OREANDA-NEWS. A steep fall in the cost of rigs, crews and chemicals is lowering drilling expenses in key US shale oil areas, prompting independent producers to get ready to step up operations.

But oil majors, cautious about the outlook, look set to wait and watch for a while longer before planning any increased activity.

Independents drove the current US shale boom of the past few years as they were quick to put hydraulic fracturing and horizontal drilling techniques to work in the many onshore, domestic fields where they had long operated. Majors were slow to make the same moves, having long ago set their priorities on offshore or non-US operations. Even then, their successes were limited despite deeper pockets and far greater scale of operations.

The scenario looks set to play out again as smaller and more nimble operators get ready to increase their rig counts following early signs of crude prices bottoming out.

Pioneer Natural Resources is one such operator. The US independent plans to increase its rig count in the Eagle Ford in Texas by July.

"We are looking to increase our rig count by 5 to 10," chief executive Scott Sheffield told Argus at the IHS CERAWeek conference in Houston. "We are well hedged and we have low operating costs."

Pioneer has set a growth target of about 10pc to 200,000 b/d of oil equivalent for 2015 from a year earlier, and it is planning to achieve that despite lowering its capital expenditure (capex) to by 45pc to \$1.85bn. It has nearly 90pc of its projected 2015 oil production hedged at \$71/bl, the company said at its investor meeting on 6 April.

As producers sharply pulled back drilling plans to focus operations only on areas that offer the best returns amid the 50pc plunge in crude prices, service providers lowered costs to win contracts in a declining market. That fall in service costs is allowing producers with sound finances to meet their growth targets with reduced capital expenditure.

"I would say the recovery has already begun," chief executive John Hess of independent producer Hess told Argus. "But the recovery will be at a much slower pace."

The supply growth of about 1mn b/d that the US was experiencing until late last year has slowed down as producers pulled back operations, with some forecasts expecting a complete halt in US output growth by the end of this year. As demand recovers, that slowdown in supply growth will push the market higher, Hess said.

But large US inventory overhang and prospects of supplies increasing from Iran following a breakthrough nuclear agreement between world powers and the Islamic Republic may ensure that the pace of the recovery in the market will be slow.

The world's biggest independent oil and gas producer, ConocoPhillips, expects to ramp up its rig count in 2016 and 2017 amid strengthening prices, chief executive Ryan Lance said.

"Hopefully if demand stays up globally we ought to see some slight strengthening in the price," Lance said. "We're planning for a ramp up in activity as we go into 2016 and 2017. But that will be a function of whether we see that commodity price improvement or not."

Lance sees the pullback in drilling capital slowing production growth in the second half of the year, and refineries coming out of turnaround drawing down oil inventories, supporting prices.

A ramp-up in drilling would mostly occur in unconventional fields such as the Eagle Ford, Bakken and Permian basin, he said. ConocoPhillips sees a 20-30pc reduction in drilling costs and producers returning to drilling around \$60-\$70/bl, though prices are expected to be "volatile."

When asked about a potential recovery in the market by early next year, Continental Resources' chief executive Harold Hamm told Argus "It sure isn't happening before that. I sure am optimistic."

But oil majors including ExxonMobil and Shell warned of a prolonged weakness in the market amid a large inventory overhang and weak demand from key consumers such as China.

"People need to settle in," ExxonMobil's chief executive Rex Tillerson said. "This [low oil price] is with us for a while." He added that recent improvements in prices are false alarms.

Yet Tillerson also acknowledged the resilience of the US shale industry. While the US rig count has plunged by nearly half, the jury is still out on whether that will result in a significant drop in oil output or if the industry will replicate developments in the US gas sector where production has risen despite a plunge in rig use.

Similarly, BP's chief executive Robert Dudley, who called the shale industry "remarkably resilient," said the oil industry should brace itself for a "lower for longer" oil market. Dudley cited the same factors - a weak China, steady US output and prospects of higher Iranian supplies – as pointing to a weak market.