Shale Oil Drilling Getting Cheaper - Rigzone News

Shale Oil Drilling Getting Cheaper | Rigzone

Shale Oil Drilling Getting Cheaper

The cost of drilling for shale oil is dropping for the first time in about two years as demand for equipment and workers wavers.

Prices for key oilfield inputs such as steel pipe and fracking crews are softening, according to executives from shale specialists such as Diamondback Energy Inc. and Marathon Oil Corp. The timing is problematic, however, after US crude prices posted their worst start to the year since the lockdowns of early 2020, raising doubts about the wisdom of adding more oil supplies to global markets.

Some of the price relief for shale-oil explorers has been driven by a deep depression in natural gas markets that is spurring companies to suspend or cancel drilling, freeing up rigs to migrate to more-profitable crude projects.

“It is a cost deflation,” Diamondback Chief Executive Officer Travis Stice said this week, citing a $25-a-foot drop in the cost of steel pipe as an example.

At the same time, oilfield-service providers like Halliburton Co. are pushing back, pledging to mothball equipment rather than see their fees shrink. Halliburton and fellow oilfield titan SLB have been among this year’s worst-performing energy stocks in the S&P 500 Index.

“This is the first real test that the service companies have faced this cycle,” J. David Anderson, an analyst at Barclays Capital Inc., said during a phone interview. “Can service companies hold the line here?”

Executives with one of the most-closely watched shale drillers – EOG Resources Inc. – said inflation pressures are easing. Costs should continue to deflate into next year, President Billy Helms Jr. said during a conference call on Friday.

Even before this year’s 11% slump in benchmark US oil prices, shale drillers were exercising restraint in expanding output. Rewarding investors with dividend increases and share buybacks took precedence over production growth for the first time in the industry’s young life.

That has left oilfield-service executives with the tricky choice of holding the line on pricing or discounting to retain customers and market share.

“The energy market in North America is in a state of flux, with mixed opinions and perspectives among oilfield services companies,” James West, an analyst at Evercore, wrote in a note to clients. Some oilfield contractors are offering discounts to ensure their fleets remain employed “while others are increasing pricing or remaining firm on pricing.”

Helmerich & Payne Inc., the biggest provider of rigs in the Permian Basin, is idling equipment rather than reducing fees.

Rig leases account for about 15% of drilling a new well, so lowering the fee doesn’t guarantee the equipment will be used, according to Helmerich CFO Mark Smith. Rather, price concessions are broadly detrimental to rig owners because they put downward pressure on rents come contract-renewal time, he said.

“Pricing is so easy to give up and so hard to get back,” Barclays’ Anderson said.

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