The number of rigs drilling for crude in the U.S. dropped to its lowest level in four years as the American shale industry continues its retrenchment in the face of plunging crude prices. The FT reports:
The number of oil-directed rigs active in the US has now fallen almost 30 per cent from the recent peak of 1,609 in October last year. Since the start of the year, they are down by 359.The latest figures show a decline horizontal drilling activity – 80 of the 83 rigs idled in the past week – mainly in the areas that have led the US shale oil and gas boom.
Rig count helps give a rough understanding of how many new wells are being drilled, but it comes with some important caveats. Shale operators are getting better at drilling more horizontal wells per well pad, which blurs somewhat the correlation between the number of active rigs and total production. Moreover, the rigs going idle are the ones operating in less productive and costlier regions; the so-called “sweet spots” in various oil plays around the country are still pumping out large amounts of crude. As the FT notes, the rig count for horizontal wells, one of the technologies that has unlocked shale drilling, has dropped at a much slower pace than that of vertical wells:
So far, the numbers of rigs that are vertical and directional (those dug at slight angles) have fallen faster than that of horizontal ones. Morgan Stanley says that since mid-October horizontal oil rigs have fallen only 16 per cent, compared with 41 per cent for vertical and directional.
Still, there’s no doubt that the shale boom is dealing with its first serious stress test with the recent plunge in global oil prices. As margins shrink, many operators are finding it difficult to continue to turn a profit, and the EIA has lowered its estimates for production growth in 2015. Because American shale drilling has a high well-depletion rate and a relatively short time period between initial drilling and actual production, our frackers seem well-suited to acting as the world’s new swing producer. That seems to be the calculus behind OPEC’s decision not to cut production, but the world’s petrostates are still taking a big gamble by relying on U.S. shale to take up that mantle: as the industry gets more efficient, its breakeven prices will come down. It’s not a good idea to bet against American innovation.