Just when E&Ps thought it was safe to get back in the water comes the first news of rising prices for oilfield services.

Leading edge well stimulation prices increased in the fourth quarter of 2016 with additional momentum expected in 2017.

On a per stage basis, well stimulation pricing capped an average 3% rise in the third quarter of 2016 with a 17% jump midway through the fourth quarter. Price per stage has now breached the $40,000 threshold.

Service providers tie the initial increase to greater proppant volume as E&Ps move toward using 1 ton of proppant per lateral foot on leading edge wells. What is new on the well stimulation side, however, is that service providers appear unified in pushing pricing in 2017 after enduring the past year in a non-sustainable negative cash flow regime. In some cases, service providers are discussing increases of 10% or more for well stimulation services over and above the increase in price for proppant.

Simultaneously, the first increase in sand prices also surfaced during fourth-quarter 2017. Sand availability has been an evolving issue after supplies tightened from a combination of greater demand and bottlenecks in supply after some regional mines shut down during the downturn.

But there was an unexpected pricing stimulus that speaks directly to future bottlenecks. Specifically, sand providers are citing a shortage of truck drivers to haul regional sand from the mines to the customer.

Sand providers are considering workarounds, including using new modular, stackable containers to reduce the volume of truck traffic in the last mile. However, initial price increases in the 10% to 15% range for regional sand heading into year-end are accompanied by general expectations among sand providers of broader-based price increases up to 25% or more in early 2017.

Similarly, drilling contractors reported the first increase in day rates for pad optimal drilling rigs in the fourth quarter of 2016, though the arbitrage between new rates and spot market rates is primarily tied to a more comprehensive equipment package at the well site. Spot market rates for Tier 1 AC-VFD 1,500 horsepower rigs average $15,000 per day, while rates for specialized pad optimal Tier 1 units have gone as high as $18,000 per day in recent fixtures.

Examples from well stimulation, sand and drilling illustrate that the recovery in demand for oil services is underway for the first time in two years. So, too, is commodity price improvement.

Thanks in part to OPEC’s agreement to cut 1.2 million barrels per day from production during the first six months of 2017, oil appears to be on the way to a new price band in the mid-$50 range, which is a positive stimulus for field work. Service pricing traditionally follows commodity price.

Oil and gas operators had luxuriated on the opposite side of the cycle over the last two years as deflating commodity prices were accompanied by service cost declines. Those price decreases were a major part of E&P commentary on improved capital efficiency, which enabled the industry to operate successfully at commodity price levels previously thought to be unsustainable.

The other component of capital efficiency is an organic improvement in processes. Longer laterals, greater proppant loading and more stages spaced more closely together materially reduced the cost per foot of new wells.

E&Ps indicate cost savings are split equally between process improvement and service industry price reductions. However, cost reduction related to service pricing represented two-thirds of savings for completions vs. one-third for drilling services. High-intensity completions now represent 60% or more of well cost, which suggests that higher prices for well stimulation and bulk materials, such as prop-pant, may have a disproportionate impact on total well cost.

The probability of a positive inflection has given E&Ps new bounce in their step. Relieved service companies report tele-phones ringing as E&Ps kick the tires on equipment availability in 2017.

The conversation often turns to re-activating well stimulation fleets and drilling rigs. Those early signs of recovery are now validated by recent anecdotes of price increases for service providers.

Capital efficiency may have peaked just in time for higher commodity prices to bail out both financially beleaguered service providers and the E&Ps who will be paying more for services.

Richard Mason can be reached at rmason@hartenergy.com.

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