Energy Survey Points to U.S. Drilling Downturn

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Respondents to a survey from the Federal Reserve Bank of Kansas City showed drilling activity in its district is expected to decline over the next six months amid a dip in capital expenditures.

Just ahead of earnings season, the Fed showed revenues for drillers were stable during the first quarter.

"The contraction in drilling activity is expected to continue in the next six months, but firms anticipate revenues and profits will pick up somewhat," the Fed stated. "Despite this, capital expenditures are expected to continue declining even as the outlook for access to credit is stable."

Respondents expressed concern about the pace of growth, saying fewer companies were actually looking for new reserves. Without that, it may be difficult to cover expected demand.

That follows estimates from the U.S. Department of Energy (DOE) that show global liquid fuels consumption will average 102.9 million barrels per day (BBL/d) in 2024 and 104.3 million BBL/d in 2025, an increase of around a half million BBL/d from the prior month's estimate.

Production growth continues, nevertheless. The DOE believes total U.S. crude oil production will average 13.2 million BBL/d this year, up from 12.9 million BBL/d in 2023.

Apart from production, firms were asked about the price of oil and natural gas needed to make a profit during their drilling operations. The average price needed for West Texas Intermediate (WTI), the U.S. benchmark for the price of oil, was $65 per barrel and $3.47 per million British thermal unit (MMBtu) for Henry Hub, the U.S. benchmark for natural gas.

To increase drilling activity, firms said they needed $90 per barrel oil and $4.38 per MMBtu in natural gas.

WTI was trading at around $84 per barrel on Monday, while Henry Hub was at $1.74 per MMBtu.

Crude oil prices are supportive of upstream activity, but because natural gas is typically associated with crude oil, the downturn in Henry Hub prices is a concern. British energy company BP (NYSE:BP) (London, England) said recently that lower natural gas prices, higher associated costs and a focus on investor returns are behind an expected decline in production.

"Long term, the cost of gas needs to match the cost to replace the gas reserves," one respondent told the Kansas City Fed. "Current low prices do not justify the cost of reserve replacement."

The Kansas City Fed district covers Colorado, Kansas, Nebraska, Oklahoma, Wyoming and parts of western Missouri and northern New Mexico. A survey last month from the Federal Reserve Bank of Dallas found that WTI at a paltry $39 per barrel was necessary to cover operations at existing wells.

"Almost all respondents can cover operating expenses for existing wells at current prices," the Dallas Fed stated.

Across the board, respondents to the Dallas Fed said they needed an average price of $64 per barrel to profitably drill a new well, some $2 per barrel higher than last year's expectations. The break-even price in the lucrative Permian Basin was $4 higher than last year at $65 per barrel.

The government expects WTI to average $83.78 per barrel this year, while Henry Hub should come in at $2.24 per MMBtu for the year.

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