Falling Rig Numbers Do Not Necessarily Reflect on Production
The U.S. oil rig count is trending ever lower, slipping to 730 in mid-April – 53% down from an October 2014 peak. There is too much oil in the world, with onshore and offshore storage facilities filled to the brim. The fall in world oil prices from over $115 per barrel in mid-2014 to less than $50 in 2015 has caused over 51,000 lay-offs in the American oil industry and massive cuts in capital expenditure. Corporate share prices have fallen off a cliff.
Yet U.S. oil production remains at its highest since 1970, ramping up to 9.41 million barrels per day in early April, according to the U.S. Energy Information Administration (EIA). This is despite the fact that the EIA predicts that shale oil output will fall by 57,000 barrels per day over May. Leading these losses will be a fall of 23,000 barrels per day in the Bakken, a fall of 33,000 barrels per day from the Eagle Ford play and a further 14,000 barrels per day from the Niobara play.
Such production declines will be offset by 2,000 barrels per day and 11,000 barrels per day in the Utica and Permian plays respectively. Even foreign observers, such as Norwegian firm Rystad Energy, predict that American oil production is set to average 9.65 million barrels per day over 2015.
More Efficient Drilling
In the past, falling rig counts in the U.S. oil industry quickly translated into falling oil production. Now the rig counts and production seem to be trending in opposite directions. The explanation is a combination of new technology and smoke and mirrors.
Just because a rig stops drilling, it does not mean that oil production will fall immediately. A producing well will continue to pump oil until it needs further workovers or drilling, or its production costs fall below the oil price. This causes a delay that can often be as long as six months. So American oil production may look quite different in six months.
Rig productivity for both conventional vertical plays and unconventional horizontal plays has increased over recent years. An operator can drill a number of wells from one drilling pad rather than employing several rigs for the same job. This has pushed rig productivity up by 29% in the Bakken play just last year.
Other Oil Field Services
Another factor is that there is more to producing oil than directly drilling for it. It accounts for just one part of a whole suite of oil field services. An operator may cut back on drilling activity in terms of the number of wells chosen to drill but will still want to produce as much as possible from each existing well.
In terms of unconventional plays, this means re-fracking a producing well rather than re-drilling it. In addition, operators are opting for more services such as artificial lift, enhanced oil recovery and pressure pumping rather than seismic and wireline services, drilling and cementing.
Although this has provided operators with a cushion against the fall in oil prices, more pain remains on the horizon. The real oil price fall will be reflected in corporate first-quarter 2015 earnings, due for release from April onwards. 2014 earnings still reflected oil prices over $70per barrel.
The American oil sector plans further spending reductions of $126 billion in 2015 to correct balance sheets. They also face a further dilemma with dividend payments to shareholders. Investors are not prepared to forego dividends, as in earlier low oil price periods, so companies may have to cut capital budgets further. The connection between rig counts and oil production is an unfinished story.