US Energy Review

By Tsvetana Paraskova

Oil and gas activity and production is rising in the United States, but so are cost pressures. Most exploration and production companies, as well as services firms, operating in Texas and New Mexico, expect to increase their capital spending in 2022 compared to 2021. Activity in other oilproducing US states has been also growing moderately lately, surveys from the Federal Reserve Banks of Dallas and Kansas City showed.

Output of oil and gas from the seven key shale plays is rising, while production in the US Gulf of Mexico is set for a new record this year with more offshore platforms coming on stream.

Meanwhile, the American Petroleum Institute (API) called on Congress and the Administration to adopt policies to encourage development of responsibly produced domestic energy and design regulatory policies that provide certainty and incentivise investment in the oil and gas sector.

Cost pressures in US oil, gas sector intensify

The oil and gas sector in the Eleventh Federal Reserve District, which includes Texas, northern Louisiana, and southern New Mexico, continued growing in the fourth quarter of 2021, the Dallas Fed Energy Survey showed at the end of December. The business activity index—the survey’s broadest measure of conditions facing energy firms—remained elevated at 42.6, essentially unchanged from its third-quarter reading.

Oil production increased at a faster pace than in Q3. However, costs rose sharply for a third quarter in a row. Among oilfield services firms, the index for input costs increased to a record high of 69.8, suggesting significant cost pressures.

Only one of the 44 responding oilfield services firms reported lower input costs in Q4.

Among E&P firms, the index for finding and development costs rose from 33.0 in the third quarter to 44.9 in the fourth quarter. Additionally, the index for lease operating expenses also increased, from 29.4 to 42.0. Both of these indexes reached their highest readings in the survey’s five-year history, the Dallas Fed said.

Spending set to rise in 2022

The special questions in the Q4 survey focused on capital spending in 2022, and showed that most executives expect a slight or significant increase in their firm’s capital spending this year. A total of 44% of executives said they expect capital spending to increase slightly, and an additional 31% anticipate a significant increase. Sixteen per cent expect spending in 2022 to remain close to 2021 levels, and only 8% expect reductions in spending in 2022.

Among services firms, 48% of executives expect capital spending to increase slightly, while 24% see significant rises in expenditure this year compared to 2021.

Referring to the primary goal of the firms this year, the most-selected response among small firms was “grow production,” whereas the most-selected response among large firms was “reduce debt,” the Dallas Fed survey showed.

In comments to the survey, executives pointed to punitive federal regulations and uncertainty in the sector due to politics in Washington.

The political pressure forcing available capital away from the energy industry is a problem for everyone. Banks view lending to the energy industry as having a “political risk.” The capital availability has moved down-market to family offices, etc., and it is drastically reducing the size and availability of commitments regardless of commodity prices,

one E&P company executive wrote in the comments.

In the Tenth District – encompassing the western third of Missouri, all of Kansas, Colorado, Nebraska, Oklahoma, and Wyoming, and the northern half of New Mexico – energy activity expanded moderately in Q4 from Q3 and increased further from year-ago levels. Expectations for future activity remained strong. Firms reported that oil prices needed to be on average $73 per barrel for a substantial increase in drilling to occur, and natural gas prices needed to be $4.27 per million Btu, the energy survey of the Federal Reserve Bank of Kansas City showed in early January.

The drilling and business activity index moved from 39 to 31, with positive levels indicating expansion. In addition, the total revenues index remained elevated, and the wages and benefits index rose to a new survey record-high. Supplier delivery time inched up while access to credit growth eased, the survey found.

Similarly to the firms in Texas, those in other oil-producing states such as Kansas, Colorado, Nebraska, Oklahoma, and Wyoming also expect their capital spending to rise this year. Almost 20% of firms expect capital spending to increase significantly compared to 2021, while another 50% anticipate slight increases. Only 6% of firms expect capital spending to decline this year versus 2021.

“Not enough new reserves are being drilled to replace existing production,” said one firm, while another comment reads “Inflation is hitting the equipment purchases for new wells.” Another firm noted “Pressure to moderate spending from investors.”

Record Production in the Permian

The Permian, the largest US shale play, saw its crude oil production rise to a record at the end of December and is expected to further grow to 4.996 million barrels per day (bpd) in January and to 5.076 million bpd in February, the January Drilling Productivity Report from the US Energy Information Administration showed.

US oil production from the seven major shale plays is expected to rise from an estimated 8.436 million bpd in January by 104,000 bpd to reach 8.540 million bpd in February. Gas production is also set to increase, with Haynesville and the Permian leading the growth, the report showed.

The number of drilled but uncompleted wells (DUCs) across the seven major shale regions dropped by another 214 to 4,616 in December.

This is the lowest DUC inventory since March 2014 and suggests that oil producers will not be able to rely on this inventoryto sustain production - we will need to see a pickup in drilling activity,

ING strategists Warren Patterson and Wenyu Yao said, commenting on the DUCs data in EIA’s report.

Based on the current rig programme, private operators in the US are positioned for growth in tight oil output of 550,000 bpd and 4.8 billion cubic feet per day (Bcfd) of shale gas between the fourth quarters of 2021 and 2022, Rystad Energy said in a December 2021 newsletter.

“Private operators significantly outperformed their public peers on the speed of rig count additions in the first half of 2021, reached an outstanding share of about 50% of the horizontal US onshore market this summer.

Since then, both private and public producers have followed a similar rig activity trend, as many public independents have accelerated their additions in the fourth quarter to prepare for next year’s completions given the sharp drawdown of the drilled but uncompleted (DUC) well inventory,” Rystad Energy said.

In the US Gulf of Mexico, production from the deep water is set to hit a new record high in 2022, with three significant new platforms coming on stream. Output in 2022 will average about 2.3 million barrels of oil equivalent perday, up from about 1.3 million boe/d in 2012, according to Wood Mackenzie estimates. Operators have cut costs significantly to make projects viable at much lower oil prices, typically around $40 a barrel. With Brent crude at around $85, those new projects look likely to generate healthy returns, WoodMac’s Ed Crooks, Vice-Chair, Americas, notes.

The three new platforms that are scheduled to start production in the Gulf of Mexico this year are BP’s Argos, Shell’s Vito, and King’s Quay, which will be operating at Murphy Oil’s Khaleesi-Mormont and Samurai fields—with all three projects given the go-ahead before the pandemic.

Despite recovering oil production to meet growing demand, the oil lobby API called on Congress and the Administration to adopt policies to strengthen American energy leadership while building on the progress the US has made in reducing emissions to generational lows.

“Our nation has the resources and expertise it takes to meet our energy needs, support millions of jobs, continue to address the risks of climate change, and keep America free from the dangers of dependence on unreliable foreign sources. Even so, we begin 2022 with Americans viewing energy and its costs as major concerns. This is in part because lately, we’ve seen policies aimed at restricting production and delivery of U.S. natural gas and oil,” API President and CEO Mike Sommers said.

America should not be in the position of asking for foreign energy supplies, especially when we have abundant resources produced to standards that are among the highest in the world, right here at home

Sommers added in his State of American Energy Keynote Address in January.

Sommers called on Congress and the Administration to implement policies to address climate change, encourage development of responsibly produced domestic energy, and craft regulatory policies that provide certainty, unleash private investment and build on industry technological progress, including on methane emissions.