reasonable oil price levels, U.S. upstream activity is being restrained by inflated
equipment/supply costs, residual lags in the supply chain, and, perhaps most of all, manpower issues.
MICHAEL PLANTE and KUNAL PATEL, Dallas
Federal Reserve Bank
in the oil and gas sector stalled out in first-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—was 2.1 in the first quarter, down sharply from 30.3 in fourth-quarter
2022, Fig 1. The near-zero reading indicates activity was largely
unchanged from the prior quarter, a break from the more than two-year stretch
of rising activity.
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 March
15–23, 2023, and 147 energy firms responded. Of the respondents, 95 were
exploration and production firms, and 52 were oilfield services firms.
executives this quarter include an annual update on break-even prices by basin;
anticipated employee head count changes in 2023; the main factor influencing
profitability; and the top cause of worker shortages in the oil field.
OIL & GAS PRICES
average, respondents expect a West Texas Intermediate (WTI) oil price of $80/bbl
by year-end 2023. Responses ranged from $50/bbl to $165/bbl, Table 1.
Survey participants expect Henry Hub natural gas prices of $3.43 per million
British thermal units (MMBtu) at year-end, Table 2. For reference, WTI
spot prices averaged $68.51/bbl during the survey collection period, while
Henry Hub spot prices averaged $2.23/MMBtu.
Firms reported rising
costs for a ninth consecutive quarter, as all series remained significantly
above their averages. Among oilfield service firms, the input cost index was
roughly unchanged at an elevated 61.6. Among E&P firms, the finding and
development costs index slipped to 46.8 from 52.5. Additionally, the lease
operating expenses index declined 11 points to 37.6.
The supplier delivery
time index for all firms moved into negative territory, declining to -14.0 in
the first quarter from 14.4 in the fourth. This is the first negative reading
since fourth-quarter 2020 and signals that it takes less time to receive
materials and equipment, relative to the prior quarter. Among oilfield services
firms, the measure of lag time in delivery of services declined to zero from
20.0, suggesting that delivery times for these firms are no longer increasing.
One of the “special
questions” asked of survey respondents was “In the top two areas in which your
firm is active, what West Texas Intermediate (WTI) oil price does your firm
need to cover operating expenses for existing wells? In response, the average price
across the entire sample is approximately $37/bbl, up from $34/bbl last year, Fig
2. Across regions, the average price necessary to cover operating expenses
ranges from $29 to $45/bbl. Almost all of the 83 respondents can cover
operating expenses for existing wells at current prices.
A second special
question asked of survey respondents was “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 $62/bbl, on average, to profitably
drill, higher than the $56/bbl price when this question was asked last year, Fig.
3. Across regions, average break-even prices to profitably drill range from
$56/bbl to $66/bbl. Break-even prices in the Permian basin average $61/bbl, $9
higher than last year. Despite recent oil price declines, most of the 80
responding firms in the survey can profitably drill a new well at current
Large firms (with crude
oil production of 10,000 bpd or more, as of fourth-quarter 2022) require prices
of $55/bbl to drill profitably, based on the average of company responses. That
compares with $64 for small firms (fewer than 10,000 bpd).
company outlook index turned negative in the first quarter, falling 27 points
to -14.1. The overall outlook uncertainty index increased 23 points to 62.6,
pointing to firms’ continued heightened uncertainty regarding their outlooks.
Sixty-eight percent of firms reported greater uncertainty.
special question posed to executives was “Which of the following do you believe
will have the most influence on the profitability of your firm this year? The
potential answers included cost inflation, health of the global economy, access
to and cost of capital, government regulation, supply chain issues, and other, Fig.
4. Upon tabulation, cost inflation and health of the global economy were
each selected by 30% of 136 executives as having the greatest influence on the
profitability of their firm in 2023.
OIL & GAS PRODUCTION
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
remained positive but declined to 10.5 in the first quarter from 25.8 in the
fourth. Similarly, the natural gas production index fell to 7.4 from 29.4.
For oilfield services
firms, the equipment utilization index slid 29 points to 3.9 in the first
quarter. The operating margin index declined to 1.9 from 25.9. The index of
prices received for services remained positive but declined to 25.0 from 43.6.
related to employment and hours worked eased in the first quarter. The
aggregate employment index posted a ninth consecutive positive reading but
dipped to 14.3 from 25.7. The aggregate employee hours index declined to 12.3 from
27.7 in the prior quarter. Meanwhile, the aggregate wages and benefits index
edged higher, to 43.6 from 40.2.
a special question asked of respondents was “How do you expect the number of
employees at your company to change from December 2022 to December 2023?” More
than half of the executives—55%—expect their head count to remain unchanged
from December 2022 to December 2023, Fig. 5. Thirty-seven percent of
executives expect the number of employees to increase, of which 4% expect a
significant increase and 33% anticipate a slight increase. Only 8% foresee the
number of employees decreasing over the period.
the most-selected response among E&P firms was for employment to “remain
the same” in 2023, the most-selected response of support service firms was for
employment to “increase slightly” in 2023. (See table for more detail.)
final special question asked executives, “Which of the following is the primary
factor causing worker shortages in the oil field?” Forty percent of executives
cited the cyclical nature of the industry as the primary factor causing
oilfield worker shortages, Fig. 6. Another 27% selected “perception of
limited career potential, due to the energy transition,” and 10% indicated
“other.” Additional responses garnering less than 10%, each, include “lack of
work-life balance and flexible work schedule,” “compensation in other
industries,” “less-attractive work locations,” and “inability to pass drug test
and/or background check.” WO
PLANTE joined the
Federal Reserve Bank of Dallas in July 2010. 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
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