Oil & Natural Gas Industry

Source: The Handbook of Texas Online

Postwar markets for oil and gas expanded so rapidly during the autumn of 1947 that the Texas Railroad Commission ordered no shutdown days for the first time in eight years. With the end of federal regulation of oil and gas production, reversion to well-spacing regulations of the commission brought a surge of drilling. As demand swelled, petroleum prices rose to heights unequaled in almost three decades, beginning as soon as price controls ceased on July 25, 1946.

The posted price of West Texas intermediate-grade crude, for example, frozen at $.92 during the War, jumped to $1.27 by the end of that month, rose another $.10 before the year's end, and went to $1.62 in March 1947, $1.82 in October, and $2.32 in December 1947. Demand for natural gas grew, in part as a result of strikes by eastern coal miners in 1946. Some of the extraordinary demand for oil products was met with imported crude oil, however, and in 1948, despite peak domestic production, the United States became a net importer of oil. Imports increased 24 percent in 1948-49 alone.

Large-scale importation retarded exploration in areas that did not seem to have the promise of large oil reserves; Southwest Texas was especially affected. Nevertheless, by 1948 further pipeline construction connected fields in Southwest Texas and the Permian Basin with regional outlets for oil and gas. By January 1, 1950, Texas had 15,010 miles of gas transmission line and 26,409 mile of crude oil trunk lines. Their operation encouraged development of additional gas reserves in the upper Gulf Coast area, in Southwest Texas (especially in Hidalgo and Zapata counties), and in the Permian Basin.

Interstate gas shipments more than doubled between 1950 and 1955 as transmission systems reached forty-six of the contiguous states. In the Permian Basin, the discovery of high-grade crude oil below the Permian formations encouraged deep tests in both new areas and old fields; it also led to reinvestigation of areas where prospecting had been unsuccessful in the twenties and thirties. Drilling in the region rose 50 percent between 1947 and 1948 and again between 1949 and 1950. Between 1946 and 1951 the number of independents and major oil companies doing business in Midland rose from 135 to 363, as companies such as J. S. Abercrombie of Houston and Rowan Drilling of Fort Worth established local offices.

Among the newcomers were growing numbers of young men from other parts of the country; George H. W. Bush and John and Hugh Liedtke, among others, launched oil careers in the Permian Basin during this era. Major finds in this region included new discoveries in the Midland and Delaware basins, on the Central Basin platform and in the multicounty Spraberry trend. Major discoveries during the period 1946-50 included Andector (1946), Goldsmith 5600' (1947), Kelly-Snyder and Diamond M (1948), TXL (Ellenburger) and Cogdell (1949), and Prentice and Salt Creek (1950). By the end of the decade the Permian Basin was the leading oil-producing area in the United States.

The long-standing dispute over ownership of the Tidelands was settled with federal legislation in 1953. Earlier work, including a discovery on State No. 245, had not established the economic importance of these areas, but geophysical work off Brazoria, Chambers, Galveston, Jefferson, and Matagorda counties supported increasing levels of leasing and, in later years, significant discoveries. On-shore discovery of the Neches field in 1953 and West Hastings in 1958 supported declining reserves in the upper Gulf Coast and East Texas areas.

The intense exploration of the early 1950s made sizable additions to the estimated known reserves of the state, which peaked in 1952 at 15,314,964,000 barrels. The major on-shore oilfields of Texas had been located by the middle of the 1950s. Though there were annual increases during some years thereafter, the general trend was downward, to 14,859,674,000 barrels in 1960 and 13,063,182,000 barrels in 1970. During the period of declining oil reserves, natural gas came to occupy an increasingly important place in the petroleum industry of Texas both as a source of energy and as the origin of feedstocks for a growing petrochemical industry.

Federal and state governments had important roles in this general development. In 1947, the Railroad Commission ordered well shutdowns where it found operators flaring large quantities of casinghead gas. Its first target was the complex Seeligson field in Southwest Texas, where it required that all oil or gas be put to uses that conformed to conservation orders. The Seeligson order marked the first shot in a series of legal battles over gas conservation from which the commission emerged triumphant.

