Even with relatively high oil prices, U.S. E&P activity growth remains modest. Much of the spending increases by operators this year has gone to covering higher equipment, service and personnel costs, rather than to boost activity.
MICHAEL PLANTE and KUNAL PATEL, Dallas Federal Reserve Bank
Activity in the oil and gas sector rose during third-quarter 2023, according to oil and gas executives responding to the Dallas Fed Energy Survey. The business activity index, the survey’s broadest measure of conditions facing energy firms in the Eleventh District, increased from 0 in the second quarter to 10.9 in the third quarter, Fig. 1. The increase was driven by the exploration and production (E&P) side of the business. The business activity index for E&P firms jumped from 1.0 in the second quarter to 22.5 in the third quarter. However, the business activity index for oil and gas support services firms declined from -1.9 to -12.2.
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 Sept. 13–21, and 147 energy firms responded. Of the respondents, 98 were exploration and production firms and 49 were oilfield services firms.
Special questions asked of executives this quarter focus on the energy transition’s expected impact on the price of oil; anticipated global oil consumption in 2050 relative to current levels; the short-term outlook for U.S. oil rigs; cost expectations for next year; impacts on lead times for interconnecting new well pads with the electricity grid in the Permian Basin; and competition with oil and gas support firms for hiring and retaining employees.
OIL & GAS PRICES/SUPPLY & DEMAND
On average, respondents expect a West Texas Intermediate (WTI) oil price of $88/bbl at year-end 2023; responses ranged from $70/bbl to $120/bbl, Table 1. Survey participants expect a Henry Hub natural gas price of $3.14 per million British thermal units (MMBtu) at year-end, Table 2. For reference, WTI spot prices averaged $90.29/bbl during the survey collection period, and Henry Hub spot prices averaged $2.68/MMBtu.
In one of the special questions, executives were asked, “Looking five years ahead, what impact do you expect the energy transition to have on the price of oil?” The largest portion of the executives surveyed, 33.3%, said they expect the energy transition to slightly increase the price of oil, looking five years ahead, Fig. 2. Nearly as many respondents, 32.6%, anticipate a significant increase. Twenty-five percent expect no impact. Only 9% anticipate the energy transition to decrease the price of oil.
Another special question asked executives, “How do you expect global oil consumption in 2050 to compare with current levels?” In response, the percentage of executives who expect global oil consumption in 2050 to be higher, when compared to current levels, exceeds the percentage that expects it to be lower, Fig. 3. Of the executives surveyed, 28% expect global oil consumption in 2050 to be slightly higher when compared to current levels, and an additional 25% expect it to be significantly higher. Meanwhile, 25% of executives expect consumption to be slightly lower in 2050, when compared to current levels, and an additional 8% expect it to be significantly lower. Fifteen percent expect global oil consumption in 2050 to be close to current levels.
COSTS/FACTORS
Firms reported rising costs for an 11th consecutive quarter. Among oilfield services firms, the input cost index remained positive but declined from 41.2 to 33.4. Among E&P firms, the finding and development costs index edged up from 14.9 to 18.3. Additionally, the lease operating expenses index was essentially unchanged at 25.6.
A special question asked executives, “What are your expectations for your firm’s drilling and completion cost per well in 2024 versus 2023?” Firms were classified as “small,” if they produced fewer than 10,000 bopd, and “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 represent the majority of production (more than 80%).
Across all firms, 60% of executives expect drilling and completion costs per well in 2024 to be higher than in 2023, while 18% expect costs to be lower, Fig. 4. Twenty-one percent expect no change.
Executives from small E&P firms were more likely to expect an increase in costs per well than those from large E&P firms. Meanwhile, executives from large E&P firms were more likely to expect a decrease in costs per well than those from small E&P firms.
STRATEGY/FINANCIAL OUTLOOK
The company outlook index moved into positive territory in the third quarter, jumping from -9.1 to 36.0. Optimism was more pronounced among E&P firms; the outlook index was 46.8 for E&P firms, compared with 14.9 for services firms. The overall outlook uncertainty index remained positive but plunged 30 points to 6.8, suggesting that while uncertainty continued to increase on net, fewer firms noted a rise in the recent quarter.
One of the special questions asked executives, “Do you expect the number of U.S. oil rigs six months from now to be much higher, much lower or near current levels?” Most executives, 84%, said they expect the number of U.S. oil rigs six months from now to be near current levels Fig. 5. Fourteen percent note they anticipate the number of U.S. oil rigs drilling six months from now to be much higher, while only 1% of executives said they expect it to be much lower.
A higher percentage of executives at support service firms expects the number of U.S. oil rigs to be much higher in six months, compared with the percentage of E&P executives who agree.
OIL AND GAS PRODUCTION
Oil and natural gas production increased at a faster pace, compared with the prior quarter, according to executives at E&P firms. The oil production index increased from 8.0 in the second quarter to 26.5 in the third. Meanwhile, the natural gas production index rose from 2.1 to 15.4.
One of the special questions asked executives, “For your firm, how has the lead time to interconnect new well pads with power from the grid changed in the Permian Basin compared with one year ago?” Among the executives surveyed, 45% said the lead time to interconnect new well pads with power from the grid was about the same compared with one year ago, Fig. 6. Twenty-six percent of executives said lead time slightly increased, and an additional 19% noted a significant increase. Only 10% said the lead time decreased, relative to one year ago. This question was posed only to executives who said their firm drilled or completed a horizontal well in the Permian in the past two years.
A separate special question asked respondents, “What impacts does the current lead time to interconnect new well pads with power from the grid in the Permian have on your firm?” Forty-three percent of executives said the current lead time has added financial costs for their firms, Fig. 7. “Added constraint on meeting emission reduction targets” and “minor constraint on business activity” were each selected by 30% of executives as impacts, because of the current lead time. Thirty percent of executives note the current lead time has had no impact. This question was posed only to executives who said their firm drilled or completed a horizontal well in the Permian in the past two years.
OFS SECTOR
Oilfield services firms reported continuing deterioration in most indicators. The equipment utilization index remained negative but edged up from -7.9 in the second quarter to -4.2 in the third. The operating margin index declined from -21.6 to -30.7. The index of prices received for services was relatively unchanged at 2.1.
EMPLOYMENT TRENDS
The aggregate employment index posted an 11th consecutive positive reading but declined from 13.1 in the second quarter to 5.5 in the third. While the aggregate employment index was positive, the single-digit reading indicates employment was little-changed from the prior quarter. The aggregate employee hours index was relatively unchanged at 9.6. Meanwhile, the aggregate wages and benefits index declined from 34.5 to 24.5.
Yet another special asked the respondents, “Over the next five years, which sector do you believe your firm will compete with the most, when it comes to hiring and retaining employees?” Of executives surveyed, 32% believe their firms will compete most with the service sector when it comes to hiring and retaining employees over the next five years, Fig. 8. An additional 26% believe their firms will compete most with the construction sector for recruiting, followed by 15% citing the renewables sector. 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.