Service companies first, then producers
From the Houston Chronicle
The Trump Administration’s steel tariffs will increase costs in the West Texas oil patch at a time when drillers and service firms already faced rising labor and materials costs, investors say.
Labor shortages in the Permian Basin and a lack of available working equipment have led to delays and higher prices to drill and frac wells this year.
Though the advent of sand mines in the region has helped to ease costs on transportation and sand, labor costs are expected to rise 10 to 15 percent and materials costs are expected to go up 5 to 10 percent this year, a reflection of the recovery in oil prices and increased demand for equipment and fracking work.
Oil field service companies and pipeline companies will get hit with tariff costs first, but ultimately those companies will have to pass on their costs to customers and ratepayers – oil producers, the companies that extract oil and gas from the earth.
“And that’s off of what I would say are already pretty modest margins for the energy service sector relative to history,” said Neil Wizel, managing director at private equity firm First Reserve in Houston. “There was already upward pressure on service and labor costs and those announcements on tariffs aren’t likely to mitigate that.”
“There really is a lack of supply of labor in a lot of areas in the Permian Basin,” he added.
The cost of steel makes up about 10 percent of the capital expenditures needed to drill a well and bring it into production, said Toby Loftin, managing principal of BP Capital Fund Advisors.
“That would raise the marginal cost of production,” Loftin said. “Raising the marginal cost implies you’ll need a higher oil price.”
For a slew of upcoming pipeline projects needed to carry oil, and particularly natural gas, from the Permian Basin, “it doesn’t stop the project but it has an effect of a 5 to 10 percent increase in the cost of the project,” Loftin said. Steel makes up about 20 percent of a pipeline project, he said.
