Current Report Summary

• Sector activity: Slight decline in oil and gas sector in Q3 2024; business activity index fell from 12.5 (Q2) to -5.9 (Q3).

• E&P vs. services: Activity unchanged for E&P firms (index 0), but down for services firms (-18.1).

• Production:

  • Oil production increased (index from 1.1 to 7.9).

  • Natural gas production decreased (index from 2.3 to -13.3).

• Costs:

  • Slower cost increases for oilfield services (input cost index down from 42.2 to 23.3).

  • E&P finding and development costs fell (from 15.7 to 9.9).

  • Lease operating expenses dropped slightly (from 23.6 to 21.3).

• Equipment/utilization: Oilfield services equipment utilization turned negative (from 10.9 to -20.9); margins fell further (from -13.0 to -32.6).

• Employment: Little change; aggregate index steady at 2.9, but employee hours declined (from 8.1 to -2.3).

• Company outlook: Outlook turned pessimistic (index down from 9.9 to -12.1), and uncertainty increased (index up 25 points to 48.6).

• Price forecasts:

  • WTI oil: $73 per barrel by year-end 2024, $81 in two years.

  • Henry Hub natural gas: $2.62 per MMBtu by year-end, $3.24 in two years.

Summary of Key Forecast Charts from the Dallas Fed Energy Survey

1. West Texas Intermediate (WTI) Crude Oil Price Forecast:

   • Average year-end 2024 forecast: $72.66 per barrel.

   • Range: The lowest forecast is $55.00, and the highest is $100.00 per barrel.

   • Current Spot Price (during survey): $70.82 per barrel.

   • Long-term forecast: WTI is expected to reach $81 per barrel in two years and $87 per barrel in five years.

   
   

2. Henry Hub Natural Gas Price Forecast:

   • Average year-end 2024 forecast: $2.62 per MMBtu.

   • Range: The forecast ranges from a low of $1.50 to a high of $4.25 per MMBtu.

   • Current Spot Price (during survey): $2.23 per MMBtu.

   • Long-term forecast: Henry Hub is expected to rise to $3.24 per MMBtu in two years and $3.89 per MMBtu in five years.
     

3. Production Constraints in the Permian Basin:

   • Crude oil production: 92% of executives do not expect pipeline constraints to limit oil production in the Permian by 2026, indicating confidence in the infrastructure to support growing production.

   • Natural gas pipeline bottlenecks: Most firms (80%) do not plan to ramp up well completions once natural gas pipeline bottlenecks are resolved, indicating that additional supply pressures may not materialize even if transport issues are addressed.

4. Impact of Low Waha Natural Gas Prices on Services:

   • 47% of service firms in the Permian Basin reported a slight negative impact on demand due to low natural gas prices, while 17% saw a significant impact.

Special Questions to 133 Oil and Gas Firms

1. Is your firm planning to ramp up well completion activities in the Permian Basin once the natural gas pipeline bottleneck is cleared?

• 80% of firms not planning to ramp up well completion: Majority of firms are not intending to increase well completions once the bottleneck clears, signaling a cautious approach despite improved infrastructure.

• 20% planning to ramp up: A minority expect to increase completion activity, likely anticipating improved price conditions once transport constraints ease.

Implication for Supply: With most firms not planning to increase activity, natural gas supply growth may remain subdued even after pipeline issues are resolved, limiting potential downward price pressure.

2. Do you expect your firm's crude oil production to be constrained between now and 2026 due to crude oil pipeline capacity constraints in the Permian?

• 92% do not expect constraints: Most firms do not foresee crude oil production limitations due to pipeline constraints before 2026.

• 8% expect constraints: A small percentage anticipate capacity issues affecting production.

Supply Outlook: Crude oil production is unlikely to face significant constraints due to pipeline capacity in the near to medium term, suggesting stable supply growth.

3. What impact did low Waha Hub natural gas prices have on demand for your firm’s services in the Permian Basin in the third quarter of 2024?

• Slightly negative impact (47%): A near-majority of service firms reported slightly reduced demand for their services.

• No impact (37%): A significant portion saw no change in demand despite low gas prices.

• Significantly negative impact (17%): A minority reported a sharp drop in demand for services.

Service Demand Trends: While the majority of firms experienced a slight or no impact, a notable segment faced significant declines in demand, potentially affecting service sector profitability in the region.

4. Is your firm aiming to electrify its oilfield operations?

• Fully electrified (18%): A portion of firms have fully transitioned to electrified operations.

• Planning full electrification (6%): Only a small percentage aim to fully electrify in the future.

• Partial electrification (31%): A third expect partial electrification, suggesting a moderate shift toward energy efficiency.

• No plans to electrify (45%): Nearly half have no intention to electrify operations, reflecting cost or operational challenges.

Electrification Trends: While there is some movement toward electrification, the majority of firms are either partially transitioning or not planning to electrify at all, which may slow energy efficiency gains.

5. What is the current lead time for electrical components, such as transformers?

• Less than one year (54%): Most firms report a manageable lead time of less than a year for electrical components.

• More than one year (31%): Over a third of firms face lead times exceeding one year, with 10% reporting delays of two to three years.

Operational Delays: Extended lead times for electrical components could delay electrification and efficiency improvements, especially for firms that rely on new infrastructure.

6. What is the top challenge to electrifying oilfield operations?

• Permian-focused firms:

  • Grid access uncertainty (29%): The top concern is future grid access, indicating infrastructure challenges.

  • Other challenges (25%): Issues such as grid infrastructure were commonly cited.

• Firms outside the Permian:

  • Too expensive (30%): Cost is the primary barrier.

  • Lead times for equipment (26%): Delays in obtaining equipment are another key issue.

• Firms not looking to electrify:

  • Too expensive (48%): High costs are the primary deterrent.

  • Grid stability and other concerns (17%): Grid reliability remains a concern for some.

Electrification Challenges: The cost of electrification and uncertainty about grid access are the main obstacles, especially in regions like the Permian where grid infrastructure is less reliable.

^{Comments from Survey Respondents}

Volatility and Uncertainty:

- Market volatility and political uncertainty are leading to cautious planning for 2025.

- Firms are delaying investment decisions, awaiting election outcomes and clearer economic signals.

Natural Gas Price Distortions:

- Permian Basin natural gas is priced well below futures, signaling localized oversupply or infrastructure issues.

- This pricing disconnect may persist, impacting production decisions and revenue.

Oil Price and Inventory Dynamics:

- Rising oil inventories are exerting downward pressure on prices.

- Geopolitical risks (Ukraine, Middle East) could push prices up in 2025, but political and economic uncertainties remain key drivers.

Underinvestment in Supply:

- Low prices and the energy transition are leading to underinvestment, threatening future supply adequacy.

- This could result in supply shortfalls and price spikes in the medium term.

M&A and Sector Consolidation:

- M&A activity is sluggish, with fewer deals and assets available, favoring larger firms.

- Smaller operators and service companies face challenges due to reduced continuity of work and cost inflation.

Cost Inflation and Regulatory Pressure:

- Rising costs, especially in oilfield services and equipment, are squeezing margins.

- Regulatory uncertainty is compounding challenges, particularly for smaller firms.

- Weak Investor Sentiment:

- Limited investor interest in oil and gas is restricting capital availability for exploration and growth, further tightening future supply.