US oil, gas operators not worried about inflation, credit: Dallas Fed Q2 survey

Activity in the heartland of US oil and gas production was unchanged in the second quarter as operators tried to assess what the future holds for well costs and inflation, according to the Federal Reserve Bank of Dallas' quarterly energy survey released June 22.

The Dallas Fed's Eleventh District covers all of Texas, southern New Mexico, and northern Louisiana and includes some of the hottest plays in North America, such as the Permian Basin and the Haynesville Shale.

Tighter credit conditions since February are not behind the tepid performance, respondents to the Dallas Fed's special questions on credit said. Most of the 143 respondents to the credit question — 54% — said credit conditions had no impact on their business, with 28% saying there was a slight impact since February. Looking at the rest of the year, however, the number of respondents expecting a slight impact from credit conditions grew to 41%, with "no impact" falling to 38%.

The survey corroborates S&P Global Commodity Insights' recent findings that exploration and production companies (E&Ps) have slashed their debt since the COVID-19 pandemic and have weaned themselves off debt, as investors will no longer be paying for growth in oil and gas production volumes.

Inflation seems to be subsiding

Inflation in the oil patch has cooled, according to the survey results, although firms reported rising costs for the 10th consecutive quarter while the rate of price increases has declined. For E&Ps, finding and development costs "plummeted," while lease operating expenses also declined, according to the survey.

Still, 60% of executives surveyed expect their largest category of expenses — money spent to drill and complete oil and gas wells — to be higher at the end of 2023 than they were in 2022.

Scale matters

When it comes to costs, there was a decided split between "small" producers with less than 10,000 barrels per day of production and larger E&Ps, the bank said.

"Larger firms more often than not expect their drilling and completion costs to be lower at year-end 2023 than year-end 2022," the bank said. Forty-six percent of executives at larger firms expect costs to be lower this year, with 21% expecting no change and 34% expecting drilling and fracking costs to be higher.

In contrast, 68% of executives at smaller operators expect to see the costs to drill and complete wells to be higher this year than last, the survey said.

"Expenses for everything have increased dramatically, while oil prices remain weak and the natural gas price ... is negative," one small producer told the Fed. "I would drill if costs were not so high. Margins have been squeezed to the point that it is hard to commit to new projects, and all of the uncertain economic projections give no confidence as to what is going to happen going forward."

When it comes to predicting prices, oil and gas firms continue to be more optimistic than the commodity markets, the bank said. Survey respondents said they expected oil prices for the second quarter to average $77.48/b while the average price during the June 7-15 survey period was $69.89/b. For natural gas, survey respondents said they expected prices at the benchmark Henry Hub to average $2.97/MMBtu while prices were averaging $2.03/MMBtu during the survey period.

S&P Global Commodity Insights reporter Bill Holland produces content for distribution on Capital IQ Pro .