By the end of 1948, eighty-two projects utilizing casinghead gas had been completed in Texas and forty-three more were underway, largely by major companies and large independents, often acting cooperatively. On April 1, 1953, the commission shut down the 2,268 producing wells in the Spraberry trend of the Permian Basin in its battle to eliminate the conspicuous waste of natural gas. A large measure of control over natural gas passed to the Federal Power Commission in 1954, when the United States Supreme Court ruled that the FPC had jurisdiction over the production of gas sold in interstate commerce (the FPC had set interstate prices since 1939).

This decision, and the FPC policy of keeping the price of natural gas low, led to the growth of intrastate gas sales and encouraged the further expansion of the petrochemical industry within the state, as El Paso Natural Gas and other companies invested in sizable gathering and transmission systems.

During the 1950s, oilmen enhanced the gas reserves of Texas with the discovery of two new horizons in the Katy field (1954) and of eight new gas fields: Hansford (Morrow, Upper) in 1953; Emperor (Devonian) in 1954, Dora Roberts (Devonian) in 1955, Fashing and Halley (Devonian) in 1956, Viboras (Brooks) in 1957, and Thompsonville, NE (Wilcox 9500') and the Massive First and Massive Second sands of Viboras in 1959.

Oil producers were less fortunate in sustaining reserves, in part because of a persistent cross-pressure of rising costs against constant revenues, largely the consequence of the increasing volume of less expensive foreign crude oil. With the exception of a short break during the Suez crisis of 1956, cheap foreign oil continued to reach American markets in increasing volume.

In 1955, when total demand for oil rose 7.6 percent over the previous year, imports increased by 17.2 percent. When domestic demand fell in 1957 and 1958, Texas allowable production was cut in half, but imports continued to rise. Attempts made by the Texas Independent Producers and Royalty Owners Association and other industry associations to restrict imports did not succeed in Washington. By 1960, increased imports prompted the Railroad Commission to lower producing days to eight per month, a level that remained into 1962.

The consequence of low prices and severely restricted production was the sale of numerous oil and gas properties and companies during the 1960s. Honolulu Oil, Union Texas Natural Gas, Republic Natural Gas, Monterey Oil, and Plymouth Oil were among the companies acquired by other firms during the decade.

In 1969, Michel T. Halbouty of Houston, a leader in petroleum trade associations, estimated that the number of independent producers in the United States had declined by three-quarters during this period; though Texas was less hard-hit, as many as one-quarter of the independents in Midland, one of the state's petroleum centers, went out of business between 1951 and 1969.

The most notable developments in oil during the latter half of the 1950s were the improved management of production, the expansion of the petrochemical industry, and natural gas discoveries. Producers, caught between rising costs and prices depressed by imported crude oil, increasingly implemented efficiency measures, including unitized production of oil from common fields or pools. Scurry County producers formed the Scurry Area Canyon Reef Operators Committee, and the large and complex Seeligson field was unitized, along with fields throughout the state, with the encouragement of the Railroad Commission.

The commission also sought and secured the watchdog's role over pollution, confirmed by judicial decision in 1964. The petrochemical industry of Texas grew dramatically as national demand for products grew at a rate of 10 percent a year into the 1960s. New installations appeared along the upper Gulf Coast, along the Houston Ship Channel, in Odessa, and in other locations. New products included styrene, butadiene, polypropylene, and benzene; larger quantities of synthetic rubber and ammonia were also produced in the state.

Expansion of petrochemical production in Texas was a response to the increasingly large quantities of intrastate gas available from Southwest Texas, the Permian Basin, and the upper Gulf Coast area. In Southwest Texas, the Wilcox sands yielded new reserves in Bee, Goliad, Webb, and Duval counties, while exploration in Hidalgo County found additional gas in the Frio sands. During the early years of the 1960s, drillers located more than half a dozen new gas fields in Zapata and Zavala counties. In the upper Gulf area, new production was found in the Alligator Bayou (Chambers County) and Chocolate Bayou (Brazoria County) fields.

The largest gas discoveries were located in the Permian Basin of West Texas: Oates, N.E. (Devonian), Sandhills, Lockridge (Ellenburger 18600'), Waha, Toro, Sawyer, Block 16 (Devonian), Greasewood, Barstow (Fusselman), Block 16 (Ellenburger), MiVida (Fusselman) Evetts (Silurian), ROC (Devonian), Grey Ranch, War-Wink, Vermejo, and Elsinore. The largest gas discovery since the Panhandle field, the Gomez field in Pecos County, was followed by large additions to the Coyanosa and Ozona fields during the latter half of the decade. In Southwest Texas there were important gas discoveries in the Alazan, North (J-36), Laguna Larga, Zone 21-b trend, Laredo, C. J. Martin, and McMurray fields.

