Energy survey shares insight on drilling, market outlook

By Staff | April 15, 2019

A first quarter energy survey completed by the Federal Reserve Bank of Kansas City shows that while energy related activity in Colorado, Wyoming, Oklahoma and the northern half of New Mexico was flat at the end of 2018, the energy landscape looks different this year.

Better commodity prices are the main driver, coupled with a fairly balanced global supply and demand market, according to the team at the Tenth Federal District Reserve.

The surveyors provided a summary of the special questions asked to drillers, operators, service firms and others related to the energy sector.

Summary: This quarter firms were asked what oil and natural gas prices were needed for drilling to be profitable on average across the fields in which they are active (in alternate quarters they are asked what price they need for a substantial increase in drilling). The average oil price needed was $52 per barrel, with a range of $30 to $85. This average was down slightly from $55 in the third quarter of 2018, but matched the price reported in the first quarter of 2018. The average natural gas price needed was $3.02 per million Btu, with responses ranging from $1.50 to $5.00. Firms were again asked what they expected oil and natural gas prices to be in six months, one year, two years, and five years. Expected oil prices increased since the last quarter and were above the average price needed to be profitable. The average expected WTI prices were $60, $61, $65, and $72 per barrel, respectively. However, natural gas price expectations decreased. The average expected Henry Hub natural gas prices were $2.85, $2.91, $3.05, and $3.18 per million Btu, respectively. Firms were also asked about their expectations for access to pipeline capacity in the next 6 to 12 months. More than 62 percent of energy contacts expect pipeline capacity to increase either significantly or slightly in the next year. Less than 12 percent of firms expect pipeline capacity to decrease. Finally, respondents were asked about drilled but uncompleted (DUC) wells. Around 20 percent of firms indicated their number of DUC wells had increased compared to a year ago, while only around 8 percent expect their number of DUC wells to increase in the next 6 to 12 months.

In addition to the summary of survey answers, the new Q1 energy report also included several selected comments, including the following (all source names were not included).

“We are focusing on what we control, shoring up and improving our equipment, hoping that translates towards better efficiency, and doing so from cash flow and without taking on debt. Regardless of energy prices over the next 6 months, we want to reduce debt and be better positioned to ride out another downturn in pricing should that occur.”

“The market seems to have found a healthy supply and demand balance. That balance is being driven by oil supply being reduced from OPEC and demand remaining stable in spite of economic growth concerns.”

“There is little lag between increased commodity prices and the ability to ramp up oil production, leading to more production and lower prices. It seems the market is able to reach supply-demand equilibrium (barring one-off geo-political events) much more quickly. Drilling and completion technology has led, again, to rapid production. Companies can simply move more quickly on shale plays with greater success.”

“Commodity prices are the key determinant in any activity (capital expenditure changes). Most likely no change if prices are higher, and significantly lower prices would create a reduction in activity.”