Oil exploration costs to fall by a third: WoodMac

Oil exploration costs are expected to fall by a third as drillers cut their 2015 budgets by an average 30pc, according to consultancy Wood Mackenzie, as demand for rigs, crews and chemicals declines.

While the overall number of wells to be drilled will dip in 2015 as a result of the spending cuts, drilling activity is poised to recover in 2016 as "explorers seize their chance to drill at lower costs," it said.

Three key factors will drive the downtrend: outright costs decline by 19pc, simplification of activities and efficiency improvements save 10pc, and the strength of the US dollar will save 4pc, it said.

Producers will enjoy only about half of these gains in 2015 as contracts unwind and operators take time to adopt new practices. "Deflation at this rate could allow any companies that hold spending flat into 2016 to fund 50pc more exploration versus 2014," it said.

A 50pc plunge in oil prices since June amid rising supplies and a weak demand outlook has forced producers, both big and small, to pare their capital expenditure (capex) budget and focus operations only on areas that offer the best return as cash inflows get squeezed.

Only three US shale oil areas generate at least 10pc returns with benchmark US WTI prices at $50/bl, the consultancy said in a separate study. The remaining 35 top oil-weighted shale acreage areas need an average drilling and completion cost reduction of 30pc to be economic at $50/bl.

mg/dcb

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