US independents deliver on cost cuts

US unconventional oil and gas producers have largely delivered on their plan to cap costs, succeeding despite price inflation in the oil service sector driven by rising drilling activity.

The US rig count has held above 1,000 since early April, more than doubling from 2016's low, with weekly gains continuing as producers across major basins step up their activity. The total number of rigs operating is still only about half that earlier in the decade, but the recovery is allowing oil service companies to charge more for crews and equipment. Oil companies are deploying different strategies to offset the increases, including acquiring acreage to strengthen core assets while using existing infrastructure, deploying new technology and selling assets where production is higher-cost.

Key Permian producers are keeping costs in line with year-earlier levels. Top Permian shale producer Concho is already seeing the benefits of its acquisition of smaller RSP Permian. The enlarged firm's operating costs fell to $5.93/bl of oil equivalent (boe) in July-September from $5.99/boe a year earlier. Pioneer Natural Resources saw its production costs fall to $9.51/boe in the third quarter from $9.72/boe a year earlier. But the factors capping their costs are starkly different.

Concho aims to benefit from scale, and says further decreases are likely even as it ramps up operations over a larger acreage following its RSP Permian purchase. It has also factored future cost increases into its plan for later this year and next. That is in part because "by drilling longer laterals and the spacing we are using… you can get a whole lot more done", chief executive Tim Leach says.

Pioneer attributes its cost-capping to divestment of assets with higher production costs. The independent has sold assets in the Eagle Ford and elsewhere as it transitions to become a pure Permian-focused operator, a process that it expects to complete by the end of this year. Its most recent divestment is that of its pressure pumping business to Midland, Texas-based oil service provider ProPetro for $400mn.

Producers hit paydirt with local sand

Pioneer expects to tighten cost control further as it secures more of its fracking sand supplies locally. It has signed a long-term agreement to source 30-40pc of its sand needs from west Texas "at roughly half the cost of our average current supply of sand", chief executive Tim Dove says. "As we continue to look at the benefits of reducing sand costs, you can have very dramatic improvements on our well economics."

Diamondback Energy recently began testing using 100pc local sand in the Permian's Midland basin. Tests showed savings of as much as 60pc for each lateral foot of drilling relative to the "northern white sand" usually favoured by frackers, which has to be shipped by truck or rail from mines in the upper midcontinent. Diamondback, which this year acquired Permian peer Energen, saw costs rise to $8.70/boe in the third quarter from $7.67/boe a year earlier, but expects further cuts in overall operating costs as it steps up drilling activity.

Beyond the Permian, smaller independents such as Continental Resources and Whiting Petroleum are also reining in costs. Continental, a key producer in the Bakken shale formation in North Dakota, is saving $100,000-$500,000/well by improving efficiency and cutting sand costs. Bakken peer Whiting expects its lease operating expenses in the fourth quarter to fall to $7.60-$8.00/boe from $7.91-$8.53/boe in January-September, as it implements a new well completion design that it says helps boost initial output by over 80pc in the first 45 days, in some cases.