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Some oil drillers feel the crunch as well costs rise in the hottest US fields

Workers connect drill bits and drill collars, used to extract natural petroleum, on Endeavor Energy Resources' Big Dog Drilling Rig 22 in the Permian basin outside of Midland, Texas.
Brittany Sowacke | Bloomberg | Getty Images
Workers connect drill bits and drill collars, used to extract natural petroleum, on Endeavor Energy Resources' Big Dog Drilling Rig 22 in the Permian basin outside of Midland, Texas.

The cost of drilling and fracking wells in the nation's hottest oil fields is quickly rising — that's if you can book the crews to do the work.

The Permian Basin that lies beneath western Texas and southeastern New Mexico is ground zero for the U.S. shale drilling revival. The basin's geology allows producers to extract oil economically, but contractors are jacking up prices as drillers pile into the region.

That raises concerns for exploration and production companies that are still nursing profit margins back to health after more than two years of low oil prices.

The crunch is due to both supply and demand. A wave of bankruptcies swept through the oil patch last year, weakening or wiping out some of the companies that sell services to drillers. Meanwhile, energy industry dealmaking rebounded last year — and the Permian drove mergers and acquisitions activity.

Oil majors like Chevron and Exxon Mobil — which splurged on a $5.6 billion Permian purchase last month — have signaled they intend to ramp up drilling in the basin as they focus on short-term projects that generate swift returns.

Denver-based Lilis Energy is one small exploration and production company focusing on its assets in the Delaware Basin, a less-developed section of the Permian where land has lately fetched record-setting prices.

The company recently hired a contractor to drill two wells at a cost of $13,900 per day per rig. Two months later, CEO Avi Mirman said Lilis couldn't contract a rig for less than $16,000 a day.

And drilling a well is just half of the equation. Permian operators like Lilis must also to pay for hydraulic fracturing, or injecting water, minerals and chemicals at high pressure into wells to break up shale rock and release oil.

When Lilis solicited bids to frack wells recently, quotes rolled in at about $2.2 million. When it came time to execute two months later, the cost had surged nearly 50 percent to $3.2 million.

Now, frack crews' schedules are booked through the summer in some cases, Mirman said.

"To get a slot with a frack company to frack a well once it's been drilled is really difficult," he told CNBC.

"It's really hard. We've been able to do it, but it's really, really hard."

The drilling figures align with rates for rigs leased from top-tier contractors that analysts for energy investment bank Simmons & Co. International found on a Christmastime trip through the Permian. In one case, prices had reached $17,000 per day.

To be sure, there are plenty of idle oil rigs stacked up in massive lots in the Midland and Odessa, Texas, area, according to Simmons.

Still, one contractor will haul rigs all the way from North Dakota and the Rockies to drill wells in the Permian for a producer that Simmons interviewed. It's unlikely the producer is paying for the move, it noted. Instead, drillers said the contractor is probably footing the bill to get its rigs into the Permian, where they will have steady work.

Something similar happened to Lilis when Mirman insisted on contacting a "hot" rig — one that has been in operation recently, with a crew that's familiar with that specific rig and with one another.

He finally found a hot rig about 600 miles away in southern Texas. The owner paid about 75 percent of the $600,000 bill to move the equipment, he said.

Drillers are finding ways to deal with fracking costs, too. One driller told Simmons it would simply hire a second-tier fracker after its top-tier service company raised its prices. Another said it would either frack fewer wells or opt for a less expensive method of fracking.

More pricing pressure appears to be coming. Many of the major well services companies endured significant pain during the downturn, and they're now notifying their customers that the discounts they've offered are no longer sustainable, Simmons said.

As well services companies emerge from bankruptcy, "the next logical step, in our view, would be further industry consolidation," Simmons wrote. That would create a smoother path to price increases, it said.