By Ryan Duman, Senior Analyst, and Scott Forbes, VP Cost Center of Excellence
Last year, operators doubled down on capital discipline and scaled back activity with a 25% drop in rig counts. Costs for several important components fell by double-digit percentages.
However, today’s cost environment is considerably different from twelve months ago. The oil field service (OFS) sector must claw back margins to improve financial health. At the same time, E&Ps want further savings to generate cash flow. Equipment is also aging and being cannibalized, while OFS firms continue to cut headcount.
This sets the stage for an incredibly dynamic year. Can we expect more of the same in 2020? In our recent webinar, we took a closer look at the numbers.
Which cost categories fell the most last year?
We saw substantial deflation recently in rig day rates, pressure pumping and casing. Pressure pumping rates declined by 13% in Q4 2019 alone. So far this year, we see additional deflationary pressures due to the supply being greater than the demand for these services. Together, these three categories make up almost a third of total drilling and completion costs.
How did cost deflation influence overall well costs?
Costs vary considerably between regions, so it’s worth paying attention to basin-specific costs. In the Delaware basin, for example, overall well costs fell by an average of 7% from 2018 to 2019: that equates to about US$1million.
Tracking specific cost movements and understanding the importance of various components is challenging. To get a clearer picture of the impact of costs on overall project economics, we’ve modelled the data on a granular level. Listen to the webinar to understand our methodology.
Will E&Ps start to drill more wells?
E&P budgets reset in January and, suppressed the rig count freefall. But prices for rigs, horsepower, sand, chemicals, steel, and cement won’t turn around that fast. We see continued softness in Q1 2020, but the situation could change quickly after that, depending on the activity and further OFS consolidation.
What could force service costs higher? And when will the market change? Listen to the webinar to understand our methodology.
Innovation in the Permian
In the Permian, operators have benefited from significant service sector price cuts. Nearly every Permian water-related cost category has fallen, leading to a 15% deflation in the last quarter of 2019. And operators have benefitted to the tune of several hundred thousand dollars per well from the transition to in-basin sand and improved last-mile solutions.
As the sector matures, innovations such as “cube” development strategies are helping to improve efficiency. But how effective are these initiatives at saving money? And what other factors have the biggest influence on breakevens? Replay the webinar by filling out the form on this page and understand what levers are available for operators that are focused on reducing costs.