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North Dakota oil rigs drop points to U.S. output decline after May: Kemp

John Kemp is a Reuters market analyst. The views expressed are his own.

London, Jan 26 – The decline in oil drilling that has occurred so far across the United States is probably enough to ensure U.S. production peaks by April or May, though that might not be evident until June or July given delays in publishing production records.

If the number of active rigs continues to decline in the next few weeks, which seems likely, it is reasonably likely U.S. oil production will be falling by June or July 2015.

In North Dakota, the number of rigs drilling for oil has fallen by almost a quarter in less than four months, according to oil field services company Baker Hughes.

Baker Hughes puts the number of active drilling rigs in the state at just 147 last week, down from 189 at the beginning of October, and the lowest number since December 2010.

Baker Hughes counts rigs as active only when they are actually drilling – from the time the rig breaks ground and the well is spudded to the time the rig reaches target depth.

The company excludes rigs in transit, moving in and rigging up, or engaged in non-drilling activities such as production testing.

North Dakota’s Department of Mineral Resources (DMR), which uses a slightly broader definition, puts the count higher at 157 but shows a similar decline over the last three months.

Related: Bakken oil producers need $55 to keep production steady: Kemp.

Moreover, of the 157 rigs included in the department’s active list, 27 are recorded working on projects that began in 2014; it remains unclear whether they will be deployed on new wells.

Many rigs are being stacked. DMR records shows at least four of the 157 active rigs are due to be stacked once their current well is completed rather move to another job.

Rigs are said to be “cold stacked” when they are released from contract or stopped and the crew is normally laid off. Warm stacking refers to taking a rig off the market temporarily, in the hope of obtaining a better rate in future, and basic operations and staffing are normally maintained (“And it begins – rig stacking” Dec 11, 2014).

Initially, some drillers appeared to believe that rigs could be warm stacked in the expectation of a quick rebound in prices and drilling activity. But as wellhead prices remain stuck below $50 per barrel, and in some cases below $40, more rigs are being cold stacked.

The DMR estimates a fleet of 140-160 active rigs is needed to maintain output and replace declining production from existing wells. Current rig counts suggest North Dakota’s oil production will soon stop growing. If rig counts decline much further, output will start to decline by the middle of the year.

The same story is playing out across the two other big shale plays, Eagle Ford and Permian Basin, both in Texas.

The total number of rigs drilling for oil in the Big Three shale plays dropped to 794 last week, down from 954 at the start of October, according to Baker Hughes.

The Big Three shale plays account for around 60 percent of all the oil-directed rigs operating across the United States, but more than 95 percent of all the increase in U.S. oil production since 2009.

So these are the plays which matter in terms of rebalancing the oil market, and there are signs the rebalancing is already well underway.

(Editing by William Hardy) Copyright (2015) Thomson Reuters. 

This article was from Reuters and was legally licensed through the NewsCred publisher network.

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