Kemp: Factors That Will Drive US Oil Production In 2015

At the same time, breakeven prices for new wells will come down substantially to reflect cheaper drilling and pressure pumping costs.

In some instances, however, producers may postpone the completion of already drilled wells to defer the costs and hope for a recovery in prices.

Completion accounts for two-thirds of the total cost of some of the very long horizontal wells now being developed. And one third of the well's total production may occur in the first 12 months. So there are sharp financial incentives to slow completion where possible.

There is a substantial backlog of oil wells that were drilled in 2014 waiting for the arrival of pressure pumping crews and other completion services. U.S. production could continue rising for several more months as these wells are finished and put into production.

But there are also anecdotal reports from oilfields that some completions are being postponed to save costs and wait for a more favourable price environment. If widespread, slower completions could cause production to peak earlier than expected.

Data Availability Bias

While production forecasts are about much more than just rig counts, rig counts are one of the few pieces of data readily available in near real-time. There is no comprehensive and timely information on drilling speed, well depth and horizontal length, initial production rates, and decline rates on the stock of existing wells.

There is some information on the number of new wells started ("spudded") each month but that is only marginally more helpful than a rig count because production depends on where the wells are located and how many horizontal stages are fractured, among other factors.


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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.