Oil and natural gas companies are expanding production activity at a robust pace despite supply chain disruptions and rising costs, according to the most recent Federal Reserve Bank of Dallas survey of energy executives.
This quarter’s survey revealed that despite positive top-line numbers, oil and natural gas companies have to navigate several behind-the-scenes challenges to meet consumers’ and politicians’ production demands.
Oil and natural gas production increased in Q2 2022, but the increase in production slowed slightly relative to the prior quarter. The survey’s measure of companies’ six-month business outlooks improved significantly. Approximately 73 percent of firms reported an improved six-month outlook compared to Q1 2022.
While the survey’s business outlook uncertainty index remained high, fewer firms reported a rise in uncertainty compared to the previous quarter.
Survey respondents identified supply chain challenges and the threat of government regulation as major themes impacting current operations and future outlook uncertainty.
Many of the responses in the open-ended section concerned how regulation and mixed messages from Washington impact investment in the industry. According to an executive of an oil and gas support services firm:
“At the top is the continuing uncertainty regarding the administration and its policies and stances. This unease filters throughout our areas of operation. Projects have been approved by our customers [but] budgets are not being released because nobody wants to get caught short by a policy change. This is especially true in the longer time-frame jobs.” (emphasis added)
Another executive surveyed identified the administration’s rhetoric as a major barrier for investment and confidence in the industry:
“The highest uncertainties are no longer below ground (ultimate recoveries, initial production rates, gas–oil ratios, operating expenses), as we’ve gotten very good at forecasting, estimating and predicting those. No, the highest uncertainties now are all above ground (politics, windfall profits tax, surtaxes, leasing bans, product prices, inflation, supply times, material availabilities, contractor availabilities and capital availability).” (emphasis added)
In the words of one executive surveyed:
“The supply chain seems stretched to the max in the Permian Basin. There really is not much ability to increase drilling activity.” (emphasis added)
Almost half of the executives – 47 percent – said supply chain issues are having a slightly negative impact on their companies. An additional 47 percent of executives said supply chain issues are having a significantly negative impact. Only 6 percent of executives reported that their companies are experiencing no supply chain issues.
Executives were provided with five inputs – steel goods, personnel, equipment, sand, and chemicals – and were asked to rate the current level of availability for each good. Almost no executives rated the availability of any input as in oversupply. Executives rated the availability of steel tubular goods as the input experiencing the most severe shortages. General equipment, personnel, and sand were also rated as experiencing shortages.
According to an executive of one exploration and production firm, the supply chain shortages are particularly hindering the operations of small producers:
“Oilfield tubular goods are in very short supply. Suppliers are giving longtime large customers first purchasing priority, resulting in shortages for small players. The shortage of frac [fracking] crews extends the time for establishing cash flow from new wells. Regulations and monitoring of gaseous emissions are very concerning and expensive for small stripper-well operators.”
In total, 46 percent of executives identified “labor shortages, cost inflation and/or supply-chain bottlenecks” as the primary factor driving uncertainty regarding their firm’s outlook. 27 percent of executives cited uncertainty about government regulation as the primary driver, and 20 percent said oil price volatility.
The two factors are interrelated – responses to the open-ended section identified how rhetoric from Washington limits smaller producers’ ability to obtain capital and discourages workers from entering the labor force.
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