Cost cutting could spur increased drilling activity

Fuel Fix:

Drilling activity has slowed as companies have slashed budgets, but could return to boom-time levels next year as it becomes cheaper to hunt for oil, a new report finds.

Oil and gas companies are expected to curtail their spending by about 30 percent this year, prompting widespread speculation that the industry is headed for a dramatic slowdown, according to the study released Thursday by Wood Mackenzie.

But as companies pull back on spending, they are also forcing down bloated exploration costs, which could spur an uptick in drilling in the coming months, according to the study.

“They will definitely be spending less but that money will go further,” Andrew Latham, vice president of exploration at energy analyst firm Wood Mackenzie, said.

The number of wells will fall this year, but drilling should recover by next year as oil companies “seize their chance to drill at lower cost,” the report notes. Wood Mackenzie expects exploration costs to fall by one-third, correcting a long-standing inflation problem and allowing drillers to stretch their dollars further in the oil patch.

Service costs have been a “thorny issue for years,” Latham said, prompting the industry to look for ways to drill as efficiently as possible. Falling prices will “further focus minds and push operators to squeeze harder,” he said.

“It’s not just that you’re getting a rig for a lower day rate, but you’re drilling a simpler rig and getting that rig from a nearer location than you would have in an overheated market,” Latham said.

Even though capital expenditures have been cut, drilling could bounce back to 2014 levels, the report says.
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The drop in the price of oil is forcing greater efficiencies on the process for finding and recovering oil.  That is the market forces at work that command economies and state owned businesses find hard to match.  It si one of the reasons why countries like Russia and Venezuela are finding it harder to deal with the reduced revenues.