Anadarko Petroleum Conference call, commentary on service costs

Anadarko is one of the largest US based exploration and production companies had their conference call today.  They are a deepwater exploration specialist, but also have considerable on-shore US assets in the Wattenberg (Colorado, oil), North East Marcellus (Pennsylvania, dry gas), and Permian Basin.

I skimmed the transcript and didn't see anything to earth shattering.  There was an interesting comment on service costs:

"Okay, I will start with this and I will see if I can get Chuck Meloy to also to give you a few thoughts from him. If you think about the fact that onshore today, unlike say ten years ago, around 70% of our costs are now in completions, whereas 10 years ago 70% of the costs were in actual drilling of the wells, and 30% were in completions. As a result, as we’ve looked at this and comments I made in January at a conference would concur with and get ready to tell you that simply we don’t see this being a quick change to the service cost environment simply because we are going to honor our contracts and I think so will the industry.

We are in this with the service companies as partners. As we move to sync up those costs however I think you can anticipate that maybe by the end of the year, early into the next we could see significant reduction in service calls. If we were fortunate enough to be able to find a [indiscernible] to save 20% reductions in service calls and you think about it being in a prior world at $90 per barrel and the economics they gave us at the well head, $70 could be the new $90 or $90 could be the new $70, however you want to look at it."

The implication here is that service costs may not have the scope to drop to the degree seen in prior busts because of the make up of those costs.  I don't really understand why completion costs are less flexible than drilling costs, but if this is true then I will have to temper my expectations for cost reductions.   Actual declines in service costs are only one area where E&Ps can increase drilling efficiency.  It is important to remember that drilling efficiency had been increasing steadily prior to the oil price declines without cost concessions from service providers.