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(Reuters) - The land rush that drove thousands of roughnecks, drillers and leasing agents to North Dakota's oilfields is cooling off, bringing down costs in the country's most expensive major energy basin.
Service costs are falling as companies concentrate drilling in fewer locations, industry executives say, while equipment rents are down after demand evaporated due to a nationwide glut of natural gas.
This pricing squeeze has pinched oil service companies around North America from Halliburton Co (HAL.N) and Baker Hughes Inc BHI.N on down. But it has helped producers such as Continental Resources Inc (CLR.N) and Whiting Petroleum Corp (WLL.N), big players in the North Dakota-centered Bakken basin.
Leaseholders have a set number of years to start producing on a property or surrender the lease, and that pressure created a frenzy of drilling activity. North Dakota has become the No. 2 oil-producing U.S. state after Texas.
"The whole industry has been frantically trying to hold a lot of the acreage, hold it by production, and get the wells drilled," Continental Chief Operating Officer Rick Bott said, describing how a shift to drilling more from one site had cut its drilling time per well by more than a third this year.
"That's allowed us to essentially do quite a lot more with a lot less."
Many other companies in the region, with stakes secured, are turning to sinking more wells from single spots, known as pad drilling.
"Your efficiencies can get a whole lot better once you get away from drilling a well just to hold a section," Magnum Hunter Resources Corp MHR.N Chief Executive Gary Evans said at a conference hosted last week by the Independent Producers of America Association (IPAA).
While the Bakken remains the priciest major U.S. oil basin for drilling a well, at up to $11 million apiece, executives see costs falling by as much as a tenth by the end of 2012.
Nonetheless, experts warn that an especially cold winter could send costs spiraling back up - for two different reasons.
Last year, a mild winter depressed demand for heating fuels like natural gas, and prices collapsed. So gas drillers nationwide scrapped many exploration projects, freeing up equipment and workers for oil basins like the Bakken.
This effect would start to disappear, however, if colder temperatures boost gas demand enough to cut the glut and put more equipment back to work.
The mild winter last year also made it easier for companies to operate in North Dakota. But an especially brutal cold season could send footloose oil workers back south, creating labor shortages in an already tight market. At only 3 percent, North Dakota's unemployment rate is the lowest in the country.
The combination of "horizontal" drilling, or running wells into reservoirs from the side, and hydraulic fracturing -- pumping in water and sand to crack and prop open the rock -- is what opened up access to the Bakken and other shale basins.
North Dakota, a relatively unpopulated, rural state, had little of the infrastructure needed to smoothly handle an oil boom that tripled output in less than five years. Production hit another record high in July, at 674,000 barrels per day, and is forecast to double again by 2015.
Costs escalated due to shortages of equipment, crews and fracking raw materials like sand, which had to be brought in by rail. Oasis Petroleum Inc (OAS.N), for one, says fracking makes up 40 percent of its entire well costs.
Ruben Alba, a former Halliburton manager in the Bakken who now works for energy investor ICO Fund, described the constant headaches for drillers there, from the volatile costs in a thin market for services to the challenge of moving oil out to refineries. "It's like having a base on Mars," Alba said. "You need to keep it supplied with oxygen."
Lynn Helms, director of North Dakota's Department of Mineral Resources, put the average well completion costs for the Bakken at $9 million to $11 million -- or about $3 million higher than the other hot U.S. oil development in Texas, the Eagle Ford.
But conditions are improving as infrastructure gets built out and more "pad" drilling is done. Continental says the move yields up to 10 percent cost savings per well, and Hess Corp (HES.N) anticipates efficiency gains next year for the same reason.
Among the smaller players, Oasis and Kodiak Oil & Gas Corp KOG.N are both targeting reductions of 5 percent to 10 percent in per-well costs in the next six months.
Experience helps. Oasis cut the number of days to drill a well from 29 days in 2010 to 23 days in the first half of 2012, said Chief Operating Officer Taylor Reid. The number of days to frack a well has been cut in half, to five days, over that time.
"We've gotten much more efficient on fracking," Reid said at the IPAA conference in San Francisco. "As we go into late this year, early next year, and go to more pad drilling, you're going to see a lot more efficiencies from eliminating those rig moves, drilling those wells on common pads, and getting the benefits of a lot of the shared services."
Oasis is targeting an average year-end cost of $8.8 million per well, compared with $10.5 million in the first half of this year. The company also has its own well servicing arm, set up last year with an eye to providing at least half of its services in-house to ensure it had access to equipment when it needed it.
Service providers were almost all caught off-guard as North American production shifted to higher-priced liquids from gas. Baker Hughes was hit especially hard as its supply chain proved inadequate to meet the surge in demand in some areas.
But just last month, to get closer to customers and improve its supply chain, the Houston company formally opened a base in Williston, North Dakota. That followed another base opening in August in Dickinson to the south, which will support everything from cementing to fracking, and it is in the process of opening a maintenance, technology and storage facility in Minot.
While high costs are driving some small players out, the Bakken's potential has attracted renewed interest from heavyweights like Exxon Mobil Corp (XOM.N), which only a few weeks ago struck a $1.6 billion deal there.
Continental cited a study backed by the North Dakota Industrial Commission that found it could take 50,000 wells to develop the Bakken's entire 24 billion barrels of estimated oil. The COO noted the industry had only drilled a tenth of that.
"We're still very much in the early innings of the Bakken," Bott said.
Reporting by Braden Reddall in San Francisco; Editing by Patricia Kranz and David Gregorio