US Oil Rig Count Jumps To 815

U.S. energy companies added oil rigs for a second week in a row, following through on plans to spend more on drilling this year with crude prices at three-year highs, Baker Hughes, a GE company (NYSE: BHGE) said April 13.

Drillers added seven oil rigs in the week to April 13, bringing the total to 815, the highest since March 2015, BHGE said in its weekly report. More than half the total oil rigs are in the Permian Basin in West Texas and eastern New Mexico. Active units there increased by one this week to 445, the most since January 2015.

The U.S. government expects oil output in the Permian to rise to a record high near 3.2 million barrels per day (MMbbl/d) in April, about 30% of total U.S. