Faced with ongoing uncertainties ranging from the fall elections to the global oil market and the LNG “pause,” U.S. producers are holding activity steady.
MICHAEL PLANTE and KUNAL PATEL, Dallas Federal Reserve Bank
Activity in the oil and gas sector was relatively unchanged in the first quarter of 2024, according to oil and gas executives responding to the Dallas Fed Energy Survey. The business activity index, the survey’s broadest measure of conditions that energy firms in the Eleventh District face, was 2.0 in the first quarter, suggesting little-to-no growth during the quarter, Fig. 1. The index was essentially unchanged from fourth-quarter 2023.
OVERVIEW
The Dallas Fed conducts the Dallas Fed Energy Survey quarterly to obtain a timely assessment of energy activity among oil and gas firms located or headquartered in the Eleventh District.
Methodology. Firms are asked whether business activity, employment, capital expenditures and other indicators increased, decreased or remained unchanged compared with the prior quarter and with the same quarter a year ago. Survey responses are used to calculate an index for each indicator. Each index is calculated by subtracting the percentage of respondents reporting a decrease from the percentage reporting an increase.
When the share of firms reporting an increase exceeds the share reporting a decrease, the index will be greater than zero, suggesting the indicator has increased over the previous quarter. If the share of firm reporting a decrease exceeds the share reporting an increase, the index will be below zero, suggesting the indicator has decreased over the previous quarter.
Data were collected March 13-21, and 147 energy firms responded. Of the respondents, 97 were exploration and production firms, and 50 were oilfield services firms.
Special questions this quarter include an annual update on break-even prices by basin, anticipated employee head count changes in 2024, expectations regarding the net firm-level impact of the methane charge, and the expected impacts of the recent LNG export facility permitting pause. Among more salient responses, respondents reported higher break-even prices.
This quarter’s survey also includes, for the first time, a set of questions regarding price expectations for oil and natural gas over six-month, one-year, two-year and five-year horizons.
OIL AND GAS PRICES/SUPPLY & DEMAND
On average, respondents expect a West Texas Intermediate (WTI) oil price of $80/bbl at year-end 2024; responses ranged from $70/bbl to $120/bbl, Table 1. When asked about longer-term expectations, respondents, on average, expect a WTI oil price of $83/bbl two years from now and $90/bbl five years from now.
Survey participants expect a Henry Hub natural gas price of $2.59/MMBtu at year-end, Table 2. When asked about longer-term expectations, respondents, on average, expect a Henry Hub gas price of $3.18/MMBtu two years from now and $3.94/MMBtu five years from now. For reference, WTI spot prices averaged $82.52/bbl during the survey collection period, and Henry Hub spot prices averaged $1.44/MMBtu.
A special question asked executives at E&P firms, “In the top two areas in which your firm is active, what WTI oil price does your firm need to cover operating expenses per well? Accordingly, the average price across the entire sample is about $39/bbl, up from $37/bbl last year, Fig. 2. Across regions, the average price necessary to cover operating expenses ranges from $31/bbl to $45/bbl. Almost all respondents can cover operating expenses for existing wells at current prices.
Large firms (with crude oil production of 10,000 bpd or more as of fourth-quarter 2023) require prices of $26/bbl to cover operating expenses for existing wells, based on the average of company responses. That compares with $44 for small firms (fewer than 10,000 bpd).
FINANCIAL OUTLOOK/STRATEGY
The company outlook index rebounded in the first quarter, jumping 24 points to 12.0. While the company outlook index increased, it is still below the series average. The overall outlook uncertainty index fell 22 points to 24.1, suggesting that while uncertainty continued to increase on net, fewer firms noted a rise in the recent quarter. The uncertainty index this quarter was slightly above the series average.
Capital spending. One of this quarter’s special questions asked operator executives, “In the top two areas in which your firm is active, what WTI oil price does your firm need to profitably drill a new well? For the entire sample, firms need $64/bbl, on average, to profitably drill, higher than the $62/bbl price when this question was asked last year, Fig. 3.
Across regions, average break-even prices to profitably drill range from $59/bbl to $70/bbl. Break-even prices in the Permian basin average $65/bbl, $4 higher than last year. Almost all firms in the survey can profitably drill a new well at current prices. (The WTI spot price was $83/bbl during the survey period.
Large firms (with crude oil production of 10,000 bpd or more, as of fourth- quarter 2023) require a $58/bbl price to profitably drill, based on the average of company responses. That compared with $67/bbl for small firms (fewer than 10,000 bpd).
Methane emissions. In another special question, executives were asked, “The U.S. Environmental Protection Agency released guidance earlier this year regarding the methane charge from the Inflation Reduction Act. What net impact will the methane charge have on your firm?”
The most-selected response among E&P firms was “slightly negative,” chosen by 46% of respondents, Fig. 4. Another 34% selected “significantly negative,” while 19% selected “neutral,” and 1% expect a positive impact. Meanwhile, the most-selected response among support services firms was “neutral,” chosen by 41% of respondents. The next most-popular response was “slightly negative,” selected by 27% of support service firms, followed by “significantly negative,” at 20%. A small group, 11%, expect a “slightly positive” impact.
When considering small and large E&P firms, executives at small E&P firms were more likely to report a significantly negative impact—38% for small versus 20% for large.
OIL AND GAS PRODUCTION
Oil and gas production decreased in the first quarter, according to executives at E&P firms. The oil production index moved down from 5.3 in the fourth quarter to -4.1 in the first quarter, suggesting a small decline in output. Meanwhile, the natural gas production index turned negative, falling sharply from 17.9 to -17.0.
In one of the special questions, executives at E&P firms were asked, “How does the recent pause in approval of LNG export facilities impact your expectations for your firm’s natural gas production five years from now compared with before the pause?
Among executives who indicated their firms are primarily focused on the production of natural gas, slightly under half—48%—expect their firms’ natural gas output five years from now to be slightly lower than their expectations before the pause, Fig. 5. Twenty-four percent said significantly lower, while an additional 24% expect no impact. Only 5% of executives indicated an increase in expectations, due to the recent pause.
Executives from firms not primarily focused on the production of natural gas also expect some impacts from the LNG pause.
OFS SECTOR
Costs increased at a slightly faster pace for both oilfield services and E&P firms. Among oilfield services firms, the input cost index increased from 21.3 to 31.2. Among E&P firms, the finding and development costs index was relatively unchanged at 24.2. Meanwhile, the lease operating expenses index increased from 22.6 to 33.7.
Oilfield services firms reported modest deterioration in nearly all indicators. The equipment utilization index remained negative but increased from -8.4 in the fourth quarter to -4.2 in the first. The operating margin index moved down from -32.0 to -35.4, suggesting declining margins. The index of prices received for services was unchanged at -6.2.
One of the special questions asked OFS executives, “How does the recent pause in approval of LNG export facilities impact your expectations for your firm’s demand for your services five years from now compared with before the pause?
Among executives who indicated their firms have a sizeable number of customers primarily focused on natural gas production, a majority—57%—expect demand for their firms’ services five years from now to be lower than before the pause, with 33% indicating demand will be “slightly lower” and 24% selecting “significantly lower,” Fig. 6. Thirty-eight percent stated no impact, and 5% of executives expect customer demand for their firms’ services to be slightly higher than before the pause.
Executives from firms without a sizeable number of customers primarily focused on natural gas production also expect some impacts from the LNG pause.
EMPLOYMENT TRENDS
The aggregate employment index was relatively unchanged at 3.4 in the first quarter. While this is the 13th consecutive positive reading for the index, the low-single-digit reading suggests slow net hiring. The aggregate employee hours index increased from 2.8 in the fourth quarter to 6.9 in the first quarter. Additionally, the aggregate wages and benefits index increased from 21.2 to 32.8.
One of the special questions asked respondents at all firms, “How do you expect the number of employees at your company to change from December 2023 to December 2024? While the most-selected response among E&P firms was for employment to “remain the same” in 2024, the most-selected response of support service firms was for employment to “increase slightly,” Fig. 7. Only a small percentage of executives expect the number of employees at their firms to decrease. (See Table 3 for more detail.) WO
These comments are from respondents’ completed surveys and have been edited for publication. Comments from the Special Questions survey can be found below this set of comments.
EXPLORATION AND PRODUCTION (E&P) FIRMS
OIL AND GAS SUPPORT SERVICES FIRMS
MICHAEL PLANTE joined the Federal Reserve Bank of Dallas in July 2010 and is senior research economist and advisor. Recent research has focused on such topics as the economic impact of the U.S. shale oil boom, structural changes in oil price differentials, and macroeconomic uncertainty. He also has been the project manager of the Dallas Fed Energy Survey since its inception in 2016. Mr. Plante received his PhD in economics from Indiana University in August 2009.
KUNAL PATEL is a senior business economist at the Federal Reserve Bank of Dallas. He analyzes and investigates developments and topics in the oil and gas sector. Mr. Patel is also heavily involved with production of the Dallas Fed Energy Survey. Before joining the Dallas Fed in 2017, he worked in a variety of energy-related positions at Luminant, McKinsey and Co., and Bank of America Merrill Lynch. Mr. Patel received a BBA degree from the Business Honors Program at the University of Texas at Austin and an MBA degree in finance from the University of Texas at Dallas.