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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WHAT DO YOU THINK?


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

Philippe  |  January 28, 2015
Shale production requires fracking, fracking means that the geological formation must be cracked to liberate the oil or gas locked in the geological formation. The Initial Production or IP is the maximum production when the oil or gas is liberated at the high point of the released pressure. As the IP continues to take place the pressure diminishes and the propan keeps the cracks open but induces pressure drop due to the flow constraint by smaller rocks opening or cracks. This resistance reduces the production rates by 50% within the first 12 to 18 months. Past this IP production we enter the Estimated Ultimate Recovery (EUR) where the production rate is 20% of the original production. Drilling is the way in a Shale Fracking situation necessary to keep production at an elevated and profitable level. The EUR production cost would go up because of the cost of getting to market less production. It becomes a cost per barrel at market not at the well head. The production of US shale crude oil or gas will level off because of less drilling. The return on investment represented by drilling is not supported by the market prices. It may take 12 month, but rest assured US production will go down, unless the crude oil or natural gas market prices allow drilling again.
Jerry Lummus  |  January 27, 2015
Good reminder of the limitations of the rig count information. As you correctly point out however, the availability and depth (back to the 1940s) of the data base make it useful. One use is to see it as a proxy for what we unfortunately dont have - a similarly long, detailed and timely series on actual E&P expenditures, the main driver for the entire upstream industry, including future production. In a perfect information world where we would have good data on E&P outlays as well as on all the variables you list above, forecasting the impact of changes in oil prices would be far simpler. Until we get there, simple time series analysis of rig count data is one the best tools we have. Assuming HAL and BHI do merge, we need for the new entity to continue the data as BHI has done all these years.