Energy operators working across the Midcontinent and in the Rockies are steadily picking up activity, but they need average natural gas prices of $3.82/MMBtu, with oil averaging $72/bbl before there’s a “substantial” boost in drilling, according to the Federal Reserve Bank of Kansas City.
The Kansas City Fed, as it is better known, every quarter surveys executives of oilfield services (OFS) and exploration and production (E&P) companies. The energy survey provides current and expected drilling, capital spending and employment activity in Colorado, Kansas, Missouri, Nebraska, northern New Mexico and Wyoming.
“Growth in District drilling and business activity remained solid in the second quarter, and expectations indicated further expansion in the next six months,” said Kansas City Fed economist Chad Wilkerson, the Oklahoma City Branch executive. “In addition, indexes for firms’ revenues and profits jumped to their highest levels since the survey began in 2014.”
Activity “continued to outpace the previous year, and expectations remained at solid levels.”
Still, the operators who responded to the survey conducted in June said they needed higher commodity prices to raise activity much higher. In alternate quarters, the survey asks operators what prices are needed for drilling to be profitable.
According to the respondents, the average oil price needed to boost activity was $72/bbl, with a range of $35 to $80. That price level is “considerably higher than prices needed to substantially increase drilling the past few years,” researchers noted.
The average natural gas price needed was $3.82/MMBtu, with responses ranging from $2.00 to $7.00.
Respondents said they expect prices for oil, natural gas and natural gas liquids to rise at a “moderately faster pace.”
One executive said, “It is possible we could see $100/bbl in six months if travel on the road and in the air picks up globally. But those prices could also impact demand.”
Another respondent said companies “will respond to higher prices and subsequently, prices will go down as more production comes online.”
Higher Drilling, Business Indexes
The year/year indexes in the Kansas City Fed’s 2Q2021 energy survey continued to strengthen, with the drilling and business activity index moving to 59 from 10.
“Nearly all other indexes were also higher than the previous reading, with the exception of supplier delivery time, which decreased from 7 to 3,” researchers noted.
Most of the “expectations” indexes also improved. For example, the future drilling and business activity index, which hit 41, was up from 40 in the first quarter and from 26 in 4Q2020. That means more firms expect activity to grow.
The revenues and profits indexes also climbed, while “expectations for employment, supplier delivery time and access to credit also expanded.”
Asked about the “main constraint” that is limiting near-term activity, most said it was “uncertainty about future oil and/or natural gas prices.” Other constraints listed were finding enough workers, along with supply chain disruptions and/or the lack of materials or equipment.
Some executives expressed concerns about limited access to capital. In addition, “pipeline capacity constraints” were on the list of concerns.
Executives also were queried about investing in “labor saving technology” because of the dearth of workers. Around 10% reported investments were at a “faster pace than in the past,” while close to one-third said they were spending about the same as before. Another 10% were investing at a slower pace than before, while 48% were not planning any labor saving investments.
