9th January 2015
In October 2014, Gaffney, Cline & Associates (GCA) reviewed the economics of U.S. Shale oil development. Oil prices were then testing US$ 80/Bbl. In December 2014 GCA also looked at the economics of both unconventional development activity and Gulf of Mexico (GOM) activity as oil prices started testing US$ 60/Bbl noting that U.S. unconventional activity was likely to be the harder hit sector if prices continued to weaken into 2015. With oil prices plummeting further into the New Year, and using the Baker Hughes rig count, GCA is instituting a weekly watch on both onshore and GOM rig activity levels as oil prices and activity evolve.
The last days of 2014 saw the onshore oil rig count drop approximately 100 from a year high of 1,876 in mid-November 2014 to 1,782 by December 26, 2014. Based on figures released on 9th January, 2015 this count has now dropped below 1,700 for a total drop since November of 180 rigs, or about 10% off the 2014 high.
While there may be some seasonality in these figures, they also reflect the 50% drop in oil price that has taken place over the past few months, dramatically in the last month in particular.
If the trend seen in 2008-2009 following the financial crisis is any sort of benchmark for what is to follow, the continuing decline is likely to be very sharp indeed. The light gray lines on the chart show the trajectory that a decline in 2015 would follow, ranging from being the same downward trend seen in 2009 (the steepest decline), to 75% or 50% of that level of decline (the two other gray lines shown).
While the total GOM rig count has also been declining, that drop has been much more modest. Indeed, the oil-focused rig count has even increased since November although generally it is holding steady.
Looking more specifically at the key 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 has been even more marked than overall change, being 12%-14% off 2014 highs. Nevertheless, price hedging for many companies has allowed them to continue selling their produced oil at prices far above current WTI trading ranges, often in the US$ 80-90/Bbl range. However these price hedges will run out heading into Q2 of 2015, and additional activity declines are anticipated.
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