mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Frack Attack
What to Make of the American Rig Count Drop

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.

Features Icon
show comments
  • Andrew Allison

    Whilst one must sympathize with the travails of the drillers and their employees, all that matters to the overall economy and geopolitically is production volume which, even before this week’s 20% increase in in the price of oil, was expected to INCREASE in 2015.

  • FriendlyGoat

    The Saudis can decide to reverse course at any time and probably will eventually. The hardest-to-extract oil as the swing producer does not really make any sense, which is why everyone has been so surprised at the Saudi stance of the moment.

    • Andrew Allison

      Nobody is surprised at the Saudi stance. The debate is about who the target is. Seems to me it’s pretty clear it’s Iran, but maintaining US market share is runner-up.

      • FriendlyGoat

        Sure, last summer everybody expected the oil price drop this winter based on Saudis not cutting production. No one was surprised. Really, Andrew, I know you want to argue with me all the time, but some of this is getting rather silly.

  • Jacksonian_Libertarian

    All points that I have been making about oil rig numbers, but there was one left out, the seasonal nature of drilling with drops in drilling when it’s freezing outside, and the fact that fracking and drilling require muds, and fluids that freeze. So talking about drops in drilling rigs from October (the beginning of winter weather) is wrong, and operating rigs should be compared to those operating in the same month a year ago.

    • Andrew Allison

      With respect, what matters is the long-term production rate, not the number of rigs. I might add that the temperature slightly below the surface is largely independent of the season.

      • Josephbleau

        Yes the temperature increases with depth, but drilling fluids need to be made up on the surface which in North Dakota is often below 32 F in winter.

  • CaliforniaStark

    It is important to emphasis that drilling wells is done in order to find new oil or gas; curtailing exploration does not affect production from existing wells. As example, in the United States on January 9, 2015, a total of 9.1 million barrels of oil were produced; on January 9, 2014 the number was only 8.1 million barrels.

    Once an oil/gas well is producing, there is little reason to shut it down — it provides a steady stream of income with relatively low operating costs (an exception would be to shut it down until oil/gas prices increased). Drilling, by contrast requires major capital spending and a large investment of funds. It is no surprise that a lot of companies are putting drilling plans on hold.

    The article states there is a “high depletion rate” from producing wells, particularly those drilled horizontally. This is not always the case. Although in general there is a major drop in output after the first years of production, most still continue to produce at a lesser rate. As technology improves, some wells fracked less than 10 years ago are being reopened as modern techniques allow even more oil/gas to be extracted. I know of oil wells that were originally drilled in the mid-twentieth century that are still producing.

    Eventually the price of oil/gas will again go up; it might be beginning to happen now. But it is unlikely to rise to the previously high levels, as the monopoly power of the pernicious OPEC oil cartel has been effectively broken. You have to admire American ingenuity and free enterprise.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service