Oil Rig Efficiency Being Overlooked

January 14, 2015



Yet at the same time that the natural gas rig count plummeted, output continued to climb. While there were periods of slower growth, output never declined, as the analyst community had widely expected based on the rig count. In fact, since peaking at more than 1,600 in 2008, the natgas rig count has fallen 80 percent to today. In that period, output climbed 35 percent, from 60 to 81 bcf/d.


Though the increase in productivity is a big part of the resiliency in natural gas output, it's not the whole story. As natural gas prices cratered and remained relatively low after the 2009 crash, energy producers turned to other fuels, including crude oil, to buttress their declining profits. As producers drilled for oil, natural gas came out as a byproduct, adding to supply unintentionally.


Now with both oil and natural gas depressed, energy producers can't turn anywhere to soften the blow of low prices. Even so, there is reason to believe crude oil output in the U.S. will hold up much better than many realize. It comes back to the concept of efficiency that we've discussed.


Fewer Rigs Producing More

As the oil boom has gone on, it's taken fewer and fewer rigs to drill the same number of wells. In one of its monthly reports, the Energy Information Administration attempted to capture this increase in productivity across seven of the most important oil-producing regions in the U.S., which together account for 95 percent of the country's production growth.


The EIA's data starkly illustrate just how incredibly efficient drilling rigs have become over time. In the Eagle Ford, one of the most prolific shale plays in the U.S., rigs are 18 times more efficient today than they were in 2008. Rig productivity in this region is up 22 percent from just last year and 65 percent from two years ago.

The average of the seven key producing regions tells a similar story. One average rig yields 332 barrels per day of new oil production, which is 20 percent more than last year and 65 percent more than two years ago. That puts the recent decline in the rig count in perspective.


Essentially, the rig count could halve from here and be as efficient as it was in 2012, a year in which U.S. oil production grew 900,000 barrels per day (only slightly below 2014's 1.1 million barrels per day).



Moreover, the challenging oil price environment will encourage producers to become even more efficient, pushing them to do more with less. Already, a number of oil companies have said they will reduce their budgets and the number of rigs in operation, but expect to grow their production nonetheless.


That said, ultimately, it's not a matter of if U.S. oil production will slow, but when. We've made the case that output in the country will be more resilient than expected, but the fact of the matter is that the market cannot remain oversupplied indefinitely. Eventually, supply will have to be cut back, even if prices must plummet to extremely low levels to see that happen.


In our view, the past case of natural gas and the aforementioned drilling productivity data suggest that the rig count must fall much more dramatically than it already has to spur the necessary adjustments in the market. Even a peak-to-trough decline of 50 percent may not be enough, suggesting that the oil industry downturn may be deeper and last for longer than is currently being anticipated.




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