This Week In Petroleum Summary Printer-Friendly Version – United States. Energy Information Administration (EIA) –

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This Week In Petroleum Summary  Printer-Friendly Version – United States. Energy Information Administration (EIA) –




United States. oil producers may be facing supply chain issues as they increase capital expenditure

With higher crude oil prices, financial results for 42 United States. exploration and production (E&P) companies showed large increases in both cash from operations and capital expenditure in the fourth quarter of 2021 (4Q21). However, despite more capital expenditures, production has not substantially increased. Production is less responsive for several reasons. Supply chain issues and labor shortages, among other factors, are contributing to fewer drilled wells and resulting in a decreasing inventory of drilled but uncompleted wells.

We base our analysis of the E&P sector on the published financial reports of 42 publicly traded United States. oil companies. As a result, our observations do not necessarily represent the sector as a whole because the analysis does not include private companies that do not publish financial reports. In 4Q21, these 42 publicly traded companies collectively produced 3.8 million barrels per day (b/d) of crude oil in the United States, or about 33% of all United States. crude oil production for the quarter.

The West Texas Intermediate (WTI) crude oil price averaged $77.27 per barrel (b) in 4Q21, an increase of $34.77/b (82%) compared with 4Q20 and $6.66/b (9%) compared with 3Q21. Cash from operations for the E&P companies reached $27.5 billion in 4Q21 (Figure 1), the most generated in any quarter since 3Q14. Higher prices contributed to cash from operations increasing 156%, or $16.8 billion, compared with 4Q20 and 21%, or $4.8 billion, over 3Q21. Crude oil production increased year-over-year by 606,000 b/d (19%) in 4Q21 and by 183,000 b/d (5%) from the previous quarter. Compared with pre-pandemic levels, production in 4Q21 was 434,000 b/d (10%) less than in 1Q20. Over the last four quarters, capital expenditure increased by $8.7 billion (137%) to reach $15 billion in 4Q21, only 4% below the level recorded in 1Q20. In the last quarter alone, capital expenditure increased 60%, or $5.7 billion. Capital expenditures in 1Q20 were 34% below their peak in 3Q18.

As with several commodities, increases in the price of crude oil stimulate production. A comparison between the WTI price and well completions over the last seven years shows a positive relationship: when WTI prices increase, well completions increase, and when WTI prices decrease, well completions decrease (Figure 2). WTI price movements typically lead well completions by four to six months, accounting for the preparation time needed to organize resources when prices increase or to wind down operations when prices decrease. As crude oil prices fell to record lows at the beginning of the COVID-19 pandemic in 2020, well completions also declined. However, although crude oil prices have since returned to and exceeded pre-pandemic levels, well completions have remained at reduced levels. Based on quarterly financial reports from these 42 E&P companies as well as surveys such as the Dallas Fed Quarterly Energy Survey, drilling and completion activity has remained comparatively low as a result of increased capital allocation to dividends and balance sheet improvement as well as logistical issues, including personnel and equipment shortages.

Figure 2. Well drilling completions vs. West Texas Intermediate price

One constraint on well drilling and completions is the capacity of oil field service companies to provide the needed rigs and crews to bring a well online. An analysis of published financial reports for 14 United States. oil field service companies shows less cash from operations led to decreased capital expenditure compared with pre-pandemic levels, likely resulting in reduced operating capacity (Figure 3). Over the last two years, E&P companies reduced their oil production and maintained lower capital expenditure to improve their financial position and increase shareholder returns. Oil field services companies responded by reducing their capital expenditure spending on equipment by over 40% compared with 2019 and reducing employment in the sector. According to United States. Bureau of Labor Statistics data, employment in oil and gas extraction decreased by 23,900 (18%) between February 2020 and February 2021. As of March 2022, employment remains 8% below February 2020. Reporting from the Energy Workforce and Technology Council, an industry association, finds over 100,000 jobs (14%) associated with oil field services and equipment were lost between February 2020 and August 2020 as a result of policy and market responses to the pandemic. Many of these jobs have still not returned. Recent statements from several oil field service companies during earnings calls this month suggest industry shortages in labor and equipment due to supply chain and inflationary pressures continue to constrain operations.

Figure 3. Capital expenditure for 14 oil field services companies and employment in oil and gas extraction

Another constraint on well completions is a declining inventory of drilled but uncompleted wells (DUCs) and a low number of wells drilled each month. DUC inventories provide E&P companies with flexibility in coordinating the drilling and completion of wells to avoid operational delays, especially because of the long-term advanced booking required for completion crews. Another benefit of DUCs is the initial drilling, or spudding, has already been completed, which means these wells can be brought to production for relatively less upfront cost than drilling and completing a new well. After the crude oil price decline in 2020, E&P companies chose to complete wells in their DUC inventories faster than drilling new wells (Figure 4). This decision allowed for cheaper production costs in the near term; however, it can soon limit production growth if the number of drilled wells per month remains low, which can prevent the number of well completions from continuing to increase. According to our latest Drilling Productivity Report, oil-producing regions (Anadarko, Bakken, Eagle Ford, Niobrara, and Permian) contained 3,423 DUCs in March 2022, the lowest amount since May 2014.

Figure 4. Drilled and completed wells in oil-producing DPR regions

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.


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