The joy for shale producers stemming from rising oil prices following the OPEC production cut agreement may soon be over as oilfield service providers join the party, raising the prices for their services.
According to an analysis from Tudor, Pickering, Holt &Co., the costs of drilling and fracking new wells in the shale patch could grow by 20 percent by the end of this year. In real terms, this means that the breakeven level for new shale wells could rise by U.S.$10 a barrel.
This would be problematic for many shale producers who are already having trouble generating sufficient cash flows to repay their debts, which swelled considerably over the last two years. For drillers and other oilfield service providers, however, the cost increase is a logical move: after all, the crisis has been particularly harsh on this segment of the industry.
A December report from Wood Mac warned that they are still not out of the woods, cautioning service providers that 2017 will be another tough year. Beginning in 2018, however, things should start looking up. In such an environment, it’s perfectly understandable that service businesses would take advantage of rising prices to regain some of the revenue lost when they were forced to offer huge discounts on their services just to remain in business.
According to another analyst, this service price increase won’t be sufficient to make ends meet for many service providers. Bill Herbert from investment bank Simmons & Co., as quoted by FuelFix, said that some providers of fracking equipment have already raised their prices by 20-40 percent, and even this hasn’t been enough to help them get back in black.
Inevitably, this means that producers’ growth plans must consider the interests of the service providers that these same plans largely depend on, as Herbert notes. This means that service providers’ financial troubles would likely stunt producers’ growth by increasing their costs and reducing profitability. Related: Iraq Could Kill The OPEC Deal
Things could get even worse in light of recent oil price developments that suggest the OPEC deal may not have the desired effect. Yesterday, Russia, Kazakhstan, and Azerbaijan all confirmed they are cutting production in line with their obligations under the deal, and earlier several Middle Eastern producers, including Saudi Arabia and Kuwait said they’ve started cutting. But this doesn’t seem to have been enough to push prices closer to US$60.
On the contrary, benchmarks have slipped closer to US$50. Traders—including governments—certainly made some money from the price rise, but if it doesn’t prove long-lasting, everyone across the board will feel the pinch.
This should be particularly worrying for shale producers who have been assuring the market that their costs are permanently low, while this low has actually been achieved at the expense of service providers. Now, these service providers are in a position to place more costs onto the producers, so the latter should be cautious with their growth ambitions—all the more so knowing there is still a danger that oil prices will sink further if any of the parties to the OPEC agreement break away from the cartel’s plan.
By Irina Slav for Oilprice.com
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