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US Shale Production Costs Rising for 1st Time in 5 Years

US Shale Production Costs Rising for 1st Time in 5 YearsUS Shale Production Costs Rising for 1st Time in 5 Years

US shale producers are facing their first production cost increase in five years in 2017 as industry activity picks up and energy service providers hike fees to take a bigger share of the profits generated by higher oil prices.

Drilling innovations over the past decade have generated a dizzying reduction in the cost of pumping oil from shale formations across the United States - the world's largest energy consumer - triggering an energy revolution and a production boom, Reuters reported.

When that boom ended with the onset of a two-year global price war in 2014, shale producers responded with even deeper cost cuts. Technological breakthroughs allowed producers to wring more oil from the rock and halved the per-barrel price needed to turn a profit.

But for the first time since 2012, shale producers will see a rise in break-even production costs this year, according to data from Rystad Energy, which surveys producers. The per-barrel costs will increase an average of $1.60 across the shale patch to $36.50.

The drive to lower costs has run its course for now, and service firms are leveraging power in the more crowded oilfields, such as the Permian basin in West Texas, to eke out higher payments from producers.

Firms that supply rigs, crews and technological expertise are clamoring to take back discounts they extended during the slump, in some cases asking for between 10% and 15% more as the number of rigs and crews deployed in the fields rises.

Oil service providers acknowledge, however, that their price hikes may not stick until drillers generate enough demand to burn through the remaining spare capacity in the oil service sector.

Service inflation represents only a fraction of the expected rise in international crude prices this year. A Reuters poll of 31 analysts and economists forecast benchmark US oil prices will average $56.08 per barrel in 2017, up from $43.47 last year.

Between half and two-thirds of the cost savings achieved during the oil price slump are likely to become permanent even if oil prices tick higher, according to industry experts and company estimates.

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