The profitability of oil and natural gas development activity depends on both the prices realized by producers and the cost and productivity of newly developed wells. Prices, costs, and new well productivity have all experienced significant changes over the past decade. Price developments are readily observable in markets for oil and natural gas, while trends in well productivity are tracked by many sources, including EIA's Drilling Productivity Report which focuses on well productivity in key shale gas and tight oil plays.rnrnRegarding well development costs, there is a general understanding that they are sensitive to increased efficiency in drilling and completion, which tends to lower costs, shifts towards longer wells with more complex completions, which tends to increase them, and prices for oil and natural gas, which affect markets for drilling and completion services through their effect on drilling activity. However, overall trends in well development costs are generally less transparent than price and productivity trends. Given the role of present and future cost trends to determining future trajectories of U.S. oil and natural gas production under a range of possible future price scenarios, it is clearly important to develop a deeper understanding of cost drivers and trends.rnrnTo increase the availability of such cost information, the U.S. Energy Information Administration (EIA) commissioned IHS Global Inc. (IHS) to perform a study of upstream drilling and production costs. The IHS report assesses capital and operating costs associated with drilling, completing, and operating wells and facilities. The report focuses on five onshore regions, including the Bakken, Eagle Ford, and Marcellus plays, two plays (Midland and Delaware) within the Permian basin1 , as well as the offshore federal Gulf of Mexico (GOM). The period studied runs from 2006 through 2015, with forecasts to 2018.rnrnAmong the report’s key findings are that average well drilling and completion costs in five onshore areas evaluated in 2015 were between 25% and 30% below their level in 2012, when costs per well were at their highest point over the past decade.rnrnBased on expectations of continuing oversupply of global oil in 2016, the IHS report foresees a continued downward trajectory in costs as drilling activity declines. For example, the IHS report expects rig rates to fall by 5% to 10% in 2016 with increases of 5% in 2017 and 2018. The IHS report also expects additional efficiencies in drilling rates, lateral lengths, proppant use, multi-well pads, and number of stages that will further drive down costs measured in terms of dollars per barrel of oil-equivalent ($/boe) by 7% to 22% over this period.rnrnEIA is already using the observations developed in the IHS report as a guide to potential changes in near-term costs as exploration and production companies deal with a challenging price environment.

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