Oil Service Costs Rolling Over

By Eric Fox | March 06, 2012 AAA

Several exploration and production companies have reported the easing of oil service costs over the last few months in the onshore United States. This has occurred mostly in the Haynesville Shale and other dry gas areas, where development activity has slowed due to low natural gas prices. (To know more about oil and gas, read Oil And Gas Industry Primer.)

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Oil Service Costs
QEP Resources (NYSE:QEP) reported "some softening" in the cost of drilling and completing wells in the Haynesville Shale, but said that the decline in service costs was not as great as expected, given the drop in the rig count because the industry is seeing demand from operators developing oil and liquids areas.

QEP Resources recently reduced drilling in the Haynesville Shale and is currently operating one rig here, down from a peak of six rigs in 2011. The company said that the decline in service costs is not enough to restart a development program in this play.

QEP Resources reported that the gross completed well cost in the Haynesville Shale in 2011 averaged $9.1 million in 2011, and that well costs would have to be reduced by $1 million to $1.5 million per well before the company would even consider an increase in development. (Find out how to invest and protect your investments in this slippery sector. For more, see What Determines Oil Prices?)

EXCO Resources (NYSE:XCO) is also active in developing the Haynesville Shale and recently solicited bids from oil service companies to provide hydraulic fracturing services in that play. The company reported that the new contracts would reduce costs by 25 to 30% per fracturing stage.

EXCO Resources reported a $9.5 million average cost to drill and complete Haynesville Shale well in 2011, and said that the drop in fracturing costs has cut the current cost to $8.9 million per well. The company is targeting an $8.5 million well cost later in 2012 and hopes to be below $8 million per well in 2013.

EXCO Resources is also seeing oil service cost reductions in the company's Marcellus Shale operations. The company is currently drilling and completing wells here at an average cost of $6.5 million per well and is targeting a cost below $6 million.

Forest Oil (NYSE:FST) has ongoing development in East Texas, North Louisiana and the Texas Panhandle, and also reported relief from rising service costs over the last few months. The company said that hydraulic fracturing costs have fallen by 20% in these areas. The fact that Forest Oil is seeing lower service costs in the Texas Panhandle is interesting, because most of the development in this area is directed to wet gas plays.

Forest Oil's average cost for a Haynesville Shale well was $9.5 million to drill and complete in 2011, and the company expects this cost to drop to $9 million due to lower fracturing costs in 2012. The company also expects to implement pad drilling to reduce costs even further.

Cimarex Energy (NYSE:XEC) is active in the Permian Basin and reported that the average fracturing cost of a well here increased by 40% in 2011. Despite the cost inflation, the company said that it was currently seeing "relief in service costs" in the Permian Basin. This statement is significant because it seems to contradict the position of oil service companies that believe any excess capacity leaving dry gas areas will be absorbed by crude oil and liquids development.

The Bottom Line
The recent decline in oil service costs is coming at the right time for many exploration and production companies, as some operators are seeing reduced cash flow due to low natural gas prices. There is also the chance that further and more significant declines may even restart some dry gas development programs. (For additional reading, check out A Guide To Investing In Oil Markets.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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