Oil companies brace for record cost pressures amid rising production and drilling in 2022

While 2021 gave the oil and gas industry the opportunity to recover after a difficult period and returned confidence to energy stocks, US oil and gas executives are predicting an even better year ahead with production and drilling activity poised to hit a new high and oil prices continuing to climb.

But that optimistic outlook, according to a poll released on Wednesday by the Federal Reserve Bank of Dallas, comes with a caveat: oil drillers in the biggest US fields are shouldering record costs at the same time that some banks are increasingly reluctant to loan money to the sector.

Some 49 percent of executives surveyed in the poll said they aim to expand output next year, while 15 percent said their main focus would be to maintain existing production levels and 13 percent plan to focus on reducing debt. Six-month outlooks remained positive, but the index declined to 53.2 from 58.9 the previous quarter.

Equipment, leasing and other input costs for oil explorers and the contractors they hire surged to an all-time high during the current quarter, the Dallas Fed said in the report. Drillers also are seeing the universe of willing lenders shrink in the Eleventh Federal Reserve District that includes Texas and parts of Louisiana and New Mexico.

“The political pressure forcing available capital away from the energy industry is a problem for everyone,” a survey respondent said. “Banks view lending to the energy industry as having a ‘political risk.’ The capital availability has moved down-market to family offices, etc., and it is drastically reducing the size and availability of commitments regardless of commodity prices.”

Despite commodity prices falling over the last two months, US oil and gas operators have experienced strong commodity prices all year. The year-to-date WTI price has averaged approximately US $70/b and averaging around US $4/MMBtu.

However, as opposed to previous price spikes, operators have remained much more committed to capital discipline and appear poised to stick to this strategy in 2022, according to S&P Global analysts.

The Dallas Fed survey showed similar sentiments, with executives of publicly traded oil companies saying they largely plan to keep production flat or expand output at low single-digit percentage rates next year and focus on improving shareholder returns.

“Rising supply-chain disruption and associated inflation have the potential to delay and impact drilling and completion activity in 2022,” one executive said. Others said it has been difficult to find highly qualified workers.

Survey respondents on average anticipate oil prices to be at US $75 a barrel next December, and Henry Hub natural gas prices to land at $4.06 per million British thermal unit (MMBtu), both close to current pricing.

The survey polled executives at 134 energy firms in Texas, southern New Mexico and northern Louisiana, of which 90 were from exploration and production companies and 44 were from oilfield service firms.