Kemp: Factors That Will Drive US Oil Production In 2015
Not Just Rig Counts
U.S. oil production "reflects more than just the rig count," as EIA emphasised in a research note published on Monday analysing the combined effect of all the factors known to affect output. The note is essential reading for anyone trying to understand the likely production trend in 2015.
In fact, oil production reflects a constellation of factors, of which the most important are:
- The number of rigs employed (raw rig count).
- The speed with which rigs are able to drill wells on average (affected by the time lost moving location and setting up, incidents causing stoppages and type of rock drilled through).
- Efficiency and capability of the rigs (maximum operating depth and available horsepower).
- Average vertical depth of wells drilled and length of horizontal sections.
- Speed with which wells, once drilled, are pressure pumped and completed, so they can start producing.
- Quality of the rock in the neighbourhood of newly drilled and completed wells, affecting production rates.
- Average number of stages fractured in each well (which can range from 10 to 30 or more).
- Average production from the wells during the first 30 or 60 days and decline rates thereafter as natural energy in the reservoir falls.
- Decline rates on production from old wells (average age and decline rates on the stock of existing wells drilled in both shale plays and conventional oil fields).
- Wellhead oil prices relative to the full life-cycle breakeven costs of drilling new wells.
Rig counts are just one of many factors which determine production. Experts are right to remind readers that production is about much more than "just the rig count". In a sense every well and every drilling team is different and the impact on production is complicated. Some simplifications must, however, be made for the sake of analysis.
Coping With A Crash
In the face of a steep decline in oil prices, production companies have a number of strategic options to cut costs and improve recoveries.
The least-efficient rigs and crews can be idled first. The remaining rigs can be pulled from exploration work in frontier areas (where recoveries are uncertain) to focus on development work and infill drilling in existing plays (where likely production is more certain).
Within existing plays, rigs can be pulled back from the periphery to concentrate the most high-yielding "sweet spots".
Production companies can negotiate and likely obtain big reductions in hire rates for rigs and pressure pumping equipment as well as the price of all their other inputs, from water and sand to diesel and trucking.
For all these reasons, the number of new wells and the output from them is likely to fall more slowly than the rig count.
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