Report: Gas Producers Will Face Higher Capital Costs

U.S. natural gas drilling companies saw strong revenues in 2021, in part from high energy prices, but a new report indicates that 2022 may be a different story. A recent report from the Institute for Energy Economics and Financial Analysis looked at the finances of 28 shale-gas producers and found that they generated almost $40 billion in revenue during the first nine months of 2021. That’s the highest level since 2014. At the same time, companies spent $21.7 billion on well drilling and other capital expenses during that period, which was 8 percent lower than the same time period in 2020, and 43 percent lower than in 2019, the last full year before the COVID-19 pandemic. Gas producers have made it a focus in recent years to reduce capital spending on new wells in order to generate free cash flow to pay down debt and provide stock dividends. They have also kept production at maintenance levels during several years of low prices. But with the strong economic recovery from the pandemic, energy prices rose sharply, as did inflation and demand. The report says that three trends will converge in 2022 and send the gas industry’s spending higher. Depletion of the inventory of drilled but uncompleted wells (DUCs), higher inflation, and a gradual increase in the pace of well completions, which involves hydraulic fracturing of a well, will all play a role. During the pullback on spending, companies have been completing more already-drilled wells, saving between 25 to 35 percent of the cost of a new well. Companies routinely keep an inventory of DUCs in order to schedule completions efficiently, but with that number falling they may have to increase the amount of drilling, which means putting more drilling rigs into operation. In the Appalachian Basin, there were 511 DUCs in November 2021, down 26 from the previous month, according to the U.S. Energy Information Agency. Higher inflation that has affected the economy has a whole will also impact drilling costs, with Bureau of Labor Statistics data showing a 7 percent rise in 2021. In addition, the pace of well completions has been increasing due to higher prices and increased demand, further increasing spending. The IEEFA predicts that low DUC inventories and inflation could boost capital costs by 10 percent, with no change in the number of wells completed. Costs will rise further if more wells are completed, and if gas prices fall, the industry could also see less revenue. In short, the report concludes that 2021 was an “atypical” year for the industry, and 2022 could be most costly.

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