1. Texas Petro Index 2014 Annual Review Karr Ingham Petroleum Economist Texas Alliance of Energy Producers

2. The Texas Petro Index Composite Index based at 100.0 in January 1995 Composite Index based at 100.0 in January 1995 Calculated using a comprehensive group of Texas E&P indicators Calculated using a comprehensive group of Texas E&P indicators Tracks growth rates and business cycles in Texas upstream energy E&P economy Tracks growth rates and business cycles in Texas upstream energy E&P economy

3. Texas Petro Index - Components Crude oil and natural gas wellhead prices Crude oil and natural gas wellhead prices Rig count Rig count Drilling permits Drilling permits Well completions Well completions Volume & value of Texas crude oil & natural gas production Volume & value of Texas crude oil & natural gas production Industry E&P employment Industry E&P employment

4. The Texas Petro Index January 1995 – December 2014

5. Crude Oil Price/bbl WTI Posted – Monthly Average

6. Crude Oil Price WTI Posted – Moving 12-Mo Avg

7. Crude Oil Price WTI Posted – Monthly Average

8. Crude Oil Price WTI Posted – Moving 12-Mo Avg

9. Natural Gas Price - Month Avg of First-Of-Month Spot Index Price for Waha and Houston Ship Channel January 1995 – December 2014

10. Natural Gas Price – Moving 12-Mo Avg Avg of First-Of-Month Spot Index Price for Waha and Houston Ship Channel

11. Texas Rig Count Monthly Avg Jan 1995 – June 2014

12. Texas Original Drilling Permits Monthly Jan 1995 – Dec 2014

13. Texas Original Drilling Permits Moving 12-Mo Avg Jan 1995 – June 2014

14. Texas Oil & Gas Well Completions Monthly January 1995 - December 2014

15. Value Crude Oil & Natural Gas Production Monthly January 1995 – December 2014

16. Crude Oil & Natural Gas Percent of Total O&G Production Value in Texas Monthly January 1995 - December 2014

17. Texas Crude Oil Production Volume Annual 1995 - 2014

18. Texas Natural Gas Production Volume 12-Month Moving Avg Jan 1995 – Dec 2014 Texas natural gas production – 8.27 BCF in 2014

19. Texas Oil & Gas Payroll Employment Monthly January 1995 – December 2014 Texas upstream oil & gas payroll employment at a record 311,400 in December 2014 30, 700 jobs added in 2014

20. Texas Oil & Gas Payroll Employment “Extraction” and “Support Activities” Monthly January 1995 – December 2014

21. Texas Petro Index 2014 Highlights Texas Petro Index peaks at record 312.9 in October before declining in November and December A record 25,792 drilling permits issued Record industry employment achieved Crude oil production within striking distance of 1972 all-time record Rig count monthly average peaks at 904 in November

22. Texas Petro Index 2014 Highlights Monthly average posted WTI crude oil price peaks at $101.68 in June, falls to $55.52 in December (and $44.46 in January 2015) Daily crude oil price peaks at $103.75 in June, falls to $41.00 on January 28, 2015 All-time monthly record number of drilling permits issued in September and October 2014

23. The dominoes are falling….. Crude oil price peaks in June, has now fallen by 60% - value of Texas production plummets Drilling permits peak in October and fall by 50% from that level in November and December Weekly rig count peaks in week 3 November 2014 at 906 before falling to 852 at year-end and 695 last Friday

24. The dominoes are falling….. Still to come – industry employment likely peaks and begins to decline in first quarter 2015, no later than second quarter Texas crude oil production peak is months into the future, but will ultimately occur

25. What can we expect? (Or, what should we be prepared for)? The Texas upstream oil & gas economy as reflected by the Texas Petro Index is likely to contract by 40% in the coming downturn The statewide rig count is set to decline by about 2/3 to near 300 50,000 or more upstream industry jobs lost, which may translate into the loss of 250,000 jobs or more in the statewide Texas economy

26. The market occurrence that needs to happen the soonest will take the longest…. Unlike the 2008 price collapse, which was demand-driven, the current price collapse is supply-driven New production continues to come online even today, and production will continue to increase for at least several months into 2015 Probably a year or more until production falls far enough to begin to effect prices significantly

27. Five-Year Expansion Cycle is Over October peak marks end of 58-month, 66% expansion in Texas upstream oil & gas economy 180% increase in Texas crude oil production Over 132,000 jobs added to Texas upstream oil & gas company payrolls Rig count grew from 320 to 906

28. The Statewide Texas Economy Will Be Affected The Texas upstream oil & gas industry directly accounts for about 8.5% of all jobs added to the post-recession statewide economy The industry played a significant role in the addition of about 40% of all jobs added to the Texas economy post-recession The industry led the Texas economy out of recession If it’s true on the way up, it also has to be true on the way down

29. But let’s not forget….. Markets exist to serve consumers, not producers This is how markets are supposed to work The function of high prices is to stimulate production (and limit consumption), which then pushes prices lower The consumer outcome is favorable – lower prices, and the establishment of abundant and affordable energy for decades to come

30. Texas Petro Index 2014 Annual Review Karr Ingham Petroleum Economist Texas Alliance of Energy Producers