Rig count matters. Saying that it doesn’t is like a realtor saying that location doesn’t matter.
Rigs Don’t Produce Oil
The holiest mystery of shale plays is that so much production is possible with ever-fewer rigs.
But if we look at the number of producing wells, the mystery evaporates. That’s because rigs don’t produce oil and gas. Wells do.
Horizontal wells in a few tight oil plays tell most of the story for U.S. production. Figure 1 shows the rig count and number of producing wells for the Bakken, Eagle Ford, Permian, Niobrara, Mississippi Lime and Granite Wash plays.
Figure 1. Tight oil horizontal rig count and number of producing wells. Source: Baker Hughes and Labyrinth Consulting Services, Inc.
Although rig counts decreased dramatically beginning in late 2014, the number of producing wells continued to increase until very recently. This may be a technical triumph for the drilling industry but it is no cause for oil producers to celebrate.
Average well costs are approximately $6 million so, despite falling rig count, the tab for new producing wells was about $3.9 billion per month in 2015. Add to that the cost of wells waiting on completion and other non-capital costs of doing business.
Many analysts and producers want us to believe that producing tight oil has become almost free thanks to awesome advances in efficiency and technology.
A rough rule of thumb is to multiply the monthly change in tight oil horizontal rig count by $6 million to approximate how much money is spent for new producing wells. There were about 2,400 more producing wells in 2015 than a year earlier in the Eagle Ford ($6 million per well) and 2,600 more in the Permian basin plays ($6.5 million per well). That works out to about $14 billion and $17 billion, respectively. For the Bakken where wells are about $8 million apiece, the cost for 2015 was $13 billion.
$45 billion for new producing wells in the 3 main tight oil plays in 2015—almost free.
Rig Count Matters
Rig counts are sensitive to price changes and generally excellent indicators of future oil production.The 4-week aggregate of weekly tight oil horizontal rig count changes accurately and quickly reflects changes in WTI price (Figure 2).
Figure 2. Tight oil rig count change and WTI price. Source: Baker Hughes, EIA and Labyrinth Consulting Services, Inc.
Oil prices began to fall in October 2014 and reached an initial bottom in January 2015. Monthly rig count change went negative in December 2014 and reached a maximum negative change in February 2015. When prices began to increase in April 2015, rig count change responded almost immediately.
Similarly, oil production followed changes in horizontal tight oil rig count quite closely and this includes total U.S. crude oil production, not just tight oil production (Figure 3).
Figure 3. Tight oil rig count change and U.S. crude oil production. Source: Baker Hughes, EIA and Labyrinth Consulting Services, Inc.
Production began to decline after April 2015 only 2 months after the maximum negative rig count change occurred in February.
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