Dallas Fed Survey: Oil and Gas Activity Remains Steady but Change is on the Horizon

The second quarter of 2024 saw slight shifts in oil and natural gas activity, but major changes are looming on the horizon, according to new data from the Dallas Federal Reserve Energy Survey.

According to the latest quarterly survey of oil and natural gas operators in the Permian basin, oil and natural gas production was “little changed.” The production indexes showed small changes quarter-to-quarter, with oil production increasing from -4.1 to 1.1 and natural gas increasing from -17.0 to 2.3. The survey’s outlook index, a measure of business confidence, remained essentially unchanged as well, “suggesting modest optimism among E&P firms and a neutral outlook among services firms.”

Apart from the oil and natural gas activity statistics provided, the Dallas Fed also surveyed executives from oil and gas exploration and production (E&P) companies for a series of special questions on political headwinds as well as new opportunities, like the use of artificial intelligence in business operations.

Regulatory Roadblocks

The Biden administration’s politically motivated pause on permitting for liquified natural gas (LNG) exports and regulatory roadblocks create barriers to investment and production, according to several respondents.

While the LNG pause is top-of mind for the industry, other recent policies from the Biden Administration add further red tape, according to an executive from an E&P firm:

“Regulations continue to take a toll. SEC (Securities and Exchange Commission) climate disclosure proposals, the Environmental Protection Agency Quad Ob/c and the revised Clean Power Plan raise our costs and burden of compliance.”

As inflation and demand for oil and natural gas products continue to rise, one E&P executive put it plainly: “Overregulation of our industry by the federal government is hurting our economy.”

The long-term economic impact of overzealous regulation was a major theme in survey respondents’ comments. In response to the barrage public pressure to transition the economy off fossil fuels, one executive from an oil and natural gas support services firm explained the impracticality of “sweeping change” and urged lawmakers to take a long-term view:

“There is still a prevailing feeling that this administration does not fully understand our business or the ramifications the policies they are pushing will have on the overall economy, not only in the short term but for years to come.

“Fossil fuels have been around for ages, and to think you can make this type of sweeping change virtually overnight is not only shortsighted, but next to impossible. I can only speak for our infinitesimal part of the industry, but the word of the day should be compromise, not utter destruction.” (Emphasis added)

Political Uncertainty

While the current administration’s animosity towards oil and natural gas companies presents numerous challenges, forecasting what comes next and planning business decisions accordingly is also an issue.

The upcoming 2024 U.S. elections create substantial uncertainty for companies seeking to make long-term investments amidst an unclear political future. The survey data reflected this trend this quarter as its measure of business outlook uncertainty “continued to increase on net.”

Executives responding to the survey explained that in times of political uncertainty, customers tend to pull back from making major purchases or commitments, slowing overall activity in the sector. One executive from an oil and natural gas support services firm explained how ever-shifting regulations and political rhetoric cause frequent project delays:

Political and policy uncertainty remains the largest obstacle for the oil and gas industry. Our customers continue to defer or cancel planned drilling programs due to ongoing impacts of the stranded associated natural gas production in West Texas.” (emphasis added)

Another executive from an oil and gas support firm argued that consistency in policy is more important than which party holds office, as companies need regulatory stability to raise capital and pursue long-term projects:

“The uncertainty of regulatory policy between the Democratic and Republican parties makes us stop new capital spending commitments.”

Artificial Intelligence

Despite political headwinds, oil and natural gas companies continue to invest in technologies that make their operations cleaner, safer, and more efficient, including artificial intelligence.

50 percent of executives surveyed say their firms are either currently using artificial intelligence, both traditional and generative, or will be utilizing the technology within the next 12 months. Of these participants, 64 percent said they use or will use AI for, “business analysis or predictive analytics.”

One executive from an oil and natural gas support firm explained:

“We are just beginning to explore the full capabilities of artificial intelligence within our business… Firms currently not exploring the capabilities of AI will soon struggle to compete on any metric other than price.”

While discussions of AI in the energy sector have focused more on the need for additional energy to meet the increased energy demands AI requires, these comments show that oil and natural gas companies are also exploring how to use AI to increase efficiencies across the industry.

Bottom Line: While oil and natural gas activity remain relatively unchanged this quarter, major factors including AI, access to capital, industry consolidation, and political uncertainty may have major affects companies operating in the Permian Basin moving forward.

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