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Efficiencies Cause Oil Production to Increase With Fewer Rigs but Rig Counts Still Rise

Oil and gas companies use rig counts as a yardstick to measure outlook in the industry. An oilfield services company, Baker Hughes, provides the weekly rig counts. This count began in 1944, and it continues to be a valuable tool for analyzing trends and evaluating the activity of the industry. Exploration and development spending by oil companies are the basis for the report, and this spending is motivated by the prices of oil and natural gas and expectations for future prices. The number of rigs is indicative of the confidence that oil and gas producers may have about current drilling conditions. The counts are also used to determine activity levels of companies that provide oilfield services, since the number depends on the current and forecasted demand large oil producers provide for drilling, completion and other energy services.

Increased drilling efficiencies such as pad drilling, which involves drilling multiple wells on a single site, reduce the number of rigs necessary. This means that the forecast may indicate a leveling off in the number of rigs, or even fewer rigs, but with an actual increase in the number of wells and production rather than a decrease. Because of this factor, Baker Hughes now reports well counts, also, in order to give a more accurate picture of current production. As oil and gas producers gain more experience with extraction in the shale plays, they expect to continue to develop new technologies and increase efficiencies to drive costs down even further while increasing production.

 In spite of the expectation set earlier in the year for a decrease in rigs, the number of oil rigs has risen again, bringing it to the highest number in nearly 30 years. This is partially due to the cutbacks in the rigs drilling for natural gas, which is currently at a 19-year low. Another factor is the steady price of oil for most of the past year. That stability has supported more drilling and higher rig counts.

 At the worst point of the recession in 2009, oil rig counts were down to well below 200. The numbers came back relatively quickly because of two major trends. The first trend was the recovery of oil prices, which made raising money easier in capital markets. The second trend was that companies were discovering ways to make shale drilling profitable. The Bakken shale region in North Dakota and the Eagle Ford shale region in South Texas are two of the areas that have been major players in the rise of rig counts, where before drilling activity was minimal or nonexistent.

 In the summer of 2012, oil rig counts fell corresponding to a drop in the price of crude oil per barrel. During that time of volatility, the counts stayed low, but as prices recovered, the counts came back up. The forecasts for 2014 indicate that companies are feeling confident about the economic feasibility of the drilling in the major oil shale plays in the United States, including new exploration in the Utica and Marcellus Shale plays in Pennsylvania, West Virginia and Ohio. Based on the current outlook, rig counts are not expected to fall, and will probably hover around the current level or rise throughout 2014.

Joseph Barone

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