Drilling Oil and gas executives report they are beginning to see some relief in drilling and completion costs, partially because service companies have become more willing to renegotiate contracts.

Producers are examining variablepricing contract structures. Such contracts typically are tied to oil futures prices or the Baker Hughes rig count.

Doug Sheridan, managing director and founder of EnergyPoint Research Inc., sees a movement away from fixedprice contracts toward prices that reflect commodity prices, especially on the international oil markets.

For example, a drilling contract could contain day rates based upon predetermined price points such as if crude falls below $50/ bbl for 30 days, he said. His independent market research firm specializes in monitoring customer satisfaction in the oil and gas industry.

Bill Hale of Ernst & Young LLP also said he sees a more variable pricing structure for drilling contracts within the US, based upon dropping revenues and a sluggish Baker Hughes Inc. rig count.

Ensco International Inc. reports the Ensco 8500 started operations during June in the Gulf of Mexico. The first of seven new ultradeepwater semisubmersibles, Ensco 8500 has a 4-year contract with Anadarko Petroleum Corp. and Eni. Photo from Ensco International.

US drilling activity increased for the first time in 11 weeks, up by 23 rotary rigs to 899 drilling for the week ended June 19 - the same number as 3 weeks earlier but down from 1,906 during the same period a year ago, Baker Hughes reported in its weekly statistics.

Barclays Capital Inc. analysts on June 22 forecast that worldwide exploration and production expenditures will reach $387 billion during 2009, which would be down 15% from last year. The forecast was based upon a survey of 402 companies.

"Growth in E&P is anticipated to return in 2010 by over half of the companies surveyed," said Barclays Capital analyst James D. Grand ell in New York.

Producers' strategies vary

Occidental Petroleum Corp. Pres. Stephen Chazen said Occidental is renegotiating supplier contracts and laying down rigs. The company's first-quarter financial results included an $8 million pretax charge for terminated rig contracts.

OCCIDENTALS CHANGE IN CONTRACT TERMS

Oxy expects a 20%-25% cost reduction across all areas compared with 2008 costs, he said. He expects the full effect of the cost reductions to be realized during the rest of this year and going into 2010.

Devon Energy Corp. Pres. John Richels in May said that Devon's costs have dropped 10-15% from the beginning of 2009, and the company expects costs to come down another 10-20% by year end.

Apache Corp.