Record-breaking levels of oil and gas expansion seen earlier in the year have cooled as the industry reacts with uncertainty to rising costs, potential regulations and continued labor and supply chain restraints.
In its fourth quarter Energy Survey, the Federal Reserve Bank of Dallas said activity continued to expand but at a slower pace. The survey’s broadest measure of conditions facing energy firms, business activity, rose for a ninth consecutive quarter but at a slower pace – 30.3 compared to 46 in the third quarter.
The survey also found that while oil and gas executives were upbeat, their optimism waned during the quarter as the company outlook index sank 20 points to 13.1 from 33.1 in the previous quarter, below the series average. Uncertainty rose to 40.1 from 35.7, rising among both service companies – 30.9 – and exploration and production companies – 45.4, with 53 percent of E&P firms reporting an increase in uncertainty.
Kunal Patel, senior business economist with the bank, told the Reporter-Telegram in a telephone interview there are several factors increasing uncertainty in the industry, among them continued cost increases, supply chain delays, commodity price uncertainty and potential new regulations.,
In 2023, “executives will continue to think about cost inflation, they continue to think about supply chain delays,” he said. “Those two things impact their ability to continue activity expansion.”
Costs continued to rise and supply chain delays continued in the fourth quarter, but both moderated during the quarter, the survey found.
Responding firms reported rising costs for an eighth consecutive quarter, with the indexes remaining elevated. However, the rate of those increases has slowed. Among oilfield services firms, the input cost index was 61.8 versus 83.9 last quarter. Among E&P firms, the finding and development costs index was 52.5, a modest decline from 64.7 last quarter. Additionally, the lease operating expenses index dropped 22 points to 48.4. Executives generally expect prices of their key inputs to increase next year. Fifty-eight percent expect a slight increase, while another 10 percent expect a significant increase.
“Inflation continues to be a top-of-mind issue in exploration and production. We are girding ourselves for further cost increases in 2023. This is against a backdrop of commodity price uncertainty and fears of demand destruction owing to recession,” one respondent commented.
It is taking longer for firms to receive materials and equipment, although the pace at which those delays are growing has moderated. The supplier delivery time index remained positive but declined to 14.4 in the fourth quarter from 28.4 in the third. Among oilfield services firms, the measure of lag time in delivery of services edged down to 20.0 from 21.1, remaining well above average.
Oilfield services firms reported broad-based improvement, with key indexes remaining solidly positive though the equipment utilization index fell to 32.8 in the fourth quarter from 55.2 in the prior quarter. The operating margin index edged up to 25.9 from 25.4. The index of prices received for services remained positive but declined to 43.6 from 64.9.
Patel said the survey found continued strength in the industry’s labor market. The aggregate employment index posted an eighth consecutive positive reading but moved down to 25.7 from last quarter’s series high of 30.0. The aggregate employee hours index moved down to 27.7 from 33.3 in the prior quarter. The aggregate wages and benefits index remained positive but declined to 40.2 from 47.3.
Almost two-thirds of respondents expect their capital spending to increase in 2023. Thirty-nine percent expect their capital spending to increase slightly while 25 percent expect a significant increase. Another 22 percent expect spending to remain at 2022 levels.
“We’ll have to wait and see how much of that increased spending is related to rising costs,” observed Patel.
Most firms are using an oil price between $70 and $85 a barrel for 2023 capital planning purposes. He noted that respondents are showing more confidence prices are being supported at current levels. Respondents expect West Texas Intermediate to end 2023 at $84 a barrel and Henry Hub prices to end the year at $5.64 per million British thermal units.
Oil and gas production also grew but at a slower pace. Patel said there was no dominant reason hindering growth in production, with cost inflation and/or supply chain issues garnering 32 percent of responses, followed by a maturing asset base and availability of capital. “Other” reasons, labor issues and regulations were also cited.
“It’s logical we’ll continue to see what is a solid expansion, especially if prices remain at current levels,” said Patel.