13th February 2015
GCA’s U.S. Oil & Gas Monitor shows the U.S. rig activity now declining at a rate that exceeds that seen in 2009. Based on the Baker Hughes count there was a weekly fall of 100 in the U.S. onshore rigs, with this now having declined by 570 from a year high of 1,876 in November 2014 to 1,306 on 13 February 2015. The fall this week was the largest drop seen since the decrease started last November.
- 6 Feb 2015 - Rig Index Continues Sharp Drop Despite A Rising Oil Price
- 30 Jan 2015 - Rig Index Drops Sharply Once More, Causing Late-Day Rally In Oil Price
- 23 Jan 2015 - Rig Index Continues Decline Trend
The Gulf of Mexico rig count continues to illustrate the difference in impact between the onshore and offshore with a gain of two rigs (see GCA’s article Pain Likely in 2015, But Deep Water GOM Should Be Better Placed Than Unconventional).
The sharp fall in the onshore rig count contrasts with further upward movements in the oil price, with Brent breaking through the US$60 per barrel mark and ending the week at US$61.09 per barrel. While WTI prices moved upwards as well, the gap between WTI and Brent widened to US$8-9 per barrel, reflecting the increased inventories reported at Cushing.
Operator sentiment at the NAPE show in Houston this week suggested plans by many Operators will be to drill just enough wells to hold production steady this year. Some estimates were that this could result in rigs in key plays being reduced to one half or one third of pre-crash levels. While there is still a long way to go to reach this low, the rapid acceleration in the last 3 weeks suggests that the fall could indeed end up being greater than that seen in 2009.
Added to the decline in drilling activity is also confirmation of plans, at least on the part of some operators, to drill but not immediately complete wells. That final cost (which may be around half of the total well cost) and tie-in activity would then be deferred until prices rise from current levels. The benefits of this are shown in a new GCA analysis of the present value improvement by delaying completion against the price offered by the forward strip.
The mathematics of this are not simply about the absolute oil price, but the gain in price assumed into the future, which can be locked in at the point of decision making. Based on the degree of contango seen currently in the market deferring completion and tie-in to the second half of 2015 could add around 10% to the net present value of a well. It could add significantly more if the operator is prepared to go at risk and hope that prices rise even faster than the strip itself, although this also risks deferring cash flow today and then finding that oil prices stay at or around current levels, or even fall.
If this strategy is adopted to a significant extent it could have a meaningful impact in deferring production from early-mid 2015 to later in the year or 2016 (see GCA’s article Oil Price Crash to Have 2 Million Barrels per Day Impact in the US?).
Rig Count and Oil Price Indices
In order to provide a relative comparison, the GCA Indices for rig count and oil price compare today’s data with the average in the three month period April to June 2014. Changes this past week place the GCA Index for U.S. onshore rigs at 73, 31 points down on the 2014 high and 6 points down on the previous week. Conversely, the Brent oil Index closed up 3.
Permian, Eagle Ford and Bakken
Looking more specifically at the major onshore basins where unconventional (tight and shale) oil are being developed (Permian, Eagle Ford and Williston Basin), which together represent 60% of the oil-targeted activity, the drop is 62 in the week with a significant 48 rigs being cut in the Permian.
On an Index basis these plays continue to slightly exceed the overall onshore rig count change, with the drop ranging between to 34 and 39 points off 2014 highs, compared to 31 for the total onshore.
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