Firms noted limited impacts from tighter credit conditions so far, and most do not expect any significant impact on their business plans through the remainder of the year.
MICHAEL PLANTE and KUNAL PATEL, Dallas Federal Reserve Bank
Activity in the oil and gas sector was unchanged in second-quarter 2023, according to industry executives responding to the Dallas Fed Energy Survey. The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—edged down to zero in the second quarter from 2.1 in the first, 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 (Texas, northern Louisiana, southern New Mexico).
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 7–15, 2023, and 152 energy firms responded. Of the respondents, 101 were exploration and production firms and 51 were oilfield services firms.
Special questions asked of executives this quarter focus on firms’ cost expectations for the year; the impact of tightening credit conditions on firms and their outlook; how global oil consumption is performing against expectations; and the likelihood that artificial intelligence will replace personnel over the next five years.
OIL & GAS PRICES/SUPPLY & DEMAND
On average, respondents expect a West Texas Intermediate (WTI) oil price of $77/bbl by year-end 2023. Responses ranged from $60/bbl to $100/bbl, Table 1. Survey participants expect a Henry Hub natural gas price of $2.97 per million British thermal units (MMBtu) at year-end, Table 2. For reference, WTI spot prices averaged $69.89/bbl during the survey collection period, and Henry Hub spot prices averaged $2.03/MMBtu.
One special question asked of survey respondents was “How has global oil consumption, so far this year, compared with what you expected before China announced its reopening in December 2022?” Forty-three percent of executives said global oil consumption, so far this year, has slightly underperformed when compared with what they expected before China announced its reopening in December 2022, Fig. 2. An additional 14% said consumption has underperformed significantly. Thirty percent said consumption has met expectations. Only 14% said consumption overperformed.
COSTS/FACTORS
Firms reported rising costs for a 10th consecutive quarter. While the indexes remain above series averages, the rate of cost increases slowed. Among oilfield services firms, the input cost index remained positive but fell sharply to 41.2 from 61.6. Among E&P firms, the finding and development costs index plummeted to 14.9 from 46.8. Additionally, the lease operating expenses index declined to 26.0 from 37.6.
One of the special questions asked of survey respondents was “How do you expect your firm’s drilling and completion cost per well at year-end 2023 to compare with year-end 2022?” Firms were classified as “small,” if they produced fewer than 10,000 bopd, or “large” if they produced 10,000 bopd or more. In the U.S., small E&P firms are greater in number, but large E&P firms make up the majority of production (more than 80%). A breakdown of the data is shown in Fig. 3.
Across all firms, 60% of executives expect drilling and completion costs per well to end the year higher than where they were at year-end 2022, while 28% expect them to be lower. Twelve percent expect no change.
Larger firms, more often than not, expect their drilling and completion costs to be lower at year-end 2023 than year-end 2022. Forty-two percent of executives at larger firms said they expect their firm’s drilling and completion costs per well to be slightly lower, with another 4% expecting that costs will be significantly lower. Twenty-one percent expect no change, while another 21% percent anticipate slightly higher, and 13% predict significantly higher costs.
On the other hand, smaller firms on net anticipate their drilling and completion costs at year-end 2023 to be above where those costs were at year-end 2022. Among these firms, 45% expect costs to end the year slightly higher, and 23% expect them to increase significantly. Only 18% anticipate slightly lower costs, and 4% predict significantly lower costs.
STRATEGY/FINANCIAL OUTLOOK
The company outlook index remained negative in the second quarter but moved up to -9.1 from -14.1. The overall outlook uncertainty index remained positive but plunged 26 points to 36.9, suggesting that while uncertainty continued to increase on net, fewer firms noted a rise this quarter than last quarter.
A special question posed to survey respondents asked, “Have tighter credit conditions since February 2023 had an impact on your firm so far?” More than half of the executives—54%—note that tighter credit conditions since February 2023 have had no effect, Fig. 4. Twenty-eight percent reported a slight impact, and 18% reported a significant impact.
Executives from small E&P firms were more likely to report a significant impact than those from large E&P firms or support services firms. Twenty-four percent of small E&P companies reported a significant impact, compared with 8% of large E&P companies and 15% of support services firms.
Yet another question asked executives, “How do you expect tighter credit conditions to affect your business plans through the remainder of the year?” Forty-one percent anticipate that tighter credit conditions will have a slight impact on their business plans through year-end, and 21% expect a significant impact. Thirty-eight percent expect that tighter credit conditions won’t affect their business plans.
Executives from support services firms and small E&P firms were more likely to expect significant impacts, relative to large E&P firms. Twenty-four percent of support services companies expect a significant impact, compared with 22% from small E&P companies and 13% for large E&P companies.
OIL AND GAS PRODUCTION
Oil and natural gas production increased at a slower pace, compared with the prior quarter, according to executives at E&P firms. The oil production index was 8.0 in the second quarter versus 10.5 in the first. Meanwhile, the natural gas production index declined to 2.1 from 7.4.
OFS SECTOR
Oilfield services firms reported deterioration in most indicators. The equipment utilization index turned negative, falling to -7.9 in the second quarter from 3.9 in the first. The operating margin index tumbled to -21.6 from 1.9. The index of prices received for services remained positive but decreased to 3.9 from 25.0.
A ”special question” asked of this group was “How do you expect the cost of your firm’s inputs, excluding labor, at year-end 2023 to compare with year-end 2022?” Most executives expect the cost of their inputs, excluding labor, to be higher at year-end 2023 relative to year-end 2022, Fig. 5. Fifty-seven percent of executives said they expect input costs to be slightly higher, while an additional 14% anticipate them to be significantly higher. Eighteen percent expect the costs at year-end 2023 to remain close to year-end 2022 levels. Only 10% anticipate lower costs in 2023.
EMPLOYMENT TRENDS
The aggregate employment index posted a 10th consecutive positive reading and was relatively unchanged at 13.1. Similarly, the aggregate employee hours index was relatively unchanged at 10.5. Meanwhile, the aggregate wages and benefits index declined to 34.5 from 43.6.
One final “special question” asked executives, “Do you expect artificial intelligence (AI) to replace some of your firm’s personnel over the next five years?” Accordingly, 78% of executives don’t expect artificial intelligence to replace personnel over the next five years, Fig. 6. A significant majority of executives at small E&P companies—84%—said they don’t expect AI to replace personnel at their firm. Seventy percent of executives at large E&P companies responded the same, as did 74% of support services firms. WO
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.