WoodMac: Operators face US Lower 48 onshore cost inflation

US Lower 48 onshore operators are beginning to experience cost inflation following a flurry of first-quarter development activity, said Wood Mackenzie Ltd. analysts who believe service price increases began as early as third-quarter 2016.

A WoodMac report said 2017 is an inflection point for the onshore oil field services for three reasons:

• Growing confidence around oil prices following production-cut targets by the Organization of Petroleum Exporting Countries and some non-OPEC producers.

• Increased operator budgets for the Lower 48.

• Deep-price concessions by the offshore service companies resulted in negative operating margins for several quarters.

WoodMac forecasts 15% cost inflation in 2017, with variability across basins.

Recovery trends

Jackson Sandeen, WoodMac senior research analyst for the Lower 48 upstream, said, “The recovery in oil prices and capital spend increases signal the beginning of an upward trend in activity. The speed of increase in 2017 is squeezing the service sector, supporting our view on cost inflation.”

Sandeen said service companies will regain pricing power in 2017 but he does not expect the service sector will return to 2014 pricing levels during 2017. The days of rock-bottom breakeven oil prices could be history for exploration and production companies, he said.

“All E&Ps voice the best intentions to keep a laser eye on costs,” Sandeen said. “But continued productivity and drilling efficiency gains over 2016 will be difficult to achieve as operators pivot to a more-aggressive development mode.”

On average, US-focused independents have increased capital budgets 60% year-on-year. With operators promising more production growth, WoodMac forecasts a continued tightening on equipment, time, and labor, which will drive up utilization rates.

“This recovery will look different than 2011, when the global economy was weak and US unemployment was high,” Sandeen said.

Operators in the most active plays such as the Delaware, Midland, Denver-Julesburg basins and the Bakken formation will face the most severe pricing increases.

The core subplays in the top Lower 48 basins, with wellhead breakevens of $30-40/bbl, will continue to make economic returns despite cost inflation.

“The marginal assets, however, with breakevens north of $40/bbl, could move out of the money if efficiency and productivity gains come to a halt during the onshore ramp-up,” Sandeen said.

E&P companies have guided towards 10-20% cost inflation while offshore service company forecasts have ranged from 15-40% depending on the product line.

Contact Paula Dittrick at [email protected].