Producers brace for higher oil field costs
90 percent in survey say they’re expecting to pay more in 2018, meaning better times are likely ahead for services providers
Oil producers are convinced they’ll have to pay more to drill wells and pump oil next year as crude prices surge toward the $60-a-barrel mark.
In a recent survey by the British bank Barclays, 90 percent of U.S. oil producers said they expect oil field costs to climb next year. Those costs rose in places like the Permian Basin in West Texas this year, as drillers sent oil rigs back into the field and fracking companies struggled to find enough working equipment to keep up with demand.
Almost two-thirds of the surveyed companies said overall costs could rise up to 10 percent. Hydraulic fracturing costs could climb as much as 15 percent, most of the companies said.
That’s good news for Houston’s crop of oil field services companies — companies that cut tens of thousands of jobs in 2015 and 2016 after crude prices collapsed. Services companies, such as Halliburton and Baker Hughes, both of Houston, and Schlumberger, which maintains one of its principal offices here, provided deep discounts to their customers and accepted greatly reduced profit margins to hold onto business during the downturn.
They slashed jobs to lower
costs — for both the services firms and their production company customers.
But with U.S. drillers planning to pump a record amount of oil, rising services costs will follow. Across North America, oil and gas producers plan to increase spending 21 percent next year after boosting spending 35 percent this year, according to Barclays.
Much of this year’s spending surge was concentrated in West Texas’ prolific Permian Basin. Permian production hit a record 815 million barrels in 2017, blowing past the previous mark of 790 million barrels set in 1973, business research firm IHS Markit said Tuesday.
“The magnitude of the rebound in Permian Basin liquids production is unprecedented,” analyst Reed Olmstead said in a report. “Not so long ago, many in the industry were saying the Permian was dead.”
In 1973, operators pumped an average of 2.16 million barrels of oil and gas liquids per day. Permian volumes this year will average 2.75 million barrels per day, IHS said, a rise of more than 25 percent, or about 600,000 barrels, per day. By the end of 2018, the Permian surge should push total U.S. liquids production to an all-time high of 10.5 million barrels per day, Olmstead said.
“The implications for U.S. energy security are significant,” Olmstead said, “since we have become, in a relatively short period of time, more selfsufficient in terms of energy supply and are less reliant on imports.”
The Barclays survey was based on oil prices hovering around $55 a barrel next year. On Tuesday, U.S. crude prices climbed 2.6 percent to settle at $59.97 a barrel, the highest close since June 2015. The rally came after news that an explosion crippled a Libyan pipeline.
Rising services costs will test whether oil producers can make money on cheap oil. Over the past few years, U.S. energy companies have touted efficiency gains that have made it cheaper to produce oil and gas. Those efficiency gains are a mix of low oil field services prices and technological breakthroughs.
More than half of the surveyed companies (51 percent) thought rising oil field costs would erase at least 75 percent of those efficiency gains.