Last month, Dave Lesar of Halliburton noted that the domestic market is short of fracture (frack) sand, equipment and experienced personnel. The No. 1 North American pressure pumper is adding 2,000 people to the payroll and putting idled equipment back to work at a frenetic pace. While the company continues to place an emphasis on protecting the market share it built up in the downturn, it is also warning of the eagerness of its suppliers to raise prices.

Following the downturn, oilfield service companies slashed prices to survive. Layoffs, asset retirements and CAPEX reductions were all necessary to stay afloat. Since that repositioning for a depressed environment, oil prices have rebounded requiring a ramp up in spending on people and equipment necessary to execute new projects.

So when, and how much of these cost increases for oilfield service companies will creep into the market and out of the pockets of E&P companies? Currently, many small E&P companies are hedging their commodity price positions to raise capital and execute their development programs while minimizing their exposure to volatile revenue streams. On the cost side, improvements have certainly been made in technology and streamlining the supply chain, but the question remains – how much of this can be maintained? Many of the “new normal” breakeven figures coming out are often calculated with respect to a depressed service cost environment.

Some believe that true technological gains might account for as account for as little as 10% (or less) of the service cost savings. But with nearly three quarters of a million barrels per day of daily production hedged this year alone by small to medium sized companies, a sharp uptick in service costs driven by increased activity from a sharp oil price upsurge could put those highly hedged into a bind. Large companies with healthier balance sheets are less likely to hedge large proportions of their production and could absorb (and ultimately create) rising service costs with a sharp uptick in oil prices. But how will smaller hedged companies face this scenario.

One analyst noted, “The only danger is that (hedged) companies will miss out on higher prices if crude moves above $60 per barrel.” This of course assumes that service cost remain manageable.

Andrew Meyers, Douglas-Westwood Houston