In the upper Gulf Coast area the Katy I-B, Katy Cockfield Upper B, and Point Bolivar fields came into production near petrochemical installations. The other major gas fields discovered during the 1960s and 1970s include Trawick (Travis Peak) and Oak Hill (Cotton Valley) in East Texas, Giddings (Austin Chalk, Gas) in Central Texas, Washita Creek (Hunton 19475'), Buffalo Wallow (Hunton 19600'), Buffalo Wallow (Morrow), and Canadian, South East (Douglas) in the Panhandle, and No Word (Edwards) in Lavaca County.

In response to the Permian Basin Rate Case decision by the United States Supreme Court in 1964, which confirmed more extensive Federal Power Commission jurisdiction over the production of gas for the interstate market, the shift of gas to the intrastate market continued, making additional feedstock available to installations within the state. As prices moved up sporadically during the 1960s and early 1970s, hitting $.35 per thousand cubic feet of "new gas" in 1973, exploration for natural gas increased. Oil activity also picked up during 1972, when the Railroad Commission increased allowables to 100 percent of the "maximum efficient rate."

In response to the continuing decline of national petroleum reserves, the federal government, which had capped oil prices in 1972, reclassified them according to four categories: old oil (oil produced from properties in production in 1972), released oil (oil from old reservoirs in excess of 1972 production), stripper oil (from wells that produced ten barrels or less per day), and new oil (not in production in 1972). Price ceilings were removed from all but old oil.

Texas achieved record production in 1972 with 1,263,412,000 barrels, but estimated proven crude oil reserves continued to decline from the historical high point of 15,581,642,000 barrels, achieved in 1951. The decline of Texas reserves both affected and reflected the loss of spare capacity in the domestic petroleum industry with the continuing decline of the domestic industry and reserves.

Though the Texas industry had come to accept the fact that the prospects of the oil industry were increasingly determined in Washington, during 1973 it was indisputable that the future of Texas oil was being written in foreign capitals. Renewed warfare between Israel and some Middle Eastern Arab countries brought the United States and the Netherlands to support Israel, thus prompting Mu`ammar al-Gadhafi of Libya to call for an embargo of crude oil shipments from Muslim counties to the two western nations.

Though the embargo "leaked" from the time it was proclaimed, the occasion permitted OPEC (the Organization of Petroleum Exporting Countries) to execute a grand shift of economic power: suppliers took control over the price of crude oil from multinational purchasers. Within six weeks of the October onset, the price of Arabian crude rose from $5.40 to $17 a barrel. In the United States the Emergency Petroleum Allocation Act, the federal government's response to shortages, adjusted the ceiling price of "old" oil upward to a national average of $5.05. New, released, and stripper oil was still uncontrolled and rose to $10.82 in December.

In Texas the response was a dramatic increase in drilling and exploration. The rig count increased 35 percent between 1973 and 1974 and 26 percent the following year. The increased activity slowed the rate of decline of the state's oil production and crude oil reserves. The impetus lasted until 1976, when new federal classifications and lower price lids were established. Thus, while well completions rose 30.8 percent in 1975, they declined 4.3 percent the following year, in response to federal price regulation.

Federal regulation also encouraged an economically risky shift of exploration investment to the Anadarko Basin of Texas and Oklahoma. Producers continued to implement secondary recovery projects in the Seminole and other fields. With improvements in geophysical techniques, offshore exploration for large reserves actually increased and the discovery rate improved, from Galveston to Corpus Christi, with significant discoveries in Galveston Bay and other areas by Pennzoil, Union Oil of Texas, and other companies.

Refineries in the state invested largely in energy-saving and pollution-control technologies in response to higher operating costs and more stringent federal regulation. Federal policies changed again in 1976, with the Energy Policy and Conservation Act, which reorganized categories of oil, reduced the price of "upper-tier" oil, and placed ceilings on other categories. Wildcat drilling declined temporarily, but after six months new prices were issued, producing an increase in activity during 1977.

During this year, a brisk demand in the interstate gas market stimulated additional off-shore exploration and the construction of additional processing projects on the Texas Gulf Coast. Refineries continued to reduce stack-gas emissions and to process waste oil for energy generation. By the end of the following year, the Alaska Pipeline was flowing; it alleviated international shortages until the autumn of 1978.

