Oil service costs could rise 15 percent this year, Wood Mac says

Helmerich & Payne motor man Michael Palmer, left, and floor hand Travis Palmer, right, move equipment as a section of pipe is drilled into the ground for oil and gas extraction on a Diamondback Energy lease Wednesday, Sept. 14, 2016 outside of Midland. ( Michael Ciaglo / Houston Chronicle )

As crude prices stabilize and drilling rigs dig into shale plays again, oil field service costs are beginning to rise back up. That could squeeze drillers’ margins later this year.

Energy research firm Wood Mackenzie believes oil field service costs could jump 15 percent this year overall, with prices for some equipment and services possibly rising as high as 40 percent, it said in a recent report.

Though oil field service companies aren’t likely to charge the same prices they got in 2014, before oil prices collapsed, they will probably get back market pricing power, Wood Mackenzie said.

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Oil explorers all “voice the best intentions to keep a laser eye on costs,” said Jackson Sandeen, senior research analyst at Wood Mackenzie. “But continued productivity and drilling efficiency gains over 2016 will be difficult to achieve as operators pivot to a more aggressive development mode.”

The firm estimates U.S. oil companies will hike spending 60 percent this year on average, but drillers expect service prices to rise on average 10 percent to 20 percent, even though service companies forecast 15 percent to 40 percent price increases this year.

Oil fields in which companies can pump crude profitably below $40 a barrel will still turn a profit even with service cost inflation. But the more active oil plays in West Texas will likely see the biggest increases in oil field service prices, Wood Mackenzie said.

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“Many difficult contract negotiations will be had in the coming months as operators look to honor growth targets shared with investors at the start of the year,” Sandeen said. “It is clear that service sector margin recapture will be a key feature in 2017 as the industry turns the corner on activity.”