A tight labor market is creating a shortage of frac crews which will result in another backlog of DUCs, BTU Analytics said during an April 6 webinar. This will hinder the ability of producers to ramp up oil and gas production.

Analysts also pointed to capital commitments for emissions reductions, made as part of corporate ESG policies, as posing headwinds for E&Ps strapped for funds for capital investments.

The oil and gas industry is struggling to grow production following the departure of many employees during the pandemic, said Matthew Hagerty, senior energy strategy analyst for BTU. This is compounded by historically low unemployment. Couple that with tightness in the materials market, from steel to frac sand, and the near-term pricing ingredients exist for a boom in oil and gas production.

At least, that has been the pricing environment in the past. Not this time.

“In terms of production entering into the market, we’ve seen rigs be able to be brought online much faster than we are for frac crews,” Hagerty said. That means that a lot of wells are going to be drilled that cannot be completed in the near term—a problem in the near term but perhaps an opportunity in the long term.

“[It means that] some of the cash flow that is going in the ground today actually gives producers an opportunity to be more capital efficient in years ahead as they’re able to draw down on what we call drilled but uncompleted (DUC) wells,” he said. “What that does for producers in 2023 is potentially support more production, even if prices aren’t as strong as they are today in this $100-plus environment.”

Surges in the number of DUCs are not new for the E&P sector. Constraints on midstream takeaway in 2018-2019 led to a significant buildup of DUCs in the Permian Basin, Hagerty said. As the industry recovered from the initial impact of the pandemic, those DUCs were eventually drawn down throughout 2021. Now, they are building back up again.

ESG policies

Budget makers paid a lot of attention to internal ESG policies in their plans for 2021 and 2022. A significant outlay of capital was earmarked for reducing emissions, Hagerty said. That spending is not necessarily a significant headwind at the moment, he said, but it is building up to be one.

“At the end of the day, your capex budget is tight,” Hagerty said. “Especially as you’re seeing a lot of focus from investors about returns and share buybacks and whatnot … the more this ESG spending increases, the more of a headwind that is for increasing production, really, going forward as we get into the 2023-plus time frame.”

That’s because many of the programs companies are funding to reduce methane emissions and meet other goals are ambitious. A major producer like Occidental Petroleum, for example, is examining reduction of Scope 3, which reaches beyond a company’s own operations to downstream emissions of the products it creates.

“There are companies out there that are getting really aggressive with how they want to reduce emissions and that is likely to draw more and more into these ESG capital spending budgets going forward,” he said.

Inflection point

The current price volatility will pass, said Connor McClean, senior energy analyst for BTU, and upward pressure on commodity prices will ease as production grows later in 2022. However, this growth is unsustainable and long term, oil and gas prices will return to high levels.

“It appears that the era of energy prices being at the sustained low level, and production just growing unfettered appears to be coming to an end.” McClean said.

Maintaining high growth and low prices requires investment, McClean said, and not just in upstream production activities. Without investment in midstream operations to increase takeaway, the upstream forecast remains bearish. That’s because midstream infrastructure development is subject to regulatory risk.

In the short term, the war in Ukraine will continue to be responsible for price volatility. Prices should come down when the conflict ends, but BTU sees the war as an inflection point for U.S. energy. It is either an opportunity for the U.S. to grow oil and gas production and fill in those gaps globally, or the energy crisis experienced now will speed the transition away from fossil fuels.

Comments