A long-awaited drop in the cost of drilling and maintaining wells has finally materialized, easing the pressure on oil and natural-gas producers whose profits are being squeezed by lower prices.
Executives at the companies that own and develop fields complained for months that as tumbling energy prices ate into revenue, margins were being hurt by the stubbornly high cost of materials, labor and drilling services needed to get oil and gas out of the ground. In recent weeks, that has finally begun to change.
Lower costs, along with a modest rebound in oil prices to more than $55 a barrel, helped several companies deliver better-than-expected earnings in the first quarter.
"We've certainly seen a cost response almost everywhere now," said John Richels, president of oil and gas producer Devon Energy Corp.
The Oklahoma City company said its costs have dropped 10% to 15% from the beginning of 2009 and predicted they will come down another 10% to 20% before the year is out. The decline helped mitigate Devon's $4 billion loss in the first quarter driven by the diminishing value of its oil reserves.
Costs began falling in the first quarter, and the trend has accelerated in recent weeks. XTO Energy Inc., another producer, reported earlier this month that drilling costs fell 15% to 20% in April alone.
"Almost overnight, the costs have dropped like a rock," said Dan McSpirit, an analyst with BMO Capital Markets in Denver.
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