Oil and gas in America… disappointment in exploration and production activity (article)

Widespread disappointment with the current pace of US oil and gas exploration and production. Dissatisfaction with the sector’s sluggish performance in the first half of 2023 is general and affects operators, drilling contractors and equipment/service companies.

This comes despite the fact that most of the industry participants expected this slowdown due to many reasons.

On July 7, the US oil services company Baker Hughes’ Exploration and Production Activity Index report stated that the number of exploration rigs reached 680 rigs across the United States, while the number represents an increase of 6 rigs from the previous week.

The count is still down by 72, or down 9.6%, from the same week in 2022, the first gains in the rig count over the past 10 weeks.

It should be noted that the US activity is far from the expectations announced by many specialists in this field at the beginning of this year.

This graph, from the Dallas Federal Reserve’s second-quarter energy survey, points to an unsuccessful year for US exploration and production activity:

The main influencing factors

It turns out that the exploration and production sector has reached this point, not because of one or two dominant factors, but rather as a result of a variety of issues, which is confirmed by the results of the energy survey for the second quarter of 2023, conducted by analysts at the Federal Reserve Bank of Dallas.

While the numbers collected by analysts certainly illustrate some aspects of this problem, the real evidence is in the “comments” section of the survey, and those comments collected by the Federal Reserve Bank of Dallas came from operators and equipment/service companies.

These comments are very useful, not because of the facts that support them, but in terms of clarifying the ideas of many of the top management of the sector.

Through these many comments, it can be said that the following elements represent a factor in the weakness of American activity.

Comments indicated that commodity pricing remains weak, all expenditures have increased thanks to inflation, labor availability remains a thorny issue, and some operators still have recessionary expectations and are holding back on capital spending.

In contrast, a number of publicly owned operating companies continue to practice “fiscal discipline”, choosing to restrict capital expenditures in favor of greater profits for shareholders.

The lack of bank lending to independent producers, especially small companies, reduces their ability to invest in new drilling activities.

On the other hand, the insidious quality of government regulation and lawmaking, coupled with the hostile White House stance, hamper upstream activity in many ways.

When one looks at this list, and thinks about the way the various factors interact with each other, it is not difficult to see why US exploration and production is suffering.

The following graphic, prepared by Specialized Energy Platform, shows the number of oil rigs in the United States:

Commodity pricing

In terms of commodity pricing, since the third week of April, the price level of oil futures has failed to exceed $80 per barrel.

During the same period, the price fell to less than $70 per barrel several times, and this is not a price level that would motivate a wide range of operators to violate their financial discipline and invest in more capital.

Meanwhile, the monthly average natural gas price at Henry Hub’s pipeline distribution center has fallen steadily since the beginning of 2023.

More specifically, the average price for January (2023) was $3.30/MMBtu, but it was negligible at $2.18/MMBtu during June 2023.

This circumstance has arisen from high rates of gas production combined with high levels of gas storage.

The situation was exacerbated by temperatures in the lower 48 states that were warmer than historical averages from January to March 2023.

Suffice it to say, this has been a major disincentive in pushing producers to drill for gas.

“Expenses on everything have increased exponentially, while oil prices remain weak and the price of natural gas (net of my revenue checks) is negative,” said one producer in comments to the Dallas Fed.

“It looks as if the financial break-even price for oil is in the middle of the $70-a-barrel range at this point, and I would have drilled if the costs weren’t so high and the margins so tight that it’s hard to commit to new projects,” he added.

Cost increases

As the previous comment indicated, the economic inflation that took hold in the United States during 2022, and has only partially subsided now, is responsible for raising the costs of all kinds of oilfield equipment and services.

One operator complained, “Operating costs have continued to increase and remain at high levels, resulting in continued profit tightening.”

Another producer commented, “Great discipline in financing oilfield services is driving up costs…Capital costs need to fall by more than 10% for activity to increase.”

Meanwhile, one service supply company lamented that, “while equipment price increases are slowing down, the continued rise in interest rates is forcing us to increase our prices for producers, and at the same time, the federal government shows no signs of cutting spending to ease inflationary pressures.” This is a huge burden for businesses and ultimately taxpayers.”

Manpower issues are still a factor, and from attracting fresh engineering graduates from college to gaining new hands in the field, labor availability affects the ability of operators to expand the activity, and one producer noted that “labor availability is a major problem in the collar and manual labor areas.” Zarqa.

“It is difficult to find staff, and the wage rate requirements continue to increase,” he explained.

Another worker agreed, saying: “Employment is hard to find, and the stigma of fossil fuels is driving young talent away from the sector.”

recession fears

Producers were waiting for a recession to occur as a result of inflation, as many economists had predicted and promised, and the fact that a recession had not yet occurred is in itself a problem.

“All the uncertain economic forecasts don’t give confidence in what’s going to happen,” one operator told the Dallas Fed.

Another producer commented: “It seems that the rumor of recession leads people to play a conservative role, because they do not know what will happen (instead of betting on growth), and this uncertainty leads to buyers reducing their purchases and lowering their expectations for growth,” indicating the need to stick to the path for the time being. .

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One company reported, “We believe that the next quarter will see flat oil prices, while the US faces its current inflation and/or economic struggles.”

Financial discipline

Operators gave a variety of reasons for continuing to reduce spending, for example, one respondent said: “Lower oil and gas prices greatly affect free cash flow and reduce capital expenditures.”

Another producer noted that publicly owned companies help reduce rig activity by distributing more profits to shareholders, saying, “The interest in profits after paying off debts to investors reduces the number of rigs.”

In addition, “It’s not good in the oil and gas business for a small independent producer,” said one operator, explaining why his company continues to spend on capital expenditures.

Attitudes of the financial community

It’s no secret that a certain part of the financial community in the US is now looking forward to the idea of ​​lending money to exploration and production companies, believing that it helps save the planet.

“The lack of bank lending to independent producers has significantly reduced our ability to invest in new projects,” one operator noted.

“We are constrained by our organic cash flow, and lower natural gas prices have cut that cash flow by more than half,” he added.

Meanwhile, an equipment/service company explained the lack of business growth with a succinct comment: “Accessing capital for our customer base continues to be a challenge.”

Government intervention and uncertainty

Perhaps no factor other than inflated commodity prices and costs spurred so many comments on the Dallas Fed poll as did the government’s role in exploration and production.

“Regulatory uncertainty continues to be an issue,” said one producer. After this comment, another stated, “The lack of support from management بايدن] It makes the investment questionable.”

Another company explained that “as the government continues its ‘war’ on oil and gas, there are additional costs involved for operating stakeholders.”

She added, “We have hope that, while seeking to increase production, the base of supply and demand will be consolidated.”

On the ESG front, one operator stated that “uncertainty around methane emissions regulations is an issue that affects our business.”

In the Service/Supply group, one company voiced its frustration, stating that “Federal regulatory agencies continue to harass our industry, thereby endangering our country’s energy security.”

Another company, preferring to be less important, stated: “We will dodge and try to stay out of control, so as not to draw the attention of lawmakers and regulators… It seems that oil prices are being traded as a financial instrument apprehensive about this imminent recession rather than the fundamentals of supply and demand, which indicate Strong attractions are coming our way.”

The Dallas Fed will publish its full energy survey for the second quarter in the July issue of World Oil magazine.

* Kurt Abraham, Editor-in-Chief of the American magazine World Oil.

*This article represents the opinion of the author, and does not necessarily reflect the opinion of the energy platform.