Latest Dallas Fed Energy Survey Indicates Strong 2023 Investment plans Despite Increasing Uncertainty and Supply Chain Issues
In the most recent Federal Reserve Bank of Dallas survey of energy executives, industry leaders expressed rising uncertainty about the future of oil and natural gas, along with increased input costs, supply chain bottlenecks, and labor shortages. However, despite their concerns, the majority of firms plan to increase capital spending in 2023.
For the eighth consecutive quarter, firms reported that they are facing rising costs. However, the input index cost slowed, suggesting that the rate of rising costs is decelerating. Furthermore, in the special questions section of the survey, thirty-two percent of firms stated that increased costs and/or supply-chain bottlenecks are the biggest drag on their crude oil and natural gas production expansion. One executive stated:
“Inflation continues to be a top-of-mind issue in exploration and production. We are girding ourselves for further cost increases in 2023. This is against a backdrop of commodity price uncertainty and fears of demand destruction owing to recession.”
Additionally, companies continue to face extended delivery times to receive materials and equipment, especially among oilfield service firms. Delays in supply deliveries eased up slightly compared to the previous quarter for both exploration and production (E&P) and oilfield service companies, but executives remain concerned. One oil and gas leader stated:
“Supply delivery times are difficult. Inflation affecting operating expenses (wages and salaries) is an issue affecting our business.”
Labor indexes in the fourth quarter pointed towards strong growth in employment, hours, and wages. The aggregate employment index, which represents average employment levels for the industry, was down from the third quarter’s record high, but remained elevated, making it the survey’s eighth consecutive positive reading. This news comes in tandem to recent Texas Workforce Commission data that shows the state added 2,600 oil and natural gas jobs in November, making the industry a major contributor to employment and economic growth in the region. In addition, less than 9 percent of respondents stated that labor was their biggest drag on increasing production.
Although the oil and natural gas labor market in Texas and surrounding states is strong, it may not be strong enough to keep pace with inflation and high energy demand. In the open-ended section of the survey, several energy executives described the challenges their firms face in hiring and retaining employees. One energy support services firm executive stated:
“Attracting and retaining labor remains our most significant and intractable challenge. Despite wage and benefit increases, retaining newly hired labor is difficult.”
Another E&P firm executive also weighed in on the challenges of the current labor market for energy companies:
“Employment continues to be a significant obstacle to growth. We cannot hire the talent we need.”
Adding to supply chain and labor challenges, energy executives also expressed concerns that the lifespan of aging facilities and equipment is inhibiting production growth. When asked what the biggest drag on crude oil and natural gas production growth was for their firm, twenty-seven percent of respondents cited a maturing asset base, making this executives’ second most common concern behind cost inflation and/or supply chain bottlenecks. In addition, sixteen percent of respondents said that availability of capital is the largest contributing factor holding back production.
Similar to the previous quarter, uncertainty continued to accelerate in the fourth quarter, with 53 percent of E&P firms reporting an increase in uncertainty from last quarter. Responses to the open-ended questions show that in addition to macroeconomic conditions and maturing assets, the industry is facing an unnerving capital formation environment. In the words of one E&P executive:
“Raising capital is a real problem that is exacerbated by the administration constantly yacking about putting the oil and gas industry out of business. That is not helpful. It has been obvious for a long time now that their plan is to deprive us of capital sources and regulate us out of business. Like it or not, oil and gas is here to stay for a very long time. Our request is simple: Get out of our way and we will deliver cheap energy.”
Despite these challenges, sixty-four percent of surveyed oil and natural gas companies plan to increase capital spending in 2023, and only fourteen percent anticipate any reduction in spending. Some E&P firms showed significant ambition, with twenty-seven percent of respondents stating they plan to significantly increase spending. This is perhaps due to the respondents’ forecasted price of oil at year-end of 2023 being $83.63, up from $73.76 at the time of last quarterly survey.
Bottom-line: While energy firms face a host of obstacles, including supply chain bottlenecks, labor difficulties, financing uncertainty, and maturing assets, persistent demand for oil and natural gas is encouraging companies in Texas, New Mexico, and southern Louisiana to continue investing in new production.