Oil and natural gas producers in the Midcontinent and Rockies are generally bullish on commodity prices but face challenges including labor scarcity, supply chain issues and drilling cost inflation, according to the latest Tenth District Energy Survey by the Federal Reserve Bank of Kansas City.
The Kansas City Fed, as it is better known, conducts the quarterly survey to gauge upstream activity levels and sentiment around oil and natural gas pricing in the Tenth Federal Reserve District. The district includes all of Kansas, Colorado, Nebraska, Oklahoma and Wyoming, along with the western third of Missouri and the northern half of New Mexico.
Labor scarcity and investor pressure to maintain capital discipline ranked as the top two factors constraining growth for exploration and production (E&P) firms in the region, the survey found. Respondents also cited price uncertainty and supply chain issues/lack of materials among the top reasons.
Despite these challenges, respondents said on average they plan to increase production 7.5% by the fourth quarter of 2022. Firms were contacted from March 15-31.
Oil price expectations surpassed survey records, said the Kansas City Fed’s Chad Wilkerson, vice president, who oversees the central bank’s Oklahoma City branch office. Respondents were asked what they expected oil and natural gas prices to be in six months, one year, two years and five years.
The average expected West Texas Intermediate (WTI) oil prices for those intervals were $96/bbl, $89, $83 and $84, respectively. The corresponding Henry Hub natural gas price predictions were $4.45/MMBtu, $4.32, $4.29 and $4.74.
Survey participants said they expect continued volatility in oil and natural gas prices, given current global events.
“The world oil price is currently in turmoil due to the Russian war on Ukraine, the negotiations with Iran and other outages and factors such as Covid resurgence in China,” one respondent was quoted as saying. “We expect higher prices until some clarity is reached on several of these issues. Expect high volatility to continue.”
A respondent said the biggest factor impacting natural gas prices going forward “is global demand and the ability for the U.S. to continue expanding liquefaction capacities. If progress is made on that front, higher prices could be in order.”
Rising Cost to Drill
Asked what prices were needed for drilling to be profitable across their portfolios, firms on average said $62 for oil and $3.72 for natural gas.
The Kansas City Fed also asked firms to indicate what prices would be needed for a substantial increase in drilling to occur on their respective upstream assets. The average oil price needed was $86, with a range of $45-150. The average gas price needed was $4.53, with responses ranging from $3.00-$6.50, Wilkerson said.
“Overall, firms reported the highest prices needed to be profitable and increase drilling in survey history (since 2014),” said Wilkerson.
One respondent explained that “the rising cost to drill and complete have operators reevaluating this cost to justify drilling. Smaller independents are having a difficult time attracting new investors.” The oilfield services segment has been battling the same supply chain and inflation challenges, translating to higher costs for producers.
Another participant said, “The extended years of low crude oil prices [have] killed the drilling business.”
Energy activity in the Tenth District increased moderately during the first quarter, researchers found, with indexes for employment, wages and benefits, and access to credit reaching their highest levels since the survey began in 2014. “The index for profits also remained elevated, while the pace of growth for revenues slowed slightly and supplier delivery time declined,” Wilkerson said.
The year/year drilling and business activity index dipped from 74 to 52, indicating a moderate decline in year/year growth.
Future activity is set to remain strong, Wilkerson said, as “expectations for future employment, capital spending, wages and benefits and access to credit continued to increase.”
A majority of firms (52%) reported a slight increase in U.S. well productivity over the course of the pandemic, Wilkerson said, with nearly 30% of firms reporting slight or significant decreases and over 18% reporting no change.
In recent years, “technology in fracturing keeps becoming more efficient,” one respondent was quoted as saying. “We are beginning to drill and complete our second-tier locations, with a bit of trepidation. I do not believe we will see the big percentage increase [in well productivity] year-over-year as happened this past decade.”
Looking ahead, 14% of firms said they expected a significant increase in productivity, and 48% predicted a slight increase. Another 24% expected no change while 14% of respondents predicted a slight decrease.
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