The second major international shock to the petroleum industry came in late 1978 with the fall of the government of the Shah of Iran. Shortages stemming from that event led to international shortages that lasted into the fall of the following year. With panic buying on new international oil exchanges and a rise in spot prices, crude prices rose by nearly one-third in March alone, while product prices rose by nearly two-thirds. President James E. Carter decontrolled oil prices in the United States, and the average price rose from $12.64 in 1979 to $21.59, and to $30 and then to $34 in 1980.

In Texas, rig counts jumped from a yearly average of 770 in 1979 to 1,318 in 1981. During these years, old records in bids for state leases were broken. Costs of lease bonuses, royalties, supplies, and services and compliance with federal regulation, especially the Clean Air Act, drove the cost of exploration ever higher. Federal inducements through the Natural Gas Policy Act led oilmen to seek economically risky objectives, notably deep tight-sand gas. The Windfall Profits Tax of 1980 and the Economic Recovery Tax Act of 1981 made it progressively more difficult to raise capital for exploration.

Subsequent lowering of the maximum tax rate and the setting of minimum tax standards dried up sources of the risk capital that had funded exploration during the postwar period. Some areas remained active, including edges of the Midland basin, gas exploration in off-shore areas and in South Texas, and the Austin Chalk formation of Central Texas. The latter, long known to contain oil, saw extensive lease play and drilling to 1986. State government received increased tax revenues from the petroleum industry during the boom. In 1983, 28 percent of all tax revenue came from oil and gas operations. With the inclusion of federal payments, income from oil and gas taxes, mineral lease and bonus, and oil and gas royalties still comprised 17.16 percent of the revenues of state government.

As most of Texas on-shore was considered "mature" in terms of geological exploration, producers turned increasingly during the 1980s to costly secondary and tertiary development programs to extract more crude oil from known fields. Shell, Mobil, Amoco, and Gulf undertook expensive carbon dioxide injections in Permian Basin fields. Texaco undertook steam-flood projects in the Sour Lake field; Mitchell Energy and Development Corporation and other operators tested Enhanced Oil Recovery techniques in East and North Texas.

Though higher natural gas prices had prompted additional searches for this resource, oil exploration was prompted increasingly by optimistic economic projections of the price of oil. As Daniel Yergin put it, "forecasting blossomed." With the passing of time, however, oilmen realized that the decline of economic activity, especially in Europe during the early 1980s, fuel substitutions, and conservation had reduced demand in developed countries during the Texas boom. Thus, as price balanced demand, the price of crude oil declined and precipitated the initial wave of business failures in oil, finance, and real estate in Texas; in March of 1983, OPEC cut its price from $34 to $29 a barrel.

In October of that year, distress in Texas business was clearly signaled by the failure of the largest independent bank in the state, the First National Bank of Midland. Further reversals were anticipated in 1985, when declines to $18 to $20 were forecast, but markets rose to $31.75 in late November, prompting buy-outs within Texas. The following year, prices fell as low as $7, triggering additional failures within the industry and the related financial community. The Texas rig count fell by more than half, from 677 to 311 in 1986, the most dramatic proportionate decline since the end of World War II.

Drilling permits fell to about one-third of the high point reached in 1981. The rig count, reflecting exploration, fell to 206 in 1989, one-sixth of the record achieved eight years earlier. Austin Chalk-area exploration and development continued in brisk spurts, in response to new technologies such as horizontal drilling, used extensively by Oryx Energy in the area. Natural gas exploration in Southwest Texas and in off-shore areas slowed, but was sustained by finds in the Vicksburg sands and by the application of three-dimensional geophysical modeling of offshore areas. The rig-count in 1991 fell to 315, less than a quarter of its level in 1981.

As national oil reserves and production declined sharply-by two million barrels per day between 1986 and 1990-Texas followed the trend. Estimated proven reserves as of January 1, 1992, were 6,797,000,000 barrels, less than half the historical peak achieved forty years before. Production of 612,692,000 barrels was less than half of the peak reached twenty years earlier.

