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Apache Wants Multi-Year Contracts to Lock in Lower Service Costs

Apache Corp. (APA), the fourth-largest U.S. independent oil and natural-gas producer by market value, said it’s working to secure more multi-year contracts for oilfield services to help stabilize and reduce the cost of drilling and completing wells.

The service model for crude explorers and producers hasn’t evolved, and should work more like the mining industry, which relies on longterm contracts when digging for resources, Mike Bahorich, chief technology officer for Apache, said today in an interview at IHS CERAWeek in Houston.

“One of the ways it could change is with a long-term contract from the service companies,” as opposed to the more typical per-job cost model, he said.

Such longer-term, multi-year contracts would allow servicers to better manage their resources and drive down prices further, Bahorich said.

Service companies must balance the need for a stable stream of revenue from long-term contracts with the opportunity to cash in on higher prices through work done on the spot market. Apache has been trying to move away from spot contracts for hydraulic fracturing toward more multi-year contracts as prices have fallen, Bahorich said. The price of hydraulic fracturing work declined 15 percent in 2012 and is projected to drop another 4 percent this year, according to estimates from Houston-based industry adviser Pacwest Consulting.

Servicer Resistance

Producers may face resistance from service providers who don’t want to commit to current prices for multi-year fracking contracts, Luke Lemoine, an analyst at Capital One Southcoast in New Orleans, said today in an e-mail.

“Most pumpers are of course unwilling to lock up horsepower at today’s low prices,” Lemoine said.

Apache and other producers are altering the supply chain by owning and operating some of the resources previously provided by contractors, including the sand used to prop open cracks made by fracking, he said.

ConocoPhillips (COP), Anadarko Petroleum Corp. (APC) and EOG Resources Inc. (EOG) are the largest U.S. independent oil and gas producers by market value, meaning they don’t have refineries or chemical units.

To contact the reporters on this story: David Wethe in Houston at dwethe@bloomberg.net; Edward Klump in Houston at eklump@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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