Oil and gas executives in the Rockies and Midcontinent have downwardly revised their expectations for Henry Hub natural gas prices over the near term, according to a new survey by the Federal Reserve Bank of Kansas City.
The Kansas City Fed’s quarterly Tenth District Energy Survey gauges current and expected oil and gas activity in the Tenth Federal Reserve District. The district encompasses the western third of Missouri; all of Kansas, Colorado, Nebraska, Oklahoma and Wyoming; and the northern half of New Mexico.
Respondents, on average, forecasted Henry Hub prices of $5.01, $5.52, $5.78 and $6.19/MMBtu for six months, one year, two years and five years from now, respectively.
These predictions were down substantially from the third quarter survey, when companies predicted average prices of $7.46, $6.48, $6.16 and $6.51 for the same time frames.
“Too much supply currently,” one respondent said in the latest survey. “Will force prices down and activity down.” By 2025, though, increased liquefied natural gas export capacity combined with flat to declining supply “will require higher prices.”
The same respondent added, “Drilling and completion costs are continuing to increase while forward commodity prices are decreasing, putting pressure on drilling economics.”
Asked what natural gas prices were needed for drilling to be profitable across the fields in which they operate, the average response was $4.32/MMBtu. NGI’s Henry Hub Daily Price Snapshot showed an average price of $2.930 as of Friday.
The average price needed to spark a substantial increase in drilling, meanwhile, was $6.13.
“Inflation pressures are currently high and will need to be arrested before [natural gas production] growth can be resumed or accelerated,” one participant said. “There are tremendous price increases tied to increased activity today.”
The same respondent predicted that new methane rules proposed by the Environmental Protection Agency “will decimate small producers with older properties if implemented as currently written.”
Pipeline bottlenecks also are hindering the ability of gas to get where it’s needed, said another participant.
“While the market price may be increasing and driving inflation through natural gas dependent products, the supply side cannot respond due to lack of infrastructure between growing supply areas and growing domestic and foreign markets,” the respondent said.
On the bullish side for prices, one executive said that “five-plus years of underspending will show up on the production side. Demand will be stronger than anticipated. Prices could be higher.”
Profits Drop in 4Q
“The pace of growth in Tenth District energy activity slowed in the fourth quarter of 2022, as indicated by firms contracted between Dec. 15, 2022, and Dec. 30, 2022,” said the Kansas City Fed’s Chad Wilkerson, senior vice president, who co-authored the survey with senior survey analyst Jannety Mosley. “Firms reported a drop in profits for the first time in over two years, but still remained moderately optimistic about 2023.”
The drilling and business activity index decreased from 44 in the third quarter to six in 4Q2022, while all other indexes decreased from previous readings, except the employee hours index that increased from 37 to 41.
“Year-over-year indexes remained mixed,” the authors said. They cited that the indexes for employee hours and wages and benefits rose from 50 to 57 and 87 to 89, respectively.
“The index for wages and benefits maintained record-level highs (since September 2022),” Wilkerson and Mosley said. “However, drilling/business activity, total revenues, total profits and access to credit indexes decreased moderately.”
They said that expectations for future activity decreased slightly in 4Q2022, but remained positive overall.
The future drilling and business activity index fell from 25 in the third quarter to 19 in 4Q2022, “while expectations for future employee hours and wages and benefits increased slightly,” the authors said. “Price expectations for oil decreased slightly, and expectations for natural gas prices also moderated further.”
Respondents also were asked what the biggest impediment was to oil and natural gas production growth for their firms. Nearly 40% said cost inflation and/or supply chain bottlenecks, while 28% said uncertainty over government regulations. Another 11% said the biggest drag on production was a maturing asset base, while “a handful of firms” cited labor shortages and availability of capital, the authors said.
On the oil side, meanwhile, respondents predicted average West Texas Intermediate crude prices of $83, $86, $88 and $88/bbl for the six-month, one-year, two-year and five-year time horizons, respectively.
These predictions compare to $88, $89, $90 and $93, respectively, in the previous quarter’s survey.
Asked what oil price was needed for drilling to be profitable across their portfolios, firms on average responded $64. The average oil price needed to substantially increase drilling was $89, firms said.
On the inflation front, companies were asked how much they expected prices for their key inputs to change from December 2022 to December 2023. More than 70% of respondents said they expected prices to increase, 19% said they expected prices to remain close to current levels, and 8% expected a decrease.
