Lower costs may help US oil output rebound: IHS

OREANDA-NEWS. June 11, 2015. US oil output is poised for a rebound in 2016 as drilling and completion costs fall and producers narrow their focus on the most productive wells.

Those two factors will "substantially mitigate the damage to the balance sheets brought on by the 2014 oil price decline," according to a study by consultancy IHS.

US exploration and production companies will see efficiency gains of 25-30pc on their onshore upstream capital investment in 2015 from a year earlier. The gain is even steeper, at 60pc, when compared to the expected savings in the fourth quarter of this year versus a year earlier.

A large part of those gains will come from the sharp fall in costs of services. Service companies have lost their pricing power as utilization rates fall, forcing them to provide greater discounts amid fierce competition in a much smaller market than a year earlier. US oil independents such as Continental Resources, Hess and EOG have all sharply pulled back drilling activities to keep spending within their cash flow following the steep fall in oil from the 2014 highs.

"This should make a material difference in 2016 E&P company performance and plays an important role in our IHS view that US production will be able to rebound in 2016, even if capital budgets remain muted," director for unconventionals research at IHS Energy Stephen Trammel said. "Even in a flat commodity-price environment, getting more for each dollar invested should allow producers to experience improved profit margins."

The Eagle Ford in Texas, Bakken in North Dakota, and Permian, also in Texas, accounted for about 62pc of capital invested from January 2013 to May 2014. The breakeven cost was less than \\$75/bl for 75pc of the output from these areas. Poorer return on capital was concentrated in other, smaller plays, making them prime candidates for cuts.

As costs continue to fall and oil prices begin to rise, the industry will start to "drill the prime picks from the inventory of 2,500 to 3,000 drilled but uncompleted wells," IHS said.