US oil and gas producers stir from hibernation

LONDON: US oil and gas drillers are reporting the biggest and most sustained upturn since oil prices began slumping in the middle of 2014. The number of rigs drilling across the country has risen by 149, or 40 percent, since hitting a cyclical low at the end of May, according to oilfield services company Baker Hughes. The active rig count has risen in 18 of the last 21 weeks confirming that a sustained upturn in drilling is occurring. Most of the extra rigs are targeting oil-rich formations (127) rather than gas-bearing formations (21) though most wells will produce a mix of hydrocarbons.

Oil prices started rising earlier than natural gas prices which likely explains why so many additional rigs have been deployed in oil-rich areas. The number of oil-directed rigs has been rising since the end of May while the number of gas rigs has been rising consistently only since the end of August.

SOUTHWEST

More than two-thirds of the extra rigs have been deployed in the neighbouring southwest states of Texas (80), New Mexico (+16) and Oklahoma (+14). Within those states most of the additional rigs have been deployed in the Permian (90) and Anadarko (11) basins of western Texas, eastern New Mexico and western Oklahoma.

The Permian and Anadarko offer nearideal conditions for low-cost and low-risk oil and gas production despite the continuing slump in other regions. These are some of the oldest, largest and best understood hydrocarbon basins in the United States with production stretching back to the 1920s (“Trek of the oil finders”, Owen, 1975).

Hundreds of thousands of wells have been drilled in the region: there are few places on the planet where the subsurface geology has been better explored and understood.

The sedimentary basins are many kilometres deep and there are multiple thick oil and gas bearing formations stacked on top of one another which can be exploited simultaneously.

The region is dominated by oil and gas production, with a friendly regulatory framework, an established liquids and gas gathering network and a large eco-system of exploration and production, drilling and oilfield services firms. The resurgence of drilling in the Permian and Anadarko basins therefore represents the application of new shale techniques (horizontal drilling and hydraulic fracturing) to some very old and conventional hydrocarbon areas.

WORST OVER?

The reactivation of drilling rigs has not been entirely confined to the southwest. There have been smaller but notable rig additions in Pennsylvania (9) Alaska (5), Colorado (4) and Ohio (3).

Increased drilling is probably enough to stabilize and start raising oil and gas production reversing the previous downtrend. Nationwide crude oil production declined by only 20,000 barrels per day in July compared with June, according to the US Energy Information Administration.

The monthly decline was the smallest for a year and the second-smallest since oil production peaked back in April 2015. With the number of oil drilling rigs up by 69 since the end of July, it is very likely US oil production has started increasing again.

The resumption of gas drilling is still in its early stages but the number of rigs has risen by 27 or 33 percent in the last two months. The resumption of North American shale drilling presents a difficult challenge for Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries. Shale producers have proved that they can just about survive with oil prices around $50 per barrel, at least in the short term.

Sustained prices much above $60 per barrel would likely produce a significant increase in US oil output and complicate efforts to rebalance the oil market as well as cut into OPEC’s market share. In the short term, therefore, $50-60 may prove to be an effective ceiling on oil prices, based on the reaction function of the shale drillers. —Reuters