Report: Drilling activity could rebound as service costs fall

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.

Related: Moody’s: North American oil companies cut capital spending 41 percent in 2015

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.

Companies have reacted more swiftly to the recent crude price plunge than they did when oil took a tumble during a brief crash in the 2008-09 recession, but the severity of the cuts varies widely depending on the company, the report notes. Those firms that made modest cuts or kept their exploration budgets flat have the best chance achieving “more with less,” the study states.

Related: Three more oil service firms cutting hundreds of jobs, wages

The change will be most acute for deepwater projects, which have long been plagued by high exploration costs, Latham said. Cheaper costs could spur more deepwater exploration as companies scramble to take advantage of the discounts now and reap the rewards of higher prices later when these projects finally become operational in the next decade, he said.

“The smart companies know that the oil price downturn that we’re in now will probably be over in that sort of time frame, and the tactics of exploring now while costs are lower and hopefully enjoying higher prices will look pretty good with hindsight,” Latham said.