US oil producers’ costs on the rise, Trump tariffs bring uncertainty to some


Activity in the US oil and gas industry continued to climb last quarter and was driven by gains in the oilfield services sector, however, the cost of goods and labour also rose.  Anadarko photo.

A majority of US oil and gas companies reported an increase in activity over last year

The Federal Reserve Bank of Dallas reports in its quarterly energy survey that US oil and gas business improved in the first quarter of 2018.  Much of the boost was driven by increased activity in the oilfield services sector.

According to the central bank, which represents the Eleventh District, about 65 per cent of the 140 energy firms surveyed reported increased activity compared to this time last year.  Since the first quarter of 2017, oil prices have risen by over 30 per cent and now sit at around $64/barrel.

About 80 per cent of oilfield services companies are more optimistic about the future and, overall, about 77 per cent of the respondents report an improved company outlook.

Rising activity in the oil patch is driving up costs for companies.  The Fed’s index for wages and benefits climbed to 46.5 from 40.6 in 2017.  The index for service firms’ input costs were up by 14 per cent from last year and over 50 per cent from last quarter.

Even though costs are on the rise, the index for prices received for oilfield services fell to 35.7 from 44 in 2017.  Less than half the energy companies reported getting higher prices and 10.7 per cent say they saw a decrease in prices.

“E&P companies are still holding service prices down at every turn. On the flip side, our costs of goods, fuel and wages are climbing every day. It is time for rate increases to ensure a profit and sustainability,” said one respondent.

On average, oil companies say they need oil to come in at $52/barrel for them to be able to profitably drill new wells.  This is $2/barrel over the previous year.  In the Permian Basin, companies say $50/barrel oil is required, which is also up by $2/barrel over last year.

The higher breakeven costs are largely due to higher land costs.  According to Reuters, on Wednesday, Concho Resources reported it will buy RSP Permian in an $8 billion all-stock deal, with land priced at over $70,000 per acre.

The possible steel tariffs floated by the Trump administration have some energy firms concerned, with about 20 per cent reporting uncertainty over the previous quarter due to the Trump tariffs.

“The recent uncertainty regarding steel tariffs has the potential to create a major immediate shortfall in upstream drill pipe and to add significantly to costs, which would negatively impact the internal rate of return on many plays,” said one respondent who works for an oilfield services firm told Reuters.

With producer capital expenditures falling from 55.7 per cent last year to 42 per cent in 2018, energy companies are signalling they may be boosting investor returns rather than expanding their drilling operations.

The Fed reports most respondents expect US WTI to be just over $63/barrel by the end of the year, with estimates ranging from $45/barrel to $77/barrel.




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