The US drilling frenzy is over. What’s not is the boom in oil production.
While companies have idled 151 rigs in five shale formations since reaching a peak of 1,157 in October, they’ll need to park another 200 for growth to stall, according to data from the US Energy Information Administration.
Output there will reach a record 5.468 million barrels a day in March even though the number of rigs exploring for oil is the lowest since 2013.
The spending cuts led to speculation that US gains would slow, eroding a global supply glut that sent prices tumbling last year.
Oil has jumped 15% since reaching a six-year low of $44.45 a barrel on January 28. Improving technology and a focus on the most promising acreage has made the rig count, a closely watched barometer of drilling activity, a less reliable indicator of future output.
“The trend in US oil production is the key variable in the oil market this year, so any sign that the great growth engine is slowing is eagerly anticipated,” said Jim Burkhard, a Washington-based vice president with IHS Inc., the global analytics firm headquartered in Englewood, Colorado. “There may be some false starts and we may have just seen one.”
The industry has become better at blasting crude out of deep underground layers of rock, according to productivity data tracked by the EIA in the major shale prospects including the Bakken, Eagle Ford, Niobrara, Permian and Utica.
The improvements have helped overcome the natural depletion of existing wells. Shale wells decline sharply at first and then trail off at a slower rate until they run dry. It’s a phenomenon known as The Red Queen, after the character in Lewis Carroll’s “Through the Looking-Glass,” who tells Alice, “It takes all the running you can do, to keep in the same place.”
As drillers cut costs, the less efficient equipment is idled first while the best machinery is dispatched to the most promising acreage, which boosts the amount of crude produced for every rig in the field. At the same time, the existing pool of wells grows older, meaning the decline rate — the Red Queen — slows down.
In North Dakota’s Bakken formation, 551 barrels a day were produced in January for each drilling rig in the field, EIA data show. That’s more than double the amount pumped per rig three years earlier. The same is true for the Eagle Ford in South Texas.
In the Permian, productivity increased 84%. In the Niobrara in northeastern Colorado, it has more than tripled.
West Texas Intermediate oil for March delivery added 43 cents, or 0.8%, to $51.64 a barrel in electronic trading on the New York Mercantile Exchange at 12:03 p.m. Singapore time.
The Bakken illustrates how producers are doing more with less. As of January, the number of rigs in the region declined to 161, 33 lower than a 2014 peak of 194 in September, according to the EIA’s February 9 report.
Yet the amount of oil pumped per rig increased 8.9%, and the EIA forecasts that output from the region will reach a record 1.316 million barrels a day in March.
“The headline US oil rig count offers little insight into the outlook for US oil production growth,” Goldman Sachs Group Inc. analyst Damien Courvalin wrote in a February 10 report.
The US has added a million barrels a day to production in each of the past three years, contributing to a worldwide glut.
Oil prices slid 49% in the second half of 2014 as the Organization of Petroleum Exporting Countries decided to defend its market share against increasing US supplies.
Lower prices forced some of the largest US shale producers, such as Continental Resources Inc., Pioneer Natural Resources Co. and Devon Energy Corp., to cut back drilling.
Despite the slowdown, the combined oil production from the five shale formations will expand by 289,890 barrels a day in the first three months of 2015, 3.4% more than was added in the first quarter of 2014, according to a February 9 report from the EIA.
In the Permian basin in west Texas, which accounted for 37% of US production growth in the past year, output will expand another 3.7% by the end of March, the EIA said. That’s after losing the 75 rigs that have been pulled from the region since a 2014 peak in November.
“The shales are where the growth is coming from in the US, so that’s where the slowdown has to come from,” said Jason Wangler, an analyst with Wunderlich Securities Inc. in Houston.
Given current rig productivity and the EIA’s forecasted declines in legacy wells, about 144 additional rigs would have to be cut from the Permian before production stops growing.
Producers would have to eliminate 21 more rigs in the Bakken, 27 in the Eagle Ford, 7 in the Niobrara and 16 in the Utica to hold oil production flat, according to EIA data through January.
And that’s without new gains in efficiency. If the natural gas boom is any guide, such improvements may have an enormous impact. In the Marcellus shale in the US northeast, the number of rigs peaked at 144 in January of 2012. Three years later, it has dropped to 98. Nonetheless, gas production has more than doubled.
“We’re going to grow production for the next few months at least,” Wangler said. “There are still more rig cuts to come.”
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