Understanding Rising Service Costs

By Staff | February 07, 2017

Breakeven costs for E&Ps operating in the major U.S. shale plays share similar variables no matter the price of oil or gas. While oil producers are inextricably linked to the price of WTI and gas producers are linked to Henry Hub prices for natural gas, each hydrocarbon producer is impacted by the same thing: service costs.

After the low oil and gas environment began in 2014, service costs have declined for the past two-plus years. With higher oil prices and more efficient operations capable of producing more for less (at least when compared to 2 to 4 year ago), one of the main talking points within the unconventional oil and gas industry is whether or not rising service costs will eat away, or potentially wipe out, positive operating margins. Among service firms and operators alike, there seems to be a consensus that service costs are and will rise.

Although we cannot predict the true impact of increased service costs to the unconventional shale energy development industry, it is useful to examine where the industry was in 2014 and 2015. We have not included information yet for full-year 2016 (we are working to gather that), but from the images included, it is clear that well-related costs have undergone undeniable declines. The question thus remains, will productivity gains achieved in the past two years make-up for rising service costs? For a well-positioned answer, check out the story here