The rate of drilling and production among operators in Federal Reserve District 11 during the second quarter remained little changed from the first quarter. Companies are biding their time amid regulatory uncertainty and unpredictable economics.
MICHAEL PLANTE and KUNAL PATEL, Dallas Federal Reserve Bank
Activity in the oil and gas sector grew during second-quarter 2024, according to oil and gas executives responding to the Dallas Fed Energy Survey. The business activity index, the survey’s broadest measure of the conditions that energy firms in the Eleventh District face, increased from 2.0 in the first quarter to 12.5 in the second quarter, Fig 1.
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 firms 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 June 12–20, and 138 energy firms responded. Of the respondents, 90 were exploration and production firms, and 48 were oilfield service firms.
Special questions this quarter focus on artificial intelligence use and benefits; the potential impact of consolidation on U.S. oil production; lithium extraction from oil field brine; the impact of low Waha Hub natural gas prices on oil field and services activity in the Permian Basin; and expectations for drilling horizontal laterals in a horseshoe pattern.
OIL AND GAS PRICES/SUPPLY & DEMAND
On average, respondents expect a West Texas Intermediate (WTI) oil price of $79/bbl at year-end 2024; responses ranged from $62.50/bbl to $100/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 $88/bbl five years from now.
Survey participants expect a Henry Hub natural gas price of $3.01/MMbtu at year-end, Table 2. When asked about longer-term expectations, respondents, on average, anticipate a Henry Hub gas price of $3.58/MMBtu two years from now and $4.28/MMBtu five years from now. For reference, WTI spot prices averaged $79.94/bbl during the survey collection period, and Henry Hub spot prices averaged $2.61/MMBtu.
A special question asked executives at E&P firms, “What impact will low Waha Hub natural gas prices likely have on your firm’s drilling and completion plans in the Permian for the rest of 2024?” Of the executives surveyed, 43% said low Waha Hub natural gas prices won’t likely affect their firm’s drilling and completion plans in the Permian for the rest of 2024, Fig. 2. Meanwhile, 43% expect a slightly negative impact, and an additional 14% said the low Waha Hub prices will have a significantly negative impact on drilling and completion plans for the rest of this year in the Permian. Small E&P firms were more likely to expect negative impacts.
Another special question asked, “What impact will low Waha Hub natural gas prices likely have on demand for your firm’s services in the Permian for the rest of 2024?” The majority of executives surveyed, 57%, said low Waha Hub natural gas prices will likely have a slightly negative impact on demand for their firm’s services in the Permian basin for the rest of 2024, Fig. 3. Thirty percent note no impact, while 14% said the low Waha Hub prices will have a significantly negative impact on demand for their firm’s services in the basin for the rest of this year.
FINANCIAL OUTLOOK
The company outlook index was essentially unchanged at 10.0. The outlook index was 16.8 for E&P firms, compared with -2.1 for services firms, suggesting modest optimism among E&P firms and a neutral outlook among services firms. The overall outlook uncertainty index was unchanged at 24.1, suggesting uncertainty continued to increase on net.
OIL AND GAS PRODUCTION
Oil and gas production was little changed in the second quarter, according to executives at exploration and production (E&P) firms. The oil production index advanced from -4.1 in the first quarter to 1.1 in the second quarter. The near-zero reading suggests production was essentially unchanged. Meanwhile, the natural gas production index also turned positive, but barely so, increasing from -17.0 to 2.3.
A special question asked, “What impact on U.S. oil production would you expect, if there were continuing industry consolidation in the U.S. E&P sector over the next 5 years? What would oil production be?” The most-selected response was "slightly lower" (48% of respondents) followed by “no impact” (22% of respondents) and “slightly higher” (22% of respondents), Fig. 4. All executives from E&P firms that produce 100,000 bopd or more selected "no impact."
DRILLING
In a somewhat different line of discussion, a special question asked respondents, “Has your firm experimented with drilling horizontal laterals in a horseshoe pattern (or U-shaped pattern)?” In specific drilling locations limited by the size of the acreage lease, drilling a horizontal lateral in a horseshoe pattern (or U-shaped pattern) provides the opportunity to drill a longer lateral while potentially saving time and reducing cost, compared to drilling two wells with half the lateral length.
A majority of the executives surveyed, 89%, said their firms have not experimented with drilling horizontal laterals in a horseshoe pattern (or U-shaped pattern), Fig 5. Seven percent noted their firms have not drilled a horizontal lateral in this pattern but plan to do so in the next two years. Five percent of executives said their firms have experimented with drilling horizontal laterals in a horseshoe pattern.
