Oil and gas production rising in the Permian Basin in the face of mounting costs

Oil and gas production rising in the Permian Basin in the face of mounting costs

Energize Weekly, June 29, 2022

Oil and gas production in Texas and New Mexico – the most productive U.S. fields – increased in the second quarter of 2022, even as operators face rising costs and supply chain challenges, according to a Federal Reserve Bank of Dallas survey.

“Activity in the oil and gas sector expanded at a robust pace,” the Dallas Fed Energy Survey found. The bank questioned executives at 133 companies operating in the region.

Drilling and production are being spurred by higher oil and natural gas prices. Company executives surveyed said they expect the average price of West Texas Intermediate (WTI) crude oil to be $108 a barrel by the end of 2022 and natural gas priced at $7.55 for 1 million British thermal units (BTUs).

In June of 2021, the average prices for a barrel of WTI crude was $71 a barrel, and the price of natural gas was $3.26 for 1 million BTUs, according to the U.S. Energy Information Administration.

The Dallas Fed survey’s broadest measure of conditions facing the energy firms edged up from 56.0 in the first quarter to 57.7, the highest reading in the survey’s six-year history.

Oil and natural gas production increased, though the pace eased slightly, according to executives at exploration and production (E&P) companies.

The core area for production is the Permian Delaware Basin, which straddles Texas and New Mexico. Industry consultant Rystad Energy is forecasting that production will hit a record average of 5.7 million barrels of oil equivalent (oil and natural gas) per day for 2022.

“The Permian Delaware has emerged as the top oil-producing play in the U.S. shale patch, outpacing growth in other oil-rich regions,” Veronika Meyer, Rystad Energy vice president, said in a statement. “With oil prices expected to remain elevated, 2022 promises to be another outstanding year for production growth in the region.”

Rystad Energy’s forecast is based upon research on 61 E&P companies in the basin.

The increase in production, however, is coming in the face of rising costs, supply chain problems in acquiring key materials and a tight job market, the Dallas Fed Energy Survey found.

“Costs increased for a sixth straight quarter,” the survey said. “Among oilfield services firms, the index for input costs jumped from 77.1 to 88.0—reaching a record high.”

None of the 52 oilfield services firms covered in the survey reported lower costs.

For E&P companies, the index for finding and development costs in the second quarter rose to 70.6 increased from 56.0 in the first quarter. The index for operating expenses was also up, and the both development and operating costs were at a six-year high.

It is also taking longer for firms to receive materials and equipment with some in short supply, including steel tubular goods, sand, and field equipment.

Two-thirds of the company executives surveyed said it will take more than a year to resolve supply chain issues.

The labor situation is also a challenge. “All labor market indexes in the second quarter remained elevated, pointing to strong growth in employment, hours and wages,” the survey said, and two-thirds of respondents said that they face labor shortages.

Leave a Reply