Nearly half of about 100 exploration and production (E&P) companies surveyed by the Federal Reserve Bank of Dallas say they expect their drilling and completion costs at yearend to be below those of late 2022. By contrast, only 22% of smaller operators—defined by the Fed as producing less than 10,000 b/d—expect lower operating costs by the end of this year.
Those data points, collected as part of the Dallas Fed’s quarterly survey of energy companies across its territory in Texas as well as parts of New Mexico and Louisiana, are supported by respondents’ views on lower development, labor and lease operating costs—as well as generally deteriorating sentiment among oilfield services firms:
While about 30% of E&P company executives who spoke earlier this month to Fed researchers said they are still seeing finding and development costs climb, 16% said they are falling. Three months ago, that latter number was a mere 1%.
Similarly, labor expenses remain a sore spot for E&P companies but also are moving toward a better balance. The Dallas Fed’s wages index fell to 28 in the second quarter from 37.8 in March. That’s its lowest mark since the summer of 2021. Of respondents, 30% said wages and benefits are still climbing, down from 38% in this year’s first quarter.
The moderation in those metrics and several others are underpinned by slowing demand and a greater hesitancy to boost production: The survey’s core business activity index for the second quarter was zero, down slightly from the first 3 months of this year but far off the reading of more than 50 it averaged from early 2021 until last fall. Only about one in five firms reported an increase in activity, down slightly from first-quarter 2023’s survey.
The survey’s outlook indicator remained in the negative during the second quarter, with several executives noting that government regulations and the general tone from some political leaders are making it difficult for them to commit capital to new projects.
Still, one notable data point from the Fed’s survey suggests that outlook may swing back into positive territory soon: The 152 E&P and oilfield service firms said the overall uncertainty in their business dropped significantly from early this year. For E&P companies, it fell to its lowest in five quarters, suggesting that—as with drilling costs—executives feel comfortable with the state of their business as well as the broader economy.
As one survey respondent commented to the Fed: “Oil prices seem to be trading like a financial instrument terrified of this pending recession instead of paying attention to supply-and-demand fundamentals, which are pointing to pretty strong draws headed our way.”
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