Texas refineries, still the most active in the nation, processed 1,625,156,579 barrels of fluids during 1992, including 784,805,108 barrels of gasoline, 136,972,276 barrels of home heating oil, and 107,953,913 barrels of kerosene (jet fuel). In that year seven refineries had individual capacities or more than 200,000 barrels of oil a day: Amoco (Texas City), Exxon (Baytown), Chevron (Port Arthur), Mobil (Beaumont), Lyondell Petrochemical (Houston), Star Enterprise (Port Arthur and Neches), and Shell (Deer Park).

Beginning in the late 1970s, with the decline of domestic oil production, these installations processed increasing quantities of heavier, higher-sulfur crude oil from Saudi Arabia, Canada, Mexico, and Venezuela that required investments in improved desulfurization techniques.

During the 1970s and 1980s the Texas oil and gas industry had what might well have been its last boom. Subsequently, economic, social, and political life in the state changed greatly. The petroleum industry, more than one-quarter of the state's economy in 1981, fell to half that level ten years later. Massive losses in energy and real estate lending brought the collapse of the large home-owned financial institutions that had commonly been at the center of community development; of the large banks, Frost National alone survived.

One-third of oil and gas employment was lost between 1982 and 1994. Workers left producing regions as rigs shut down and producers carried through successive reductions in staff; white-collar ranks thinned noticeably from the late 1980s onward, as producers cut technical and managerial personnel in the face of stagnant prices and rising costs. State and local governments found that lower income from production and property taxes necessitated austere budgets, and affected communities launched searches for new revenue and increased efforts to diversify their economies.

The proportion of state government revenue from the petroleum industry declined to 7 percent in 1993, one-quarter of its level ten years earlier. In the final decade of the twentieth century, a great industry and the aspects of Texas life that were related to it were downsizing. Only petrochemicals gained: lower prices for oil and gas caused facilities to expand and related employment to increase by one-tenth between 1988 and 1991. This sector of the industry remained competitive in international markets, despite pollution control and abatement costs, which approached $1 billion a year in 1994. At a rate governed by international prices and technology, the rest of the petroleum industry in Texas was inching down the road from Spindletop.

BIBLIOGRAPHY: Mody C. Boatright and William A. Owens, Tales from the Derrick Floor: A People's History of the Oil Industry (Garden City, New York: Doubleday, 1970). Christopher J. Castaneda and Joseph A. Pratt, From Texas to the East: A Strategic History of Texas Eastern Corporation (College Station: Texas A&M University Press, 1993). James Anthony Clark and Michel T. Halbouty, The Last Boom (New York: Random House, 1972). James Anthony Clark and Michel T. Halbouty, Spindletop (New York: Random House, 1952). John O. King, Joseph Stephen Cullinan (Nashville: Vanderbilt University Press, 1970). Henrietta M. Larson and Kenneth Wiggins Porter, History of Humble Oil and Refining Company (New York: Harper, 1959). Samuel D. Myres, The Permian Basin: Petroleum Empire of the Southwest (2 vols., El Paso: Permian, 1973, 1977). Roger M. and Diana Davids Olien, Easy Money: Oil Promoters and Investors in the Jazz Age (Chapel Hill: University of North Carolina Press, 1990). Roger M. and Diana Davids Olien, Life in the Oil Fields (Austin: Texas Monthly Press, 1986). Roger M. and Diana Davids Olien, Oil Booms (Lincoln: University of Nebraska Press, 1982). Roger M. and Diana Davids Olien, Wildcatters: Texas Independent Oilmen (Austin: Texas Monthly Press, 1984). Joseph A. Pratt, The Growth of a Refining Region (Greenwich, Connecticut: Jai Press, 1980). David F. Prindle, Petroleum Politics and the Texas Railroad Commission (Austin: University of Texas Press, 1981). Walter Rundell, Jr., Early Texas Oil: A Photographic History, 1866-1936 (College Station: Texas A&M University Press, 1977). M. Elizabeth Sanders, The Regulation of Natural Gas: Policy and Politics, 1938-1978 (Philadelphia: Temple University Press, 1981). John S. Spratt, The Road to Spindletop (Dallas: Southern Methodist University Press, 1955; rpt., Austin: University of Texas Press, 1970). Charles Albert Warner, Texas Oil and Gas Since 1543 (Houston: Gulf, 1939). Daniel Yergin, The Prize: The Epic Quest for Oil, Money and Power (New York: Simon and Schuster, 1991).

Roger M. Olien

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(information from The Handbook of Texas Online --
a multidisciplinary encyclopedia of Texas history, geography, and culture.)

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