Strong points

Permian production up 600 MMcf/d since January

Input costs at an all-time high for oilfield services

Supply chain issues hit 94% of 11th District businesses

Recent growth in natural gas production in the Permian Basin could experience a slowdown this summer as Texas producers face emerging cost inflation, supply chain issues and labor shortages. ‘work.

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In June, Permian gas production averaged 14.5 billion cubic feet per day, rising 600 million cubic feet per day, or about 4%, since January, according to data from S&P Global Commodity Insights. The jump in production comes as a handful of West Texas producers, including Chevron and ExxonMobil, are targeting double-digit oil-equivalent production growth this year, according to recent quarterly production forecasts from some of the largest producers in the Permian Basin.

Earlier this month, the Permian rig count hit a new two-year high at 340 as drilling activity in West Texas continues to grow. In the week ended June 22, Enverus’ weekly platform estimate was down slightly from the previous high at 336, according to data from the software and energy analysis firm.

This summer, however, the steady expansion of Permian drilling activity could slow as producers are hit by rising costs and growing supply chain issues, according to the energy survey of the Dallas Fed second quarter.

Inflation, supply chain challenges

In its latest report, oil and gas executives in the Federal Reserve’s Eleventh District — which encompasses all of Texas, as well as producing regions of New Mexico and Louisiana — flagged rising costs for a sixth quarter. consecutive. For oil service companies, the input cost index hit a record high of 88, down from 77 in the first quarter. Among E&Ps, the indexes for research and development costs and lease operating expenses also hit all-time highs in the survey’s six-year history.

Materials and equipment are now harder to find. Among all companies in the Eleventh District, the supplier lead time index reached an all-time high. Among oil service companies, respondents reported record metrics for delivery delays to and from their businesses. For E&P, executives reported a slight improvement in lead times which hit a record high in the first quarter.

In a series of special investigative questions, the Dallas Fed also asked executives in more depth about growing supply chain challenges at their businesses. Of the nearly 130 oil and gas companies responding to this quarter’s survey, 94% of executives rated the impact of supply chain issues on their businesses as slightly negative (47%) or significantly negative (47%). ). More than 65% of respondents said they expect supply chain issues to persist for more than 12 months.

Steel and tubular products – essential components for drilling and casing wells – are among the hardest to find with 89% reporting shortages or significant shortages. Equipment comes in second place, with 83% of respondents reporting shortages or significant shortages.

Permian outlook

Cost inflation and supply chain issues affecting oil and gas companies in the Eleventh District could have the greatest impact in the Permian Basin, where demand from U.S. producers for equipment, skilled labor and in oilfield materials such as sand and chemicals is the most highly concentrated.

After taking a heavy hit at the height of the global coronavirus pandemic, production in the Permian has struggled to regain its earlier momentum in the months since as investors now increasingly push for programs Maintenance-grade E&P. Cost inflation and supply chain delays add another layer of constraints to the basin’s ability to grow in the short to medium term.

According to a recent forecast from Platts Analytics, gas production from the Permian Basin could still increase by more than 1 Bcf/d in the remaining months of 2022, potentially exceeding 15.6 Bcf/d by the end of the fourth quarter. The same forecast shows growth slowing to 1.3 Bcf/d through calendar year 2023.

Despite the setbacks and challenges posed by cost inflation and supply chain disruptions, producers in the Permian Basin have strong incentives to continue growing in the months ahead. In May, half-cycle internal rates of return in the Delaware Basin of West Texas exceeded 90%. In Midland, they are estimated at around 77%, according to a recent IRR analysis from Platts Analytics.

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