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The Biggest Red Herring In U.S. Shale
The Biggest Red Herring In U.S. Shale
Rig productivity and drilling efficiency are red herrings.
A red herring is something that takes attention away from a more important subject. Rig productivity and drilling efficiency distract from the truth that tight oil producers are losing money at low oil prices.
Pad drilling allows many wells to be drilled from the same location by a single rig.Rig productivity reflects the increased volume of oil and gas thus produced by each of a decreasing number of rigs. It does not account for the number of producing wells that continues to increase in all tight oil plays.
In other words, although the barrels produced per rig is increasing, the barrels per average producing well is decreasing (Figure 1).
Figure 1. Bakken oil production per rig vs. production per well.
Source: EIA, Drilling Info and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
Rig productivity is a potentially deceptive measurement because it does not consider cost and apparently it always increases. It gives a best of all possible worlds outcome that seems to defy the laws of physics. Drilling productivity gives the false impression that as the rig count approaches zero, production approaches infinity.
Barrels per rig is interesting but the cost to produce a barrel of oil is what matters.
Similarly, drilling efficiency measures the decrease in the number of days to drill a certain number of feet. This is also interesting but, unless we know how it affects the cost to produce a barrel of oil, it is not useful.
The data contained in 10-Q and 10-K SEC forms provides a continuing view of a company’s financial position during the year. This allows us to determine a company’s cost per barrel and its components that rig productivity and drilling efficiency do not provide.
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Drilling Efficiency To Keep Oil Prices Low
Drilling Efficiency To Keep Oil Prices Low
Economics 101 tells us that prices in a free market are set by the interaction of supply and demand. The world oil markets have gotten a graphic lesson in that truth over the last year, as the dramatic surge in US oil production has met stagnant demand. This, in turn, has pushed down spot prices by nearly half.
The recent uptick in oil prices, however, has buoyed hopes among market watchers that a strong oil price rally is in order. Unfortunately economics is working against these investors.
Related: $50 Billion Mega Project Could Change South America Forever
Gasoline demand is starting to rise as prices have reached multiyear lows. As it continues to rise, motorists around the world will begin to suck up extra all of that extra supply. That would normally lead to a strong rebound in prices.
But unlike the 2008 fall in oil prices, which was driven by a collapse in demand across the industry, the current price quandary is supply based. And the massive expansion in supply is overwhelming the newfound demand. That may make it more difficult for prices to bounce back.
Over the past few years exploration companies have unlocked extraordinary new unconventional resources like the Alberta oil sands and US shale, leading to a historic increase in supply. More impressive is the fact that even at today’s low prices, there is likely to be some small production increase in 2015.
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