Denver—Drilling activity in Rocky Mountain basins increased moderately in the last quarter as operators in the region expect oil and gas prices to average from $62-$65/b and $2.74-$2.92/MMBtu, respectively, over the next 12 months, according to an energy survey by the Federal Reserve Bank of Kansas City.
Year-over-year activity in the region expanded for the first time since early 2019."District drilling and business activity continued to be quite solid in Q1, and expectations indicated further growth in the next six months," said Chad Wilkerson, executive and economist at the Federal Reserve Bank of Kansas City. "In addition, many firms reported growth in employment for the first time since early 2019, and price expectations for crude oil were the highest they have been in over two years."
Price expectations for oil, natural gas and natural gas liquids expanded at a slower pace, but still remained at high levels, according to the federal survey of firms operating in the region. The Kansas City Federal Reserve Bank region includes the states of Colorado, Oklahoma, Wyoming and New Mexico.
Operators were asked what they expected oil and natural gas prices to be in six months, one year, two years and five years. Expected oil and gas prices were higher than 2020. The average expected WTI prices were $62, $65, $67 and $70/b, respectively. The average expected Henry Hub prices were $2.72, $2.94, $3.14 and $3.50/MMBtu, respectively. Firms, on average, said they needed prices to be at $53/b and $2.94/MMBtu for profitability.
"Investor sentiment has changed from growth to value," said one respondent to the April report. "A more cautious approach to growth will be the focus for the next 12 to 24 months as demand recovery occurs. Demand will drive decisions long-term."
Since bottoming out in August 2020, the number of active US rigs continues to rise at a steady pace. Since August, operators across the country have added 242 rigs bringing the month-to-date total to 528 in April, or 85% higher than its trough in August 2020, according to S&P Global Platts Analytics. Meanwhile, US oil rigs are up 104% to 405 for the same time frame.
In the last year, the benchmark for US crude prices, WTI, has risen by roughly $43/b, or 261%, to a month-to-date average of $60/b. Put in perspective, today's prices are roughly $4/b above pre COVID-19 levels and sit at their highest point in nearly two years. Additionally, the recent price recovery has far outpaced that of 2016, according to Platts Analytics.
Traditionally, rig activity, on a 12-week lag, has trended well with historical WTI prices. However, more recently this relationship has broken down, suggesting capital constraints and financial discipline will outweigh the recent crude price strength as it relates to future drilling and completion activity. This is particularly apparent when it comes to Q1 2021 producer guidance. Among the 32 tight oil play producers sampled by Platts Analytics, capital spending and production in 2021 are expected to be largely flat to last year.
Also, well efficiencies resulting in higher well initial production rates continue to play a role on rig count. Longer laterals and larger frack jobs are yielding higher well IP rates and therefore fewer rigs are needed to produce the same amount of oil and gas, according to Platts Analytics.
"A tremendous amount of uncertainty will exist on both the demand side and politically during the next 12 to 24 months," said one respondent to the federal survey. "Conquering COVID-19 and returning to normal market demand will be the first step. US policy change will then provide the next tailwind or headwind depending upon direction and balance."
