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    Fed energy survey finds intensifying cost pressures


    January 3, 2022 - Mella McEwen, Midland Reporter-Telegram, Texas

     

      Jan. 1—Continued expansion of the state's oil and gas sector was obvious in the Fourth Quarter Energy Survey issued by the Federal Reserve Bank of Dallas.

      But what was also obvious in responses from the survey is that companies are facing intensifying cost pressures.

      Those cost pressures are the theme of the fourth quarter survey, Kunal Patel, business economist with the bank, told the Reporter-Telegram in a telephone interview.

      "The survey shows costs are rising. The question is how will the industry manage that?" he said.

      The survey found costs rose sharply for a third-straight quarter, with input costs for oilfield service firms climbing to a record 69.8 from the record high of 60.8 set in the third quarter. Only one of 44 service companies participating in the survey reported lower input costs.

      For exploration and production firms, finding and development costs rose to a record 44.9 from 33 in the third quarter while lease operating expenses jumped to a record high of 42 from 29.4 in the previous quarter.

      Patel noted that service firms reported improvement across the board, though the pace of growth for some indicators slowed. For example, the index of prices received for services was positive but fell to 30.3 from 42.2 while equipment utilization edged up to 51.1 from 47.8. Operating margins also remained positive but sank to 11.6 from 21.8 in the third quarter.

      One service company representative responded that the company is seeing an across-the-board increase in demand for services but "we are fighting to get back to acceptable margins for our products and services."

      Inability to hire qualified workers was a frequent comment from respondents, though the labor market showed further growth in the fourth quarter. The employment index remained positive, though it dropped to 11.9 from 14 in the fourth quarter. Service sector hiring continued to dominate. Patel noted employees are working more hours, though the employee hours index was essentially unchanged at 18. The wages and benefits index did move to a record high of 36.6 from 30.3 in the third quarter.

      Positive news in the survey was that business activity rose to 42.6, pointing to strong growth, and six-month corporate outlooks improved. Respondents forecast West Texas Intermediate prices will end 2022 at $75 a barrel — price forecasts ranged from $50 to $125 — and Henry Hub gas prices will end the year at $4.06 per MMBtu.

      Approximately 75 percent of respondents expect to increase capital spending slightly (44 percent) or significantly (31 percent) in 2022. Patel pointed out that the number of respondents expecting significant increases in spending was higher than in the fourth quarter of 2020.

      Despite the positive outlooks, Patel stressed that uncertainty remains among industry executives, who cited uncertainty over demand, the COVID-19 virus and the regulatory environment.

      "There were more comments this time about the regulatory environment," he said.

      Takeaways from the survey's pecial questions:

      —A majority of firms are using an oil price at or above $60 for budgeting purposes. The average response across all firms was $64.

      —Forty-nine percent of exploration and production (E&P) companies said that growing production was their primary goal for 2022.

      —Almost two-thirds of large E&P companies reported having plans to reduce carbon and methane emissions. Larger firms, which make up a sizable amount of U.S. oil production, are much more likely to have these plans in place than smaller firms.

      —On average, support service firms expect the price of their primary service or product to increase by 8.5 percent in 2022 while input prices are expected to rise roughly 10 percent. Increasing demand for their service or product was cited as the main factor that will influence the change in their firm's selling price.

      —Ninety-five percent of executives said they believe countries will be unable to meet their 2030 commitments for reducing greenhouse gas emissions.

      ___

      (c)2022 the Midland Reporter-Telegram (Midland, Texas)

      Visit the Midland Reporter-Telegram (Midland, Texas) at www.mywesttexas.com

      Distributed by Tribune Content Agency, LLC.

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