A collaborative article by Jennifer Thomas and Dipti Patel.

The IHS Markit North American upstream capital cost index is down slightly in first quarter 2017, while the North American operating cost index went up by a little less than 1 %. The decline in capital costs was once again driven by the offshore markets, and as a result, we’ll see modest activity in the offshore plays because of an oversupply of vessels and rigs.

The US land rig count went up approximately 26% with the biggest increase coming from the Permian Basin, with a slight increase in the region’s total costs. IHS Markit expects other basins in the region to see increased activity due to the accelerated growth in Permian pricing.

The IHS Markit onshore unconventionals price index increased by approximately 2.2% for the first quarter; most of these increases were driven by the major uptick in the Permian basin. In comparison the onshore conventionals price index will increase only slightly as service costs increase. Most of these cost increases will come from the drilling and completions segments. Senior consultant, Shrav Gummadi noted that, “Operators will be competing for the best assets in the busiest basins as service companies struggle to keep up with the immediate demands of 2017. Logistical complications in trucking and sand supply will cause price volatility through the year.” As a result, IHS Markit expects to see a 2.7% increase in overall North American capital costs for 2017 with almost a 5.3% increase in onshore capital costs and a 2.2% cost increase in overall operating costs for 2017, including a 2.7% increase in onshore operating costs. Increasing activity in the Permian could erode some of the advantages operators are seeing and could boost some of the other basins like the Bakken and the Appalachian further up. These advantages could possibly be short term in nature. Within the Permian we will see a sharper increase in costs in the Delaware basin relative to the Midland basin just because of the remoteness of the region.

The offshore index fell in the first quarter, from weak demand and oversupply in the market. In North America, offshore activity should show more positive signs for 2017 and 2018, especially in Canada, where operators are embarking on an aggressive decommissioning program. While in the United States, some offshore operators are taking advantage of lower cost structures in some basins to push development projects and prospecting exploration forward.

To learn more about North American cost trends specific to the Permian, download a complimentary presentation.

Jennifer Thomas is Customer Care Manager and Energy Analyst at IHS Markit.
Dipti Patel is a Senior Research Analyst at IHS Markit.

Posted 12 July 2017

Dipti Patel is a Senior Research Analyst with IHS Markit, leading cost research and forecasting for the North American Cost Service. She is responsible for collecting, analyzing, and forecasting cost trends in the North American market. Her experience includes rigs, equipment, and the service sectors. Ms. Patel holds a bachelor’s degree from the University of Huddersfield, United Kingdom.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.