One question that we keep going back to is how efficient are the new wells being drilled? This question is critical to determining the profitability of a well and what price of oil will support increased drilling activity (the more a well producers, the marginal cost per barrel goes down and so does the price at which the barrel must sell for the oil company to make money).
It has largely shocked experts just how little production has been lost in the United States since the downturn began. During peak U.S. drilling, 1800 rigs were operating in the U.S. That number appears to have reached a low in May of 2016 and we appear to be slowly adding rigs back.
Yet, Compared to October 2014, May 2016 crude oil production was 2% lower, while natural gas production was flat. The divergence between trends in rig counts and oil and the trends of natural gas production on the other are attributable to increases in production per new well in key regions, driven in part by advances in siting and drilling technology. For instance, new-well oil production per rig so far in 2016 has been more than twice its 2013 level in areas such as the Bakken, Eagle Ford, and Permian. Growing offshore crude oil production in the Gulf of Mexico has also helped to offset declines in Lower 48 onshore production. These graphs tell the story:
Looked at another way:
Many commentators have spoken about how surprised they are that production has not dropped off more than it has despite the significantly decreased rig count. And looking at these graphs, it has not. Yet, I still predict that some of the traditional sharp decline of shale will come to fruition in the coming months. But looking at how much better oil recovery the industry can now obtain, I believe we will see a very interesting oil market in the years to come – shale oil will be cheaper and that will encourage more production, thereby holding down prices. The implications are also huge for offshore drilling and we will tackle that in a future article. But the big question is: does it make the eventual recovery more sustainable or less sustainable? Email me your thoughts!
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