Energize Weekly, April 4, 2018
Oil and gas activity in Texas posted growth for the sixth consecutive quarter in the first quarter of 2018 with prospects for continued expansion this year, according to the Dallas Federal Reserve Bank’s quarterly regional energy survey.
The survey also found the average break-even point for drilling a new well was $52 a barrel for West Texas Intermediate (WTI) crude oil. In the first quarter of 2018, the spot price for WTI ranged from $59.20 to $66.27 a barrel. It closed March 29 at $64.94 a barrel on the New York Mercantile Exchange.
“The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—advanced from 38.1 in the fourth quarter to 40.7 in the first,” the survey said. “The increase was driven by the oilfield services side of the industry.”
The Federal Reserve 11th District is composed of Texas, Northern Louisiana and southern New Mexico. The bank surveyed 78 exploration companies and 62 oilfield service companies between March 14 and 22.
“Utilization of oilfield services firms’ equipment increased at a faster pace than in the fourth quarter, with the corresponding index at 40.4, up 11 points,” the bank said. There was upward pressure on input costs “suggesting greater cost pressures.”
“We continue to ramp up production at our company as we build out our operations,” one respondent said. “We have seen increased oilfield service costs and timing delays in the Permian. We expect a significant amount of production to come on line in 2018, which will put downward pressure on West Texas Intermediate crude oil prices.”
Labor market indexes “continue to point to raising wages and employee hours, with job growth primarily drive by oilfield services firms,” the survey said
“The labor shortage in West Texas is only getting worse,” a responding oil company executive said. “It’s not only affecting hiring, but also the availability of contract and third-party labor.”
Average prices to cover operating expenses across regions ranged from $25 to $40 a barrel. “Almost all respondents can cover operating expenses for existing wells at current prices,” the survey said
The break-even prices to profitably drill a new well ranged from $47 to $55 per barrel, depending on the region. In Texas’ Permian, the average break-even point was $50 a barrel. For the entire sample, it was $52 a barrel, up $2 from last year.
On average, respondents expect WTI oil prices to be $63.07 per barrel by year-end 2018, with responses ranging from $45 to $77 per barrel.
“Uncertainty in steel tariff provisions is leading to uncertainty in cost outlook,” the survey said. “Longer term, the tariff has the potential to impact many facets of the industry and could create additional inflationary pressures while it is in place.”
While the survey results were largely positive, it noted that, “The outlook for small oil and gas companies operating in the Permian is dismal unless West Texas Intermediate crude oil prices stabilize at $70 per barrel of higher.”
