Gas producers slow to ramp up drilling despite high prices because of federal 'uncertainty'

Instead of increased drilling, producers are using their extra profits to pay off debt, buy shares back, and increase dividends.

Updated: May 19, 2022 - 12:13am

The Facts Inside Our Reporter’s Notebook

Natural gas drilling is very profitable these days as market prices rise, but U.S. producers aren't ramping up production.

Instead they are using their extra profits to pay off debt, buy shares back, and increase dividends, The Wall Street Journal recently reported.

Ryan McConnaughey, vice president of the Petroleum Association of Wyoming, told The Center Square that one reason drilling hasn't ramped up is because of "uncertainty" about production on federal land.

"There are a lot of things that come into play when it comes to ramping up drilling, especially in Wyoming," he said. "One of the things, obviously, is the uncertainty of what's happening on federal lands and how companies can make sure that when they invest in federal production, they will be able to continue to do that."

The U.S. Bureau of Land Management (BLM) posted notices for resumed lease sales last month after the Biden administration's moratorium on lease sales was struck down by a federal judge.

But the acreage available for lease is 80% less than what the federal government was initially evaluating for potential leasing, and the agency has also increased royalty fees that oil and gas developers will have to pay.

The industry, like many other industries across the country, is also experiencing labor shortages and supply chain issues, particularly for steel pipe, according to McConnaughey.

"I think there are a myriad of factors that are hindering that full recovery in the oil and gas industry," he said, adding that it takes time to ramp up drilling.

"It's definitely not something you can turn the spigot and it will come," McConnaughey said. "Even with leases in hand, it still can take upward of a decade to get oil and gas produced. I think that is something we've been trying to get people educated on. When leasing is delayed at the federal level, that just means we have much larger gaps in supply over the long term."

Even though oil and gas prices are up right now, companies are making decisions based on long-term pricing, McConnaughey said.

"That's the best way to determine whether it's a sound investment," he said. "Obviously, there will be ups and downs in the market that they can't control. But making sure there is a positive outlook over the mid- to long-term is really the best practice."

Some in the industry said that the federal government's long-term goal is to eliminate the oil and gas industry, McConnaughey noted.

"There is that concern after hearing the rhetoric of people in the Biden administration," he said. "But there continues to be a need (for) petroleum products well into the future."

The choice is whether the production takes place in the United States or in other countries, McConnaughey said.

"We have to take the Biden administration at its word when it says it wants to shut down the industry on federal lands," he said. "Obviously they can't do that very easily on state and private lands."

In Wyoming, 90% of natural gas and 50% of oil produced comes from federal lands, according to McConnaughey.

"Any sort of shutdown on federal lands would be a disaster here in Wyoming," he said. "Our argument has always been that we should be producing it domestically where it helps our people and where we can make sure it is done safely and sustainably."