Permian output up 600 MMcf/d since January
Input costs at record high for oilfield services
Supply-chain woes hit 94% of 11th district firms
Recent growth in Permian Basin natural gas production could be in for a slowdown this summer as producers in Texas face emerging cost inflation, supply-chain issues and labor shortages.
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In June, Permian gas production has averaged about 14.5 Bcf/d rising 600 MMcf/d, or about 4%, since January, data from S&P Global Commodity Insights shows. The jump in output comes as a handful of West Texas producers including Chevron and ExxonMobil target double-digit growth in oil equivalent output this year, according to recent quarterly production guidance from some of the largest Permian Basin producers.
Earlier this month, the Permian rig count edged up to a fresh two-year high at 340 as drilling activity in West Texas continues to grow. In the week ended June 22, the weekly rig estimate from Enverus was down slightly from the earlier high to 336, data from the software and energy analytics firm showed.
This summer, though, the steady expansion in Permian drilling activity could slow as producers are hit by rising costs and growing supply-chain woes, according to the Dallas Fed’s second-quarter energy survey.
Inflation, supply-chain challenges
In its latest report, oil and gas executives in the Federal Reserve’s Eleventh District – which encompasses all of Texas, along with producing regions in New Mexico and Louisiana – reported rising costs for a sixth consecutive quarter. For oilfield service firms, the index for input costs hit a record high of 88, up from 77 in Q1. Among E&Ps, the indexes for finding and development costs and lease operating expenses also hit all-time highs for the survey’s six-year history.
Materials and equipment are now more difficult to source too. Among all Eleventh District firms, the index for supplier delivery time edged up to a record high. Among oilfield service companies, respondents reported record-high measures for delayed deliveries to and from their firms. For E&Ps, executives reported a slight improvement in delivery lag-times which hit a record high in Q1.
In a series of special survey questions, the Dallas Fed also probed executives more deeply about their companies’ growing supply-chain difficulties. Among the roughly 130 oil and gas firms responding to this quarter’s survey, a brow-raising 94% of executives rated the impact of supply-chain issues on their companies as slightly negative (47%) or significantly negative (47%). Over 65% of respondents said they anticipate supply chain issues to persist for over 12 months.
Steel and tubular goods – critical components for well drilling and casing – are the among the most difficult to source with 89% reporting shortages or significant shortages. Equipment was a close second, with 83% of respondents reporting shortages or significant shortages.
Permian outlook
Cost inflation and supply-chain issues affecting Eleventh District oil and gas firms could be expected to have the biggest impact in the Permian Basin where US producers’ demand for equipment, skilled labor and oilfield materials like sand and chemicals is most heavily concentrated.
After taking a sustained hit at the height of the global coronavirus pandemic, production in the Permian struggled to recover its earlier momentum in the months since as investors now push increasingly for maintenance-level E&P programs. Cost inflation and supply-chain delays add another layer of constraints on the basin’s capacity to grow over the short- to medium term.
According to a recent forecast from Platts Analytics, Permian Basin gas production could still grow by more than 1 Bcf/d over the remaining months of 2022, potentially topping 15.6 Bcf/d by late fourth quarter. The same forecast shows growth slowing to a projected 1.3 Bcf/d during the entire calendar year of 2023.
Despite the setbacks and challenges posed by cost inflation and supply-chain disruptions, Permian Basin producers have strong incentives to continue growing over the months ahead. In May, half-cycle internal rates of return in the Delaware Basin of West Texas topped 90%. In the Midland, they’re estimated at around 77%, a recent IRR analysis from Platts Analytics shows.
