses far fewer environmental concerns, which could help expand its use to generate electricity in the U.S. and worldwide. EIA says that the Kyoto Protocol to the United Nations Climate Change Convention recommended measures aimed at decreasing the global level of greenhouse gases and that natural gas would be a key factor in efforts to improve overall global environmental conditions.
Maintaining a sufficient supply of natural gas to feed the increasing demand in the U.S. has not been a problem until very recently. In 1999, Texas produced nearly one-third of the nation’s supply of natural gas (including offshore), some 6.1 TCF, followed by Louisiana (5.3 TCF), Oklahoma (1.6 TCF) and New Mexico (1.5 TCF). According to the EIA, these four states supplied 75 percent of U.S. production in 1999. Texas’ natural gas production has remained in the range of 6 to 6.5 TCF since 1984. (See Exhibit 73.)
Demand for natural gas is strongly influenced by weather, through its use as a fuel for heating, or increasingly for cooling. Much of this decade has seen warmer-than-normal winters which masked the growth that was occurring in gas use, but the events of late 2000 showed that the demand for natural gas may have finally outrun its current supply. National natural gas spot prices spiked as high as $10.50 per Mcf in December 2000, about the same level as a barrel of oil two years before. Regional gas prices soared above $30 in California, where the costs of fuel triggered a crisis in that state’s utilities.
The 30 rural mining-dependent counties represent almost 30 percent of Texas natural gas production. Overall, this group of counties has seen a drop in natural gas production between 1972 and 1999 of 45 percent. Though the majority of the mining-dependent counties have lost gas production, 12 of them gained, with one, Zapata County in South Texas, producing natural gas at a level nearly 15 times higher in 1999 than in 1972. (See Exhibit 74.)
Changes in Natural Gas Production in Mining-dependent Counties
|County||1972 Natural Gas Production (Mcf)||1999 Natural Gas Production (Mcf)||% Change in Gas Production|
|Jim Wells County||265,666,315||14,366,439||-94.6%|
|Sources: Texas Railroad Commission and Texas Comptroller of Public Accounts.|
A growing amount of natural gas is imported from Canada. In 1999, the EIA reports that imports from Canada, by far the primary foreign supplier of natural gas, reached nearly 3.4 TCF, a record level of more than double the amount imported in 1990.
Net imports of natural gas increased for the thirteenth straight year in 1999, contributing 16 percent of consumption, and 1999 saw the highest annual growth rate (10 percent) in Canadian imports since 1995. Additional cross-border pipeline capacity was added in 1999, increasing the deliverability of Canadian gas to U.S. markets. More pipeline capacity expansions are planned for, which could potentially add 1.3 BCF per day to Canadian imports, principally into the U.S. Midwest and Northeast.
Growth in Canadian imports has a dampening effect on the growth in Texas natural gas production, since a large portion of any gas displaced in regional gas markets would come from Texas as the nation’s largest gas supplier.
Texas Oil and Gas: Where We Stand
Texas led the nation in:
High Cost To Rural Texas
The most prolific Texas oil fields and gas fields are in rural areas. In good economic conditions, oil and gas property income and tax payments help such counties pay the bills. But when hard times come to the oil patch, counties have little economic flexibility to ride out the storm.
Today, oil producers are fighting for survival, and mergers, sales of assets, and layoffs are taking their toll on rural Texas. Grant Billingsley, with Wagner & Brown in Midland, notes that corporate mergers have affected rural Texas and that more of the manpower cutbacks can be attributed to the trend in mergers than to technology. Billingsley says, “when companies combine their assets, for example in the Permian Basin, both companies do not need full field crews in a particular area.”
The precipitous decline of oil production, moreover, has had a domino effect on related manufacturing and service industries, wreaking further damage on local economies. Texas public schools, which receive about half of their funding from local property taxes, are feeling the pinch when oil and gas property values collapse, which are based on both the level of reserves for a property (declining through time with maturity of the field) and its price. In some rural areas of the state, petroleum reserves comprise the bulk of school property tax values. (See Exhibit 75.)
Counties with Oil and Gas with More than 50 Percent of School Property Taxes in 1998
|County||Mining-Dependent||1998 Oil & Gas Appraised Property Value||1998 Oil & Gas Share of Property Value||Loss in Oil & Gas Property Value from 1998 to 1999||Percent Change in Oil & Gas Property Value||Percent Change in Total Property Value|
|Source: Texas Comptroller of Public Accounts.|
While oil prices have recovered significantly in recent times, price increases take a while to have much effect on rural economies. The latest oil price collapse was deep and lengthy, and many producers remain hesitant about substantial new investment, particularly in the face of continued uncertainty concerning future oil prices. Moreover, finding skilled personnel when needed may be difficult since the oil price upheavals have driven many out of the business.