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Oil Production Costs Increasing?

As we have discussed numerous times, the higher cost producers in the oil industry has been making systematic and systemic changes aimed at reducing the cost to produce a barrel of oil to make themselves more competitive with cheap supply sources such as Saudi Arabia.

The start of recovery from a recent two-year industry downturn offers a "unique opportunity" for companies to transform and reset the cost base, Statoil CEO Eldar Saetre said during a panel discussion with the president of Petrobras on the first day of IHS CERAWeek. Statoil has brought down its breakeven price of what it calls its next-generation portfolio of emerging and current projects, which hold more than 3 billion barrels of oil equivalent, from around $70/b-plus to well below $30/b, Saetre told the annual gathering.

But now that oil prices have stabilized around the low-to-mid-$50s/b, the question is how much of the price concessions oil services providers granted more than two years ago will be taken back. Many operators have said recently they believe they can offset the expected 15% to 20% cost increases by wringing out still more efficiencies from their own operations.

Saetre said Statoil has taken down costs for offshore conventional projects by about 50%, and believes 80% to 85% of that is permanent cost reduction.

Statoil’s comments mimic recent comments from Bob Dudley, CEO of BP, whose goal is to drive down costs sufficiently so that by 2021, $40 per barrel oil will cover spending and dividends. The company said Feb. 7 that its break-even oil price would rise to $60 a barrel this year  from an earlier assumption of as much as $55 because of the cost of buying oil and natural-gas fields in Egypt, Mauritania and Senegal. That meant BP was moving in the opposite direction to Exxon Mobil Corp.and Royal Dutch Shell Plc, which said cash flow already covers spending.

But can it hold? As we reported in the last edition of The Five Star Standard, major service companies have not been shy about their intention to recover pricing concessions previously given during the downturn. Halliburton and Schlumberger have been downright vocal about it.

Moreover, all things point to a busier industry with increased supply costs. Piping companies are busy. Day rates on rigs have risen from about $17,000 per day last year to $20,000 per day this year. Sand is at about $45 per ton, 20% higher than before. Land is more expensive – Permian Basin rock is selling for $60,000.00 per acre for drilling rights, a 50-fold increase from four years ago.

Even trucking companies are having problems. Agility Energy, for example, noted that they desperately need truck drivers, and can’t find anyone – even for $80,000.00 a year.

In short, U.S. drilling may be getting more expensive – and the industry may start to experience what it always has – an increase in service level pricing following increased drilling activity.

By: Ty Chapman

Five Star Metals, Inc.

Raising the Bar for Customer Service and Quality

Twitter: @FSM_TY

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