Oil and Gas Prices Rise, yet Production Languishes

A recent survey presented by the Dallas Fed offers hints to why production in Texas and neighboring states has not seen a boost from rising prices. One big problem? Workers.

Oil and Gas Industry People
Source: Shotbydave/Getty Images

The signals coming from the price of oil and gas are getting brighter, but Texas producers don’t seem to have noticed.

Oilfield activity in Texas and nearby states dipped in the current quarter, according to a recently released survey by the Federal Reserve Bank of Dallas, which nonetheless described the activity as strong and solid.

Based on responses to the survey from leaders in the exploration and production (E&P) and service sectors, price expectations are not much below the currently high market prices. That would have inspired rapid growth a few years ago.

For now, however, the E&P and service sectors show no signs of diverging from plans to maximize profits rather than focus on growth.

“We are encouraged by the restraint shown by US upstream operators,” said one survey respondent. “By restricting capital expenditure, we are healing historic overproduction of both oil and natural gas.” The unnamed respondent went on to predict that investor money will flow into the industry if companies continue to reduce debts and increase payouts for a year or two.

The responses also pointed to other constraints to growth: difficulties hiring skilled workers and the rate of oilfield cost inflation for the level of drilling and completion needed just to sustain current production levels.

“Labor is causing major problems in staffing for the increase in activity,” said one respondent from the services sector. “Wages are up 20%, and companies are poaching employees from competitors.”

For job seekers, this is good news. The survey reported that 75% of the companies in oil and gas support services are working to fill openings. In that group, 51% of those surveyed said they have been having difficulties filling spots.

“We are seeing a slight improvement in business activity but are struggling to hire enough qualified drivers with a commercial driver’s license,” said another service company respondent.

Based on other responses, service firms appear more likely to be hiring than E&P firms. Companies report their big problem, however, is a lack of qualified applicants. The demand for workers being greater than the supply should benefit job applicants. Second on the list of problems reported in the survey was workers looking for more pay than offered, suggesting a limit to what companies will offer.

One E&P company reported that it has worked to retain workers by moving away from work at the office, which reduces rent for office space and employees’ time spent commuting.

“My company is very small. I have made the decision to transition the work done by my employees to fully at home,” one respondent said. “I believe this serves as motivation to stay with my company and a benefit I can offer without increasing wages.”

Another respondent complained about that change: “Our company is a nonoperator, so we rely upon our operators. They’re struggling with ‘work from home,’ and everything is delayed. The resolution time for problems is greatly elongated. Responses to proposals are also greatly delayed. Invoicing and bill-paying by others have been delayed.”

While workers were demanding greater pay, they were not the only ones. Nearly every service firm surveyed reported a sharp increase in their costs, which one said reached a record high and was indicative of significant cost pressures.

Those costs are being passed on to customers, allowing service companies to increase their operating margins as they come back from last year’s deep slump.

Those with growth plans appear also to be struggling to find the power needed to produce, process, and transport the increased amounts of oil and gas.

“The delivery of electrical power remains among the largest deterrents of investment in the Permian Basin,” one respondent said. “Power suppliers are generally more than a year in the future from connecting to a new site, and, even then, they are unreliable on their date of delivery. This leaves operators less able to invest confidently.”

While those surveyed said they do not see electric cars supplanting gasoline-powered vehicles, they do report finding new uses for electricity. “We continue to have incredible growth in our electric-driven natural-gas-compression business,” said one respondent from the service sector.

Other changes include concentrating on gas production to take advantage of high prices and new working arrangements for staff members.

When asked if COVID-19 caused delays or disruptions, more than 80% said they experience little or no issues. But three comments from experts in E&P companies played up the importance of increasing vaccination rates.

“As an industry, we have to support vaccine mandates in order to enable people to safely increase economic activity and get back to the before times,” one respondent said, adding that, without Americans getting vaccinated at levels greater than 80%, the demand for oil and natural gas will be suppressed.

For others, the effect was more personal.

“The macho individualist in the oilfield has come face-to-face with a deadly virus,” one respondent from and E&P company pointed out. “Our company has lost two employees, and the oilfield service company has lost three men just due to sheer stupidity. It is a tragedy for their families.”

Another said, “We have had issues with contractors who are not vaccinated getting COVID-19 and then using federal-government-subsidized treatments in the hospital.”

While some commenters recognized the need for vaccination, some included challenges to the amount of federal aid during the downturn, which one described as “free giveaways.” Several said they thought expanded unemployment compensation payments have made it harder to hire workers.

“Disruptions are due to government payments to the workforce. Possible workers are being paid very well not to work by our government. This policy must change if we want a stable workforce in the US,” said one respondent from an E&P company.