Drilling

By: Dr. M. Ray Perryman
Published in syndication April 27, 2022

The number of oil and natural gas drilling permits issued by the Texas Railroad Commission reached an all-time high in March, at over 1,100. Hundreds of companies of all sizes are jumping into the fray. Activity is picking up across the state, with the Permian Basin reportedly seeing over 900 horizontal permits.

The demand for fuels began to surge globally as the economy reopened after the worst of the pandemic, yet the pace of recovery in energy activity lagged for a variety of reasons. Even rapidly rising prices weren't enough. One prominent impediment has been federal policies toward the industry and fears that future activity could be curtailed. Capital has also been difficult to obtain, with investors reluctant to finance drilling programs in the wake of uncertainty regarding adverse governmental actions and the lack of sufficient returns during prior periods. A more pragmatic reason is simply that many wells were drilled but not brought into production before the COVID-19 shutdown, thus allowing production initially to be increased while rigs sat largely idle.

We are finally seeing an escalation as the Russia invasion of Ukraine has hammered home that the US petroleum industry is essential to international and domestic energy security. Attitudes are slowly shifting, and rigs are going into action. Counts are now approaching 350, triple the worst of the COVID-19 crisis but hundreds less than previous peaks (though that is destined to soon change).

The vast majority of currently active rigs are in the Permian Basin, but other areas are also seeing increased focus. One reason is that natural gas prices have been trending around (and above) $5 per MMBTU (at Henry Hub), which is higher than they have been since 2008 (other than during brief spikes such as Winter Storm Uri). Because the upward pressure is driven by the Ukrainian invasion and the related expansion in Liquefied Natural Gas (LNG) demand rather than a weather event, price levels are expected to remain elevated for the time being. Consequently, the pace of natural gas drilling has accelerated substantially.

Simply issuing a permit doesn't guarantee that drilling will begin immediately. The industry is facing shortages of both materials and workers (as is virtually every other sector). From frac sand to experienced crews to drivers, there are notable challenges even with permits in place. Although part of the problem is transitory, some obstacles (particularly worker shortages) will be more difficult to resolve.

Oil production benefits the Texas economy. It is also essential to manageable fuel prices and reductions of geopolitical risk. Eventually, there will be a realization that domestic oil and gas are essential to global growth and improving the lives of billions of people (alas, a topic for another day). Stay safe!!