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Big US shale oil savings fast becoming a thing of the past

A drill rig stands on the site of an oil well outside Williston, North Dakota, US, on Thursday, Feb 12, 2015.

[HOUSTON] Huge cost savings are waning for US shale oil companies, marking an end to the drastic price cuts on equipment and services over the past 16 months that helped them survive the worst industry downturn in six years.

Companies including Anadarko Petroleum Corp, ConocoPhillips and Occidental Petroleum Corp have saved millions on drilling and fracking wells in Texas, Colorado and North Dakota since the oil price slide started by demanding that oilfield service companies slash prices by 20 per cent to 30 per cent or more.

Those savings, coupled with big gains in rig productivity that allowed more oil to be pumped with less equipment, created a lifeline for companies coping with a more than 50 per cent drop in crude prices. But productivity gains have stalled in the last few months and deflation may be slowing as well, just as producers try to withstand a lower-for-longer price outlook.

ConocoPhillips has seen its onshore drilling and completion costs fall. More savings are expected, but not as much. "If prices stay low and activity levels stay low I think you will see more pressure on deflation, but not another magnitude of the leg down we've seen so far," Jeff Sheets, Conoco's chief financial officer, told Reuters on Thursday.

The US rig count has fallen by more than half from a year ago when nearly 1,600 rigs were working, so companies that lease rigs or do hydraulic fracturing have offered double-digit discounts to get work contracts.

When asked if cost deflation is likely to continue, Darrell Hollek, head of US onshore exploration and production at Anadarko, told analysts on Wednesday the company continues to see decreases in prices, but those declines are not "as significant as what we saw earlier in the year." In West Texas, Occidental said the cost for a 4,500-foot well has fallen 45 per cent from a year earlier to US$6.3 million now. The company said on a call with analysts it expects costs to come down more, but did not say by how much.

RigData, which tracks oilfield activity, forecast cost declines for US onshore wells of US$1.2 million on average in 2015, a drop that is unlikely to be repeated next year, Trey Cowan, senior industry analyst with RigData, said.

Currently, operators are drilling wells in so-called sweet spots that produce the most oil and gas. After they go through that inventory and move on to less prolific spots, it will cost more to drill, said Cowan.

The chief executive of Baker Hughes, Martin Craighead, on the third-quarter conference call of the oilfield services giant, downplayed more cuts when an analyst asked if his company could offer additional cost reductions of 15 per cent to 30 per cent. "You are just not going to get out there and take your hats off to any customer," Craighead said. "They are going to obviously try to get as much as they can and there will be a point where it just doesn't make any sense." Mark Hanson, an analyst for Morningstar in Chicago, said the days of huge price cuts are nearly over. "I don't think there is going to be meaningful reduction from here," he said. "To use a baseball analogy, you are probably in the seventh or eighth inning."