Oil company cutbacks may raise gas prices down the road

Since August, costs for steel, cement and other materials have tumbled as much as 50%. Oil field costs, however, have dipped only about 10%, Gheit says.

"I remember (five years ago), I thought $40 was a fantastic (oil) price, and the industry worked perfectly well," BP bp CEO Tony Hayward said at a recent Cambridge Energy Research Associates conference. "The only thing that's changed is we allowed our cost base to get away from us."

Royal Dutch Shell rds.a CEO Jeroen Van der Veer says the oil giant is delaying a Canadian oil-sands project "because we think we can build it later at a lower cost."

No rush to cut costs

Service companies are reluctant to lower their fees, largely because they boast huge order backlogs from the boom times, says Deutsche Bank analyst Michael Urban.

"We can wait, so we don't have to rush and sign a contract at a (rate) that we don't think is supported by our view of the current supply/demand situation," Greg Cauthen, chief financial officer of Transocean rig, the largest offshore drilling contractor, recently told a Credit Suisse energy summit.

There are other hurdles. Gary Flaherty of oil service company Baker Hughes says costs likely will not fall because drilling technology has improved, helping oil companies save money by speeding projects. And, Urban says, it's tough to cut oil workers' salaries.

Many service companies also expect oil prices to rebound in six to 12 months, says Argus Research analyst Phil Weiss.

Bottom line: Service costs might not decline substantially for a year or longer, Urban says.

At the Cambridge conference, Andrew Gould, CEO of Schlumberger, slbthe top oil field service company, said costs eventually will drop. But, he said in comparing service companies to plumbers: "And when did the bill from your plumber last go down?"

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