Things are looking up in the oil patch. Crude prices have jumped 70 per cent since February and $50 a barrel is now in sight. Oil services giant Halliburton is predicting an accelerating upturn in activity in North America in the second half of this year and 2017. For shale producers, though, the transition from downturn to recovery will pose new challenges.
Brent crude cost $47 per barrel on Wednesday, a huge improvement on the 12-year low of around $27 earlier this year. The rally reflects an easing supply glut and expectations that cuts to investment in new wells since the 2014 price crash make a shortage of production a possibility before too long.
The healthier price has snapped the industry out of raw survival mode. The latest report from Baker Hughes counted 447 oil and gas rigs operating in the United States during the week of July 15, up about 10 per cent from the multi-decade low reached in May.
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Costs are another concern. One way producers slashed outlays in the downturn was to wring big concessions from service providers like Halliburton. Even as he said on Wednesday that drilling activity had turned the corner, Halliburton boss David Lesar warned that unsustainable price cuts would have to be reversed. Expenses could also rise as drillers compete to hire back the skilled workers they let go during the slump.
Emboldened producers may rush to boost production, only to find that cost inflation that plagued the industry during the days of $100 a barrel oil comes roaring back. At least the bust should have taught a few of them to keep a closer eye on how much they borrow.
