Texas Oil and Gas Spending Soars Amidst Economic Uncertainty

In a December survey by the Federal Reserve Bank of Dallas, nearly two-thirds of Texas oil and gas executives reported a year-over-year increase in their capital spending, and nearly two-thirds expect spending to increase in 2023.

“Like it or not, oil and gas are here to stay for a very long time,” one exploration and production company executive told the Dallas Fed. “Our request is simple: leave, and we will supply cheap energy. “

For the month ended October 12, US oil production rose 7% to 12.38 million barrels per day. Texas production rose to nearly 5.2 million barrels per day in October, up 4.6%. 

These numbers are close to the end of 2019, just before the start of the record-setting COVID-19 pandemic. But in 2023, US production is forecast to increase and set a new peak, led by the Permian Basin region of West Texas.

The Permian is expected to increase production by 0,000 barrels per day, according to the US Energy Information Administration. 

Natural gas withdrawals are already at a record high, giving Texas a 5.1 percent increase in the year ending in October.
The Energy Agency cited a survey by the Federal Reserve Bank of Dallas, noting that responses indicated increased activity, especially since most companies plan to increase their capital spending this year.

According to the report, optimism declined in the last quarter due to concerns about inflation, supply bottlenecks, and the availability of capital and labor. The threat of a recession could temper enthusiasm, said Michelle Michot Foss, an energy, minerals, and materials researcher at Rice University’s Baker Institute.

“But the math is just too compelling,” Michot Foss wrote in an email. “The writing is on the wall.” “Demand is not going away (except for the effects of the recession).”

Job growth is one example of the sharp recovery in the Texas oil region. The number of people working in oil and gas extraction and support activities increased by nearly 22% to nearly 210,000 in the 12 months ending in November. That growth rate was about four times faster than the 5.1 percent increase in all nonfarm payrolls in Texas, according to the U.S. Bureau of Labor Statistics.

The unemployment rate in Midland, Texas, in the middle of the Permian, was 2.8% in November, the lowest in the state. National unemployment in the oil and gas sector was only 1.9% in December.

“Demand is strong, but there are no more workers,” said Kunal Patel, chief economist at the Dallas Fed.

The survey showed strong growth in employment, hours worked, and wages in the last quarter. But an explosive history that included deep layoffs in 2009, 2015, and 2020 made recruiting and retention difficult.

“It’s just that most people are looking for a career,” Patel said.
How tight is the job market? “Our company is even more dependent on rotating workers for equipment maintenance,” said one Permiläinen operator.

When the local infrastructure is stretched to the maximum, the number of safety incidents due to poor road conditions and traffic will increase, the director said.

The oil and gas industry often complains about government regulations and opposition to fossil fuels. But even if all regulations were lifted, operations could not be increased by more than a factor of 10 due to a lack of workers. The manager said: “Automation cannot drill wells, move equipment, or build facilities.”

Despite the labor force, it is not the main obstacle to growth. That includes cost inflation and supply bottlenecks, which were cited by 32 percent of E&P companies when asked about the biggest slowdown in production growth. Only 8% chose labor as the biggest headwind to increasing oil and gas production.
“Inflation is the most important thing for exploration and production,” the executive told the Dallas Fed. “We are preparing for further cost growth in 2023.” This is due to the uncertainty of crude prices and the destruction of demand due to the recession.
Inflation is a major factor in plans for higher capital spending this year, Patel said. Add to that the threat of recession and continued supply issues, and it adds uncertainty that dampens optimism. In a Fed survey of About half of executives reported an increase in uncertainty compared to the previous quarter and  a year earlier.

“They’re not as optimistic as usual,” Patel said. “From a high level, activity continues to grow, and they are spending more.” “But some of that [spending] is being eaten up by cost inflation.”
Natural gas and oil prices have been volatile over the past year, partly due to the Russian invasion of Ukraine and subsequent sanctions. Crude was selling for around $80 a barrel in early 2022, rose above $120 in early summer, and then retreated to $70.

When asked what price they used to project investments for 2023, the average answer was $75 per barrel, said the Dallas Fed.

Michot Foss of Rice University said he is optimistic that the fossil fuel industry will attract more investment in the short and long term. One reason is that there are not enough materials to build energy substitutes.
“For all the pressure to paint oil and gas companies into the sunset,” he said, “the truth is that replacing these commodities is very painful.”

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