A worker waits to connect a drill bit on Endeavor Energy Resources’ Big Dog Drilling Rig 22 in the Permian basin outside of Midland, Texas. The Permian Basin and New Mexico, the biggest US oil field, lost the most rigs this week, sliding by 28 to 502, Baker Hughes data shows.
Bloomberg/San Francisco
After six straight months of plunging oil prices, US shale drillers have sent the clearest signal to date that they’re retreating.
Thirty-five horizontal rigs, their weapon of choice for reaching oil deposits in tight-rock formations such as North Dakota’s Bakken shale and Texas’s Permian Basin, were idled last week alone. It was the biggest single-week drop since a drilling boom touched off six years ago that propelled domestic production to the highest level in three decades and eventually helped trigger the global price war that the US and Opec find themselves in today.
The decline, the largest in a decade and the seventh in a row, threatens to halt US oil production growth by slowing drilling in tight-oil plays that make up virtually all of the nation’s new output. Bending to the pressure of crude below $50 a barrel, the country’s explorers idled the most rigs last quarter since 2009.
“The message from the market, that drillers need to start changing their behaviour, has now been received by the big boys in the shale plays,” Harold York, vice president of integrated energy at consulting company Wood Mackenzie Ltd, said on Friday by telephone from New York. “The tight-oil players have received the message, and they’re taking action.”
Horizontal rigs made up more than half of this week’s decline in the US oil count, which fell by 61 to 1,421, Baker Hughes said on its website on Friday. The 61-rig drop was the largest since February 1991, which also followed a tumble in prices before the start of the Arabian Gulf War.
“Unless oil prices recover, absolutely, this is the end of the drilling boom,” James Williams, president of energy consulting company WTRG Economics in London, Arkansas, said by telephone on Friday. “The total rig count should hit 1,000 by March or April, and oil production growth should be flat or declining by mid-year.”
West Texas Intermediate for February delivery fell 43 cents to $48.36 a barrel on Friday on the New York Mercantile Exchange, down 47% in the past year and 55% from June. Brent, the international benchmark, dropped 85 cents to $50.11 on the London-based ICE Futures Europe Exchange.
While rigs are sliding, the US is still on track to yield the most oil this year in more than three decades. Production averaged 9.13mn bpd in the four weeks ended January 2 and will increase to 9.5mn this year, York said.
“You won’t start seeing a slowdown in growth until the second half of 2015, and it takes until 2016 before you really start seeing the effect,” he said.
The Permian Basin of Texas and New Mexico, the biggest US oil field, lost the most rigs this week, sliding by 28 to 502, Baker Hughes data show. The Williston Basin, home of North Dakota’s prolific Bakken shale formation, lost eight rigs, and Texas’s Eagle Ford play dropped by three to 197.
As oil drilling slowed, the number of rigs seeking natural gas gained by one to 329. Gas-directed rigs now make up 18.8% of the total count, the highest share since March.
At least three contract drillers, Helmerich & Payne, Pioneer Energy Services Corp and Ensign Energy Services, have had clients terminate rig contracts early. Ensign, based in Calgary, told California regulators last month that it was dismissing as many as 700 workers after an “early and unexpected termination” of drilling contracts.
Barclays said in a report on Friday that North America’s energy producers will cut capital spending by as much as 30% this year if oil remains near $50 a barrel. US production is at risk of falling at a price under $60, Evercore ISI analysts including James West in New York said in an outlook Jan. 6.
“Lower commodity prices put marginal barrels at risk, even superior risk-adjusted US shale oil,” West said.
The Organisation of Petroleum Exporting Countries, responsible for 40% of the world’s oil supply, has meanwhile resisted calls to cut output since deciding in November to maintain a collective target. UAE won’t curb production, no matter how low prices fall, Yousef al-Otaiba, the nation’s ambassador to the US, said at a Bloomberg Government lunch in Washington on Thursday.
“Saudi Arabia and their allies has been very clear about not giving up market share,” RT Dukes, an upstream analyst at Wood Mackenzie, said by telephone from Houston. “It’s making development in the US and other places sub-economic. There’s not much in the world that looks good at $50 oil.”
