Devon CEO Sees North American Service Costs Down 2% This Year

Devon Energy Corp., the second-worst performer in the Standard & Poor’s 500 explorers and producers index last quarter, said it expects total service costs to drop about 2 percent this year as the price of pressure pumping and drilling-rig gear declines.

“We’ve been seeing costs leveling off for a while and starting to come down a little bit,” John Richels, chief executive officer at the Oklahoma City producer, said in an interview at the Howard Weil Energy Conference in New Orleans. “We have alliance agreements with all of the large providers and we renegotiate them from time to time.”

After several years of rising costs from contractors providing drilling rig and hydraulic-fracturing services, prices started to fall around the second half of last year, he said. Hydraulic fracturing, or fracking, involves pumping millions of gallons of water mixed with sand and chemicals to unlock hydrocarbons from underground rock.

Prices charged for U.S. fracking services are forecast to drop another 4 percent this year after a 15 percent tumble last year, according to PacWest Consulting Partners LLC, a Houston-based industry adviser. Fracking equipment this year, measured by the amount of horsepower available, will exceed demand by an estimated 29 percent. About 15.7 million horsepower was competing to meet demand for 12.2 million, the consultant said.

The average number of land rigs operating in the U.S. dropped 13 percent in the fourth quarter to 1,692 compared with a year earlier.

Areas of very high activity, such as in the Permian Basin in west Texas, didn’t see total service costs drop off as much as in other areas of the U.S., Richels said.

Devon dropped 14 percent in the final three months of last year. Newfield Exploration Co. fell the most among the index members at 14.5 percent.

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