In yet another special question, executives were asked, “Do you expect drilling horizontal laterals in a horseshoe pattern (or U-shaped pattern) to become more widely used in the next two years?” Of the executives responding, 45% said they expect drilling horizontal laterals in a horseshoe pattern (or U-shaped pattern) to become more widely used in the next two years, Fig. 6. The remaining 55% of executives don’t expect this to occur.
OFS SECTOR
Costs rose at a slightly faster pace for oilfield services, but at a slower pace for E&P firms. Among oilfield services firms, the input cost index increased from 31.2 to 42.2. Among E&P firms, the finding and development costs index declined from 24.2 to 15.7. Meanwhile, the lease operating expenses index declined from 33.7 to 23.6.
The equipment utilization index of oilfield services firms turned positive, increasing from -4.2 in the first quarter to 10.9 in the second. The operating margin index remained negative but increased from -35.4 to -13.0, suggesting margins declined at a much slower pace. The index of prices received for services was relatively unchanged at -4.4.
EMPLOYMENT TRENDS
The aggregate employment index was little changed at 2.9 in the first quarter. While this is the 14th consecutive positive reading for the index, the low-single-digit result suggests slow net hiring. The aggregate employee hours index was largely unchanged at 8.1. Additionally, the aggregate wages and benefits index decreased from 32.8 to 24.0.
DIGITAL TRANSFORMATION: A.I.
Several questions were asked about artificial intelligence. The first question asked executives, “Is your firm currently using artificial intelligence (A.I.)?” Executives were provided examples of traditional A.I. and generative A.I. before they responded to the question. Fifty percent of executives said their firms are not using A.I. and have no plans to do so in the near future, Fig. 7. Twenty-six percent of executives note their firms are using either traditional A.I., generative A.I. or both. The remaining 24% of executives said their firms are currently not using A.I. but plan to do so in the next 12 months.
Responses differed, depending on the firm’s size and type. Roughly half of the executives surveyed from large E&P firms (with crude oil production of 10,000 bpd or more as of fourth-quarter 2023) note they are using some form of A.I., compared with 32% of executives from oil and gas support services firms and 16% of executives from small E&P firms (fewer than 10,000 bopd). Small E&P firms were also more likely than large E&P firms and services firms to indicate they have no plans to use A.I. in the near future.
A second special question asked participants, “How is your firm using or planning to use AI?” This question was only posed to executives who said their firms currently use A.I. or are planning to use it in the next 12 months. Executives were presented with seven potential uses, along with an option for “other,” Fig. 8. The most selected response was "business analysis or predictive analytics" (64% of respondents) followed by “process automation” (44% of respondents). Both “geology or reservoir engineering” and “predictive maintenance” were selected by 41% of respondents. E&P firms were more likely to note multiple uses for A.I.
The third special question asked respondents, “What benefits has your firm experienced, or does your firm expect to experience, from using A.I.?” This question was only posed to executives who said their firm currently uses A.I. or is planning to use it in the next 12 months. Executives were presented five potential benefits of A.I., along with an option for “other.” The most selected response was "increase(d) productivity" (62% of respondents), followed by “access to better or more timely information” (53% of respondents) and “reduction in costs” (47% of respondents), Fig. 9. E&P firms were more likely to note multiple A.I. benefits.
SUSTAINABIITY
It is no secret that lithium is needed for electric vehicles and battery storage for renewable energies. In a related effort, a few oil and gas companies are now attempting to extract lithium from oil field brine. Accordingly, a special question asked executives, “Are you aware of oil and gas companies attempting to extract lithium from oil field brine?” In response, 71% of executives said they are aware of oil and gas companies attempting to extract lithium from oil field brine, Fig. 10. Twenty-nine percent were not aware.
Another related special question asked respondents, “Is your firm doing work related to extracting lithium from oil field brine?” The majority of executives, 73%, said their firms are not doing work related to extracting lithium from oil field brine and are unlikely to do so in the future, Fig. 11. Seventeen percent noted that their firms are not doing work related to extracting lithium from oil field brine but are somewhat likely to do so in the next five years. Five percent said their firm is doing work related to lithium extraction from oil field brine, and 6% said their firm is very likely to do work in this space over the next five years. (Percentages don’t sum to 100, due to rounding.)
COMMENTS FROM SURVEY RESPONDENTS
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
SPECIAL QUESTIONS COMMENTS
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.