US oil rigs inched up by one this week, Baker Hughes said Friday, hitting
the 800-mark as unconventional basin activity continued amid improving
industry conditions and oil prices that have shot up close to 30% this
year from the average of the past few years.

At the same time, observers are starting to worry that issues are
cropping up that could dampen activity, such as tightening labor, rigs,
and infrastructure.

The Eagle Ford Shale in South Texas rose by one oil rig in the past week
to 63. But there was also movement in and out of several other basins.

Chief among them was a five oil rig gain in the “others” category to 137
that offset losses in four other unconventional plays. The “others”
classification reflects activity outside the 14 named basins that Baker
Hughes tracks.

A two oil-rig drop occurred in the Williston Basin in North Dakota and
Montana, leaving 48. And losing one rig each were the Permian Basin of
West Texas and New Mexico, for a total 434; the Cana-Woodford play in
Oklahoma, which is now at 68; and the DJ Basin of Colorado, leaving 25.

As the US oil rig count ticks up – it was 8% higher on Friday than at the
start of 2018 – a number of issues are starting to show in the biggest
onshore unconventional plays that could wreak havoc with bullish domestic
production forecasts, analysts say.

One important recent smoke signal was the recent signing of four US land
rig contracts by Independence Contract Drilling at higher dayrates and an
average term of 10 months apiece. The longer term suggests domestic
operators are starting to worry about potential increases in land rig
prices and want to hold onto rigs in case they become hard to get.


In a February 12 filing, Independence noted “increasing customer
inquiries and dayrates” across its current markets of Texas, New Mexico,
Louisiana, and target markets in Oklahoma and Arkansas.

“This is very important,” Evercore ISI analyst James West said. “The
squeeze could go higher again for land rigs. Ten months isn’t heroic by
any means, but it’s better than well-to-well, and as we add more term
[per rig], we tighten the market further.”

A tighter rig market — particularly in the Permian Basin, which is by
far the most active US basin — persistent labor scarcities, increasing
need for logistics expansions, and deteriorating geology are all critical
issues facing the US oil industry, he said in a recent weekly podcast to

As a result, “the 20%-25% increase in capex we foresee…for this year
[on average for US oil companies] may not even happen, given industry’s
inability to respond, to put capital back to work,” West added.

On Friday, NYMEX crude futures settled up 26 cents to $61.25/b.

Crude averaged about $48/b during 2015-2017, and has ranged from $60/b to
$65/b this year.

Given the long-awaited rise in crude prices to the important $60/b level,
oil companies have raised capital spending modestly on the whole compared
to 2017. Some producers unveiled capex flat with last year or even cut
back slightly, since efficiency gains have allowed them to achieve their
production targets with fewer rigs.


“Equipment constraints are still there and still very real — we’re out
of frac spreads [fracturing fleets], out of high-specification land
rigs,” West said. “We are going to hear more about land rig upgrades and
land rig newbuilds starting on the land side” this year.

In addition, the sheer amount of infrastructure needed to bring
increasing volumes of oil to market is staggering, including pipelines,
trucks, rail cars, and related equipment. And sometimes the necessary
equipment isn’t needed for oil per se, it’s the water and sand needed to
produce oil.

“We estimate 5,000 to 6,000 sand trucks are on the road in the Permian
delivering sand to well sites,” West said. “Also think about the
20,000-plus water-hauling trucks that go in and out and around the shale
plays in West Texas every single day. It’s a nightmare.”

Also, West noted that about two weeks ago there was an increase in
exploration rigs, with those rigs gaining about 30 basis points of market
share quarter to date (for the week ended February 17). Horizontal
Permian exploration rigs in the first quarter gained 100 basis points of
share relative to development rigs versus the fourth-quarter 2017

That suggests geology may be deteriorating as operators move out of the
very core of shale plays, downspacing more tightly to maximize oil
production and potentially causing well interference.

“Geological conditions are…not getting better” generally, West said.

According to the US Energy Information Administration, US oil production
averaged 9.92 million b/d in fourth quarter of 2017 and recently crossed
the 10 million b/d threshold. Crude output is set to average 10.24
million b/d in the first quarter and 11.04 million in the 2018 fourth

— Starr Spencer,

— Edited by Kevin Saville,

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