Steady Activity Seen in Dallas Fed's Latest Energy Survey

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Lower natural gas prices shouldn't curb shale production too much going forward though drillers might not yet be embracing efficiency options at their wells, a survey from the Federal Reserve Bank of Dallas found.

The Dallas Fed's latest energy survey, released Wednesday, finds that oil and gas production changed little over the second quarter. Indeed, federal data show combined oil production from the Eagle Ford and Permian shale basins is expected to increase by only 0.3% from May levels to average 7.3 million barrels per day (BBL/d) for June. Combined gas production rises by about the same to average 32.7 billion cubic feet per day (Bcf/d), though all of that increase is from the Permian.

Some drillers have suggested output could be curtailed because of a lower price for natural gas. The U.S. Energy Information Administration, the statistical arm of the Department of Energy, said the price for natural gas at the Waha Hub, a pipeline-connected gathering site for the Permian, reached $1.37 per million British thermal units (MMBtu) last week, its highest point since February.

Trading at about $1.50 below Henry Hub, the U.S. benchmark, Waha Hub is nevertheless trading around 17% below the average from 2019, the year before the COVID-19 pandemic swept across North America.

But among the executives from 28 exploration and production firms surveyed by the Dallas Fed, 43% said Waha Hub prices won't impact drilling plans in the Permian this year. Another 43% said prices could only create minor headwinds, while only 14% said the market would have a negative impact on plans for the year.

One respondent said lower gas prices are curbing rig counts. Rig counts, however, are not the barometer on future production they were during the onset of the shale boom as drillers go longer with horizontal drilling with multi-bore wells.

That, however, might not be a prevailing trend in the Dallas Fed's district. The Fed asked if drillers were utilizing horseshoe patterns in their horizontal laterals, which the Fed said could open the door to even longer laterals and an overall reduction in costs.

The Fed found that the vast majority of the firms surveyed--89%--said they had not yet experimented with that drilling design.

"Expensive U-shaped horizontal drilling will not be profitable under current market conditions and uncertainty," one respondent said.

Other concerns were related to operating costs, where the Dallas Fed saw costs increase for upstream services firms. Politics too were a nagging issue for those surveyed.

"I hate to sound like a broken record, but federal intervention in the energy markets has confused everyone," one respondent said.

President Joe Biden enacted a pause on new terminals for liquefied natural gas (LNG) while it reviews the sector's environmental impacts, among other regulations the industry considers burdensome.

On prices, most expected West Texas Intermediate, the U.S. benchmark for the price of oil, to average $78.66 per barrel for the quarter, compared to Thursday trading levels of around $81.60 per barrel. Survey respondents expected Henry Hub to average $3 per MMBtu, against the $2.69 price point on Thursday.

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