Explorers face pain as oilfield costs jump: Wood Mackenzie

By David Wethe on 12/14/2018

HOUSTON (Bloomberg) -- Shale explorers are in for higher equipment and service costs in 2019 after getting hit with double-digit inflation this year, according to Wood Mackenzie Ltd. 

The rate of well-cost increases -- which includes everything from cement to drilling rigs -- is expected to average 9% across the contiguous 48 American states next year, down from 13% in 2018, according to a report released this week by Wood Mackenzie and Power Advocate, a supply-chain analytics company. But costs would need to surge about 30% to really cut into profits.

“Well costs can go up quite a bit more,” Robert Clarke, research director at the Edinburgh-based industry consultant, said in a phone interview. For smaller companies less adept at bulk purchases, “prices no doubt are going to move higher in big ways.”

Explorers are being pressed by investors like never before to reign in costs and return profits to shareholders. The combination of higher services pricing, bigger wells and maxed-out pipeline networks all prompted explorers to dial back activity in recent weeks.

The U.S. rig fleet has stagnated since late May, while the number of fracking crews blasting water, sand and chemicals underground to release trapped hydrocarbons has dropped about 5 %since mid-June.

After breaking total well costs down into 15 categories, Wood Mackenzie’s analysis found that the biggest surge over the past year was for steel tubes used to line the inside of wells, climbing 31% in the Permian Basin of West Texas and New Mexico. America’s busiest oil patch also saw hardware used in fracking -- the costliest step in well construction -- climb 22% over the 12 months ending in October.

“The spread across components, companies and basins is huge,” Clarke said. “Pain in pockets, though."

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