Baker Hughes rig count

[Mart Raamat + 3]

As everybody is well aware, the Baker Hughes rig count has really plummeted recently due to the corona crisis and currently is at 1/3 what it was a year ago. What puzzles me - a relative newcomer in the oil industry - is what this rig count figure really shows about current situation in US oil production. Common wisdom would suggest that the production should also decrease as the number of rigs go down. Of course, it cannot decrese as drastically as the number of rigs, but there must be some kind of correllation - but I fail to see the significant production loss accompaning the lower number of rigs.

If anybody could share some insight on the issue, it is much appreciated. Currently - for a newbie like me - it is difficult to understand what really the Baker Hughes data shows and tells about the current situation as well as longer term outlook for the US upstream sector. 

[Tom Kirkman + 8,860]

1 hour ago, Mart Raamat said:

Common wisdom would suggest that the production should also decrease as the number of rigs go down. Of course, it cannot decrese as drastically as the number of rigs, but there must be some kind of correllation - but I fail to see the significant production loss accompaning the lower number of rigs.

Drilling rigs are for drilling new wells, for future production.  Drilling rigs are for new, soon to become (but not yet) production.

As new wells are drilled less, eventually production will drop, as the decline rate for fracked wells is pretty darn steep.

 

[Douglas Buckland + 6,308]

Generally, in a conventional sense, Tom is absolutely correct.

For ‘shale oil’ it is a bit skewed as, due to the drastic production decline curves, within the first few years of an LTO wells life, you need to continuously drill to maintain any production plateau.

In a conventional drilling campaign, you hire a rig or three, drill your wells, release the rigs once the wells are completed and producing.

[Mart Raamat + 3]

Thank you for clarifying. The BH data shows that large majority of drilling rigs (338 out of a total of 374 rigs) were horizontal (as I understand - shale oil drilling?).

Do you then anticipate that US production will decrease in the future due to this current trend of lower rig count? 

[wrs + 893]

4 minutes ago, Mart Raamat said:

Thank you for clarifying. The BH data shows that large majority of drilling rigs (338 out of a total of 374 rigs) were horizontal (as I understand - shale oil drilling?).

Do you then anticipate that US production will decrease in the future due to this current trend of lower rig count? 

Yes, a lot.  The other thing that matters now with the horizontal drilling is frac spreads which complete wells.  Those have also dropped.  There are a lot of wells that get drilled but not completed so they are ready for a frac job but won't produce until they are fracked.  That is why the rig count isn't as correlated to production as it once was. 

The other problem with the data on production is that it lags by 60 days.  The stuff they put out each week is a WAG.  The monthly data from the actual state agencies that get the real production reports is only out 30 days after the month in which the production occurred.  So this rig count drop will show itself in the June production data but that won't be available until August.

[Douglas Buckland + 6,308]

1 hour ago, Mart Raamat said:

Thank you for clarifying. The BH data shows that large majority of drilling rigs (338 out of a total of 374 rigs) were horizontal (as I understand - shale oil drilling?).

Do you then anticipate that US production will decrease in the future due to this current trend of lower rig count? 

What is the difference in a rig drilling a vertical or a deviated well and one drilling a horizontal well? 
Answer: Absolutely nothing

A land rig/dirt rig is simply a machine to provide a hoisting capability, a rotating capability, and a pumping capability...in a nutshell. It is the tools which are run in the hole, powered by the rig, which dictate the well path.

[El Nikko + 2,145]

3 hours ago, Mart Raamat said:

Thank you for clarifying. The BH data shows that large majority of drilling rigs (338 out of a total of 374 rigs) were horizontal (as I understand - shale oil drilling?).

Do you then anticipate that US production will decrease in the future due to this current trend of lower rig count? 

A reduction in drilling activity (that's what the rig count shows) only affects future production as does a drop in completions (what you have to do before you can produce the oil). Some companies are actively shutting in or choking wells that are producing already and that is an immediate change in production levels.

We'll have to wait for the actual data but I did see an estimate of a 1.7 million barrel per day drop mentioned in one article and some have suggested that there could be as much as a 3 million barrels per day drop in production later in the year but we'll have to wait and see.

The 'shale' (and many other land) rigs can be stacked very quickly as they're land rigs but that also means they can be the first out of the gate and back to drilling if the financial conditions are right. It would take a few weeks at most to pick up a rig and crew and resume drilling wells that have already been planned. The downside to that is some companies might start drilling as soon as oil rises above the break even cost and potentially put downward pressure on prices.

 

[Blackbag99 + 20]

On 5/9/2020 at 7:42 AM, Mart Raamat said:

A

We won't see the full declines until 6 months after the rig count declines.

I would suggest that there are drilled and uncompleted to draw upon, which may extend that even further and slow the decline.

I doubt there will be any serious recovery in rigs in 2020.

[0R0 + 6,251]

The point is the storage stats. Which are not showing accumulation extending further. There was a large draw last week.

https://oilprice.com/Energy/Crude-Oil/Oil-Prices-Jump-On-Surprise-Crude-Inventory-Draw.html

 

It is backed up with a decline in VLCC rates

That would mean that consumption has grown more than expected and production reduced more than expected. For these things to happen, there had to be far more than a 1.7 Mob/d drop in production. It had to be something close to 4 mob/d in the US. And the implied cut in global production has to have been more than reported and was outside the OPEC+ agreements. Possibly this is Russian production halted due to clogged transport off their pipelines. Because known production numbers dropping do not ad up to the 20 or so mob/d implied by falling inventories and dropping tanker rates. Some of that production is terminally shut down and may take the better part of 2 years to resume.

Frackers that have hedged, are obliged to continue drilling in order to fill their contracts. As you can see on the Dec 2020 contract, prices remained above breakeven for the lowest cost operators for nearly all of the distressed pricing period. Thus drilling to fill forward production  obligations must continue. Technically, the chart is showing a sharp reversal and break out of the sharp short term downtrends. The structure of the reversal off the lows is a 3 impulses progression. That would indicate a longer term trend rather than a corrective one, which would show a 2 impulse structure

[0R0 + 6,251]

I should add that today we had the first bit of backwardation in US crude and gasoline. It is being led by RBOB at 4 months worth of backwardation of 8% from the Aug contract to Dec.

That is no indication of a continuing glut. But this is just one day. We shall see going forward.

The Moderna vaccine looks more like a candidate of promise. Watch out for a mass cancellations of lockups by even the most evil minded governors and Nazi health departments.