Oil production in the United States already has peaked, most energy executives believe, according to a new survey by the Federal Reserve Bank of Dallas.

The quarterly survey by the Dallas Fed, as it’s known, said 66% of oil and gas executives queried across the Eleventh District believe domestic oil production has peaked, while 34% said it has not. The Eleventh District encompasses northern Louisiana, most of New Mexico and Texas, which are home to the Permian Basin, Eagle Ford and Haynesville shales. 

Data was collected by the Dallas Fed on Sept. 9-17, with 166 energy firms responding, including 112 exploration and production (E&P) firms and 54 oilfield services (OFS) firms. 

Peaking oil demand was on the minds of some respondents who commented for the survey.

‘This One Is Different’

“In addition to uncertainty surrounding the health pandemic, we are in a period of energy transition away from fossil fuels,” said an executive. “Going forward, large investment pools of capital will not invest in petroleum. 

“I have lived through several industry booms and busts, but this one is different. I am afraid that only large oil companies with diverse sources of capital will survive. Dividends from one of the major international oil companies are one source of family income, and I am very concerned about the company making a substantial dividend reduction.”

BP plc earlier this month said U.S. oil demand may have peaked in 2019.

Another respondent said oil prices were too low to sustain “replacement drilling. This is by design, I suspect. There will be no recovery as long as oil demand remains depressed.”

Still another said if Democratic presidential nominee Joseph R. Biden Jr. is elected on Nov. 3, it “would wreak havoc on our industry,” and be “way worse” than any supply moves by the Organization of the Petroleum Exporting Countries. “A Biden administration would put us out of business. We could not survive a Green New Deal.”

For the survey, executives said they are forecasting Henry Hub natural gas prices to average $2.55/MMBtu by year’s end. For reference, Henry Hub prices during the survey period averaged $2.05.

West Texas Intermediate (WTI) spot prices were forecast to average $43.27/bbl at the end of 2020, with responses ranging from $30 to $60. During the survey period, WTI was averaging $38.47.

Maintaining Versus Growing

The U.S. oil rig count would increase “substantially” if oil prices average $51-55, according to 43% of the E&P executives surveyed. Another 29% said a price of $56-60 would lead to more rigs going up, while 19% said prices would need to be above $60.

More than one-third (36%) of E&P executives said they expect to see a big increase in completing drilled but uncompleted wells, aka DUCs, if oil prices average $46-50/bbl. Another 28% cited $51-55, with 18% forecasting fewer DUCs if prices averaged $41-45. 

Asked to cite their firm’s primary goal in the next six months, 19% of the E&P executives selected “maintain production” while 16% each cited “grow production,” “find additional sources of capital” and “reduce debt.” 

For the OFS executives, 31% said their primary goal in the next half year was to “grow business activity,” while another 28% chose “maintain business activity” and 11% said “reduce costs.”

According to the oil and gas executives who responded to the 3Q2020 survey, activity declined modestly from the second quarter. The broadest measure of conditions, the business activity index, remained in negative territory, but it improved from 2Q2020 to minus 6.6 from minus 66.1, “suggesting that the pace of the contraction has significantly lessened,” economists said.

The quarterly indexes are calculated by subtracting the percentage of respondents reporting a decrease from the percentage reporting an increase. 

“Production indexes rose significantly but remained negative, suggesting a moderation in production declines,” according to the survey. 

The oil production index rose to minus 15.4 in 3Q2020 from minus 62.6 in the second quarter. The natural gas production index increased 38 points to minus 10.1.

The E&P capital expenditures (capex) index increased sequentially to minus 16.4 from minus 66.1, “indicating a less severe reduction in capital spending. This means that expenditures are declining but not as much as before.” The OFS capex index also increased, to minus 35.1 from minus 73.5.

“Conditions among oilfield services firms continued to deteriorate, albeit at a slower rate,” according to economists. “The equipment utilization index jumped 50 points to minus 18.9 in the third quarter, implying utilization declined but at a much slower pace than over the prior quarter.”

In addition, operating margins climbed to minus 30.8 from minus 68.6.”

The index for prices received for OFS “remained in negative territory but moved up, from minus 64.7 to minus 26.4. Firms found some relief as the input costs continued to decline; the index was minus 9.5 this quarter.”

Meanwhile, labor-related indicators were lower from the second quarter, but they fell “at a more modest pace,” said economists. The aggregate employment index posted its sixth consecutive negative reading, but it moved higher, to minus 18.1 from 46.1. In addition, the index of aggregate employee hours worked increased to minus 15.3 from minus 47.0, while aggregate wages/benefits rose to minus 19.4 from minus 41.7.

“The company outlook index returned to barely positive territory in the third quarter, coming in at 1.9,” economists noted. “The near-zero reading indicates the outlook remained relatively unchanged, a stabilization from the sharp deterioration seen over the prior two quarters. Additionally, fewer firms noted rising uncertainty this quarter than last, and the aggregate uncertainty index fell 19 points to 17.2.”