Eying strong year-end prices, U.S. oil firms accelerate activity- Fed Survey

A drilling crew member raises drill pipe onto the drilling rig floor on an oil rig in the Permian Basin near Wink, Texas U.S. August 22, 2018. REUTERS/Nick Oxford

March 23 (Reuters) – Activity in the oil and gas sector accelerated in the first quarter as company outlooks improved, according to a survey of oil executives released on Wednesday by the Federal Reserve Bank of Dallas.

U.S. crude will sell for an average of $93 a barrel by the end of the year and natural gas prices at the largest U.S. hub will average $4.57 per million British thermal units (mmBtu), according to the survey of oil executives from Texas, Louisiana and New Mexico.

An index of activity by oil and gas companies in the region rose to 56 from 42.6 in the fourth quarter, marking the highest reading since the survey began six years ago, the survey said.

Still, executives lamented they are facing “unprecedented” supply chain and labor shortages that are affecting their ability to expand output and add employees despite sharply higher oil and gas prices.

Oil prices are at their highest level in over a decade after Russia’s Feb. 24 invasion of Ukraine and subsequent sanctions on its oil exports. Russia calls its military action a “special operation.”

The U.S. West Texas Intermediate benchmark was trading at over $114 per barrel on Wednesday, up more than 50% from the start of the year.

Nearly all oilfield services companies surveyed said they were facing higher costs, and some said labor shortages are persisting. One said it had rigs available, but could not find workers.

“The supply-chain issues and shortage of materials are unprecedented,” one respondent said, adding, “We are also facing serious workforce issues because a meaningful portion of the labor force left the industry during the downturn and due to the vilification of the oil and gas industry.”

The average oil price needed to cover operating expenses for an existing well was $34 a barrel, respondents said, up roughly 10% from last year. The average price needed to profitably drill a new well was $56 a barrel, up about 8% from last year. More than 40% of respondents said oil prices will need to be between $80 and $99 a barrel to push publicly traded firms to significantly increase their production. Nearly 60% of those surveyed said pressure from shareholders to increase returns remains the primary driver behind public companies’ reluctance to expand output.

Still, some 15% of large firms surveyed said they planned to increase growth by more than 30% this year, while 23% of smaller firms anticipate that level of growth, the survey showed.

The survey, taken in mid-March, included 141 oil and gas firms, of which 91 were exploration and production companies and 50 were oilfield service firms.

Reporting by Liz Hampton in Denver; editing by Jonathan Oatis

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