How are the U.S. oil drillers affected by the recent oil price drop?
Traders in energy have been keeping close watch over rig data to see indications of cutting back sharply on the number of rigs due to the slump in crude prices.
U.S. Oil Boom Will Live
According to Baker Hughes, the Houston-based oil field services firm, the boom in US oil production is not about to slow down despite the recent price of crude oil falling to as low as $63.72 per barrel in the first week of December, the lowest recorded price in 5 years. Driven by a combination of hydraulic fracturing and horizontal drilling which has tapped supplies from shale formations, U.S. domestic oil production climbed 6,000 barrels a day to 9.08 million barrels per day through November 28 – the fastest rate so far since January 1983, according to data released by the Energy Information Administration.
Hydrauling Fracturing And Horizontal Drilling
Hydraulic fracturing is the process of breaking rock formations to release gas by pumping millions of gallons of chemicals, water and sand underground. On the other hand, horizontal drilling, also known as directional drilling is the process used to extract energy from a source that runs horizontally such as shale rock layer. Directional drilling utilizes the following tools:
- Mud motors
- Specialized drill bits
- 3-dimensional measuring devices
- Bottom hole assembly configuration
More Oil Drilling Rigs Added
Energy-producing companies added more oil drilling rigs in the U.S. defying predictions of a drilling slowdown. Oil rigs have been added by drillers in Texas and Oklahoma (Granite Wash) but some rigs were removed from Eagle Ford in South Texas, Williston in Montana and North Dakota, and Cana Woodford in Oklahoma, according to Baker Hughes data. The country’s crude explorers ran the most rigs since mid-November boosting the rig count by three to 1,575 in the week of December 5. In mid-October, the number of rigs drilling oil was at a record high of 1,609. Natural gas drilling rigs remained unchanged at 344.
Oil Rigs Decline Caused By Global Surplus
The apparent decline in the number of U.S. oil rigs was in comparison from the mid-October peak (1,609). It was driven by a global surplus of crude products which dragged the prices down by over $45 per barrel. This over-supply of crude oil threatens to negatively impact the country’s unprecedented shale boom.
OPEC’s Refusal To Cut Back Production
This was further strained by OPEC’s (Organization of Petroleum Exporting Countries) latest decision not to cut back but to keep its production at its current output target which is at about 30 million barrels per day. OPEC which is responsible for about 40% of oil being supplied to the world resisted calls for production cuts to shrink the surplus in global markets. This OPEC decision has placed more strain on US oil producers in terms of profitability, as it has the highest drilling costs among the world’s oil producers.
Domestic Oil Production Steady
Even if there is a slight decrease in the number of U.S. oil rigs, domestic production has not shown any sluggish or slow down pattern. In fact oil continues to flow from new wells in shale formations of Bakken and Eagle Ford with projections to reach records this month based on data shown by the Energy Information Administration.
Still Profitable In Some Areas
Manuj Nikhanj, leading a team of analysts at the ITG Investment Research, Inc., said that explorers can still drill wells with good profits at $25 a barrel, in some areas of the three formations where 88% of shale output in the U.S. is attributed to the three formations, namely:
- The Bakken
- The Eagle Ford
- The Permian Basin
Drilling To Slow Down Eventually In 2015
But over the long-term, and looking at the bigger picture, however, Harold Hamm said that the drop in prices will eventually slow drilling activities. Hamm is the chairman and chief executive officer of Continental Resources, Inc., a U.S. driller. He explained that no driller will go to exploration areas to drill at a loss.
Another industry leader and expert, Fred Lawrence said that U.S. drillers are likely to take their foot off the gas and remove some rigs in 2015. Lawrence is the Independent Petroleum Association of America’s vice president. Hence, the market should expect a lesser number of oil rigs, particularly horizontal rigs in 2015. U.S. oil drillers will either remove all bolts and stainless steel Belleville washers in bolted joints to dismantle existing oil rig formations or stop adding or building new rigs.
Until the crude oil surplus in the market is saturated, and until OPEC gives in to clamor to cut oil production, the oil surplus is expected to peak around 2015’s second quarter.
Does this signal a bleak future for U.S. oil drillers?