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No Relief Likely in Permian Takeaway Before Late 2019, Energy Execs Tell Dallas Fed

Oil and natural gas sector activity continued its momentum during the third quarter across Texas, northern Louisiana and southern New Mexico, according to a survey of energy executives, but many are concerned that it’s going to take awhile before any relief in pipeline constraints in the Permian Basin.

The Federal Reserve Bank of Dallas, which covers the Eleventh District, published its 3Q2018 energy survey on Monday, comparing activity to the second quarter. Data were collected Sept. 12–20, and 171 energy firms responded to the survey. Of the respondents, 110 were exploration and production (E&P) firms and 61 were oilfield services (OFS) firms.

The business activity index, considered the broadest measure of conditions facing the region’s energy firms, dipped “very slightly” to 43.3 from 44.5, but it remained near the highest level since the survey began.

The OFS business activity index also declined to 45.9 from 54.2 in 2Q2018, “suggesting a slight deceleration in growth.” Meanwhile, the business activity index for E&Ps rose sequentially to 41.8 from 37.2.

Positive readings in the survey generally indicate expansion, while readings below zero generally indicate contraction. “All indexes in the latest survey reflected expansion on a quarterly basis,” Dallas Fed researchers said.

Oil and gas production increased for the eighth quarter in a row, according to E&P executives. The oil production index moved down to 34.8 from 39.0 in the second quarter, suggesting crude production “rose at a slightly slower pace relative to last quarter.”

However, the natural gas production index edged up sequentially to 35.5 from 33.4, “its highest level since the survey began. This suggests gas production rose at a slightly faster pace relative to last quarter.”

Utilization of equipment by OFS firms slightly increased in the third quarter, with the corresponding index at 44.8, up three points from the second quarter. Input costs on the services side continued rising as the index jumped to 46.6 from 36.3. The index of prices received for OFS remained unchanged at 23.2, “suggesting prices rose at the same pace as last quarter.”

For the energy labor market, the indexes in 3Q2018 from 2Q2018 pointed to continued growth in employment and work hours.

“The rate of growth slowed though, particularly for oilfield services,” Dallas Fed researchers said. The employment index for services fell sharply from 44.1 to 31.7, while the worked index for services also fell to 41.9 from 50.8.

“Meanwhile, the employment index for E&P firms increased from 11.6 to 17.4, the highest level since the survey began. The aggregate wages and benefits index remained positive but fell from 27.9 to 23.5.”

The company outlook index posted a 10th consecutive positive reading and edged up one point sequentially to 46.4 in 3Q2018. The uncertainty index rose 10 points to 8.8, “suggesting that uncertainty regarding firms’ outlooks increased this quarter. This increase was particularly prominent among oilfield services firms, where the outlook uncertainty index jumped nearly 22 points to 14.7.”

Every quarter the Dallas Fed asks energy executives about their views of the sector. The latest survey received a “larger-than-average quantity of comments,” particularly regarding pipeline constraints and price differentials in the Permian Basin.

Asked in what quarter executives expected crude oil pipeline capacity would be sufficient to alleviate the current takeaway constraints in the Permian, more than half (56%) said capacity would not be sufficient until the end of 2019. Forty-four percent said it would be 2020 or later. The most frequent response, selected by 27% of executives, was 4Q2019.

Respondents also were asked if they expected recent price differentials between WTI Midland and Cushing to have an impact on Permian oil production growth over the next six months.

“The majority of the executives -- 70% -- said that they expect recent crude oil price differentials between WTI Midland and Cushing to have a slightly negative impact on oil production growth in the Permian Basin over the next six months,” researchers said. “Seventeen percent expect significant impacts, while 12% expect no impact.”

More than half (52%) of the executives said the Trump administration’s 25% steel import tariffs have had a “slightly negative impact” so far on business. “Thirty-three percent noted no impact, while the remaining 15% said the steel import tariffs have had a significantly negative impact on their business.”

An E&P executive said the steel tariffs had added about  “$100,000 of costs to each of our wells. Some thought should be given to removing the tariffs when domestic mills are not currently running the products.”

Supply chain savings to the Permian also could be “significant” if there was an interstate or main lane connector between Interstate 10 and Midland-Odessa in West Texas, the E&P executive said. “This connector would dramatically remove road congestion and accidents from the farm-to-market road system and improve supply chain productivity.”

Another E&P executive cited constraints in skilled labor for commercial drivers, mechanics, electricians and welders, among others, which are likely to “limit service delivery, timing and quality, and thus negatively impact production growth.”

An E&P executive who is not an operator in the Permian said investments there seemed “overblown with outrageous costs and little real actual returns for the huge volumes of money being ‘churned.’ I believe the Permian operators/industry is hurting itself by flaring and venting natural gas rather than containing that product or using it. This will negatively impact the entire domestic industry, not just the Permian producers. I believe Texas regulators are being irresponsible in allowing this rampant pollution and waste of natural resources.”

Permian gas takeaway “is also an issue,” said another executive, “with Waha trading at half of Henry Hub recently. The infrastructure to place output in central Mexico demand centers has been delayed, with project schedules more opaque south of the border. Hopefully, in the next six months, this is resolved.”

On average, respondents expect West Texas Intermediate (WTI) oil prices to be $68.81/bbl by the end of the year. Henry Hub natural gas prices are forecast to end 2018 at $2.94/MMBtu.

“The year-end 2018 price expectations for WTI oil and Henry Hub natural gas were close to the spot price during the survey collection period,” said researchers. For reference, WTI spot prices averaged $69.79/bbl, and Henry averaged $2.95/MMBtu during the survey collection period.

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