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Most US upstream execs expect global oil supply gap by 2025: Dallas Fed survey

Highlights

OPEC is 'back in the driver's seat' on balancing market

Oil, gas activity strong in Q2 but cost pressures rising

Execs predict $70/b WTI, $3.10/MMBtu gas at end-2021

Underinvestment and a focus on the energy transition will create a global oil supply shortage in two to four years, according to three-quarters of US oil and natural gas executives surveyed by the Federal Reserve Bank of Dallas in June.

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One upstream executive said policies focused on limiting oil and gas growth, restrained capital budgets in favor of free-cash-flow generation, and continued consolidation could lead to an undersupply for growing demand.

"OPEC is back in the driver's seat," the executive said. "If they can balance market share with high prices, they'll take it."

Another respondent said only one of 400 institutional investors their company has worked with is currently willing to give new capital to the oil and gas sector. And the same is true for public companies and international exploration, the executive said.

"This underinvestment coupled with steep shale declines will cause prices to rocket in the next two to three years," the respondent said. "I don't think anyone is really prepared for it, but US producers cannot increase capital expenditures: the OPEC+ sword of Damocles still threatens another oil price collapse the instant that large publics announce capital expenditure increases."

Activity in the US oil and gas sector continued growing strongly in the second quarter, with higher capital spending but significant cost pressures, according to the Dallas Fed survey of 152 energy companies released June 23.

A broad measure of business activity by oil and gas firms remained unchanged from Q1 at 53, the Dallas Fed said of the survey covering its 11th District, which includes Texas and much of New Mexico and Louisiana.

The oil production index jumped 18.7 points to 35 points for Q2, its second-highest reading since the survey started in 2016. The natural gas production index rose 19 points to 35.

Executives expect the WTI crude oil prices to be $70/b at year's end and the Henry Hub natural gas price at $3.10/MMBtu.

Carbon tax skepticism

About 82% of respondents said they opposed a carbon tax to reduce greenhouse gas emissions. Asked what would be more effective, half favored tax credits.

Only 16% of executives said their companies have made or planned to make investments in wind or solar by 2025.

"How many of our economic competitor nations around the world will willingly shoot themselves in the foot with a carbon tax like this and yet, simultaneously, try to compete against China, India and Russia?" one executive said. "Are they going to do this to themselves? You know the answer is no."

Another executive said that only once the consumer is confronted with the cost of carbon emissions in daily life will there be real progress in making an energy transition to lower-carbon fuels.

"Simply trying to choke off supply by regulation and fiat will not provide a sustainable solution," the executive said.

Another respondent said the Biden administration's climate targets are "completely unrealistic," predicting there will be more internal combustion engine vehicles on the road in 2030 than there are now.

"There is no way we can hit the 2030 target," the executive said. "The US public will reject the Green New Deal as soon as they understand the personal impact to them in transportation, home utilities, cost inflation, etc."

On cybersecurity, about 33% of executives surveys rated their companies' defenses at a three on a one-to-five scale, while 45% rated their companies at a four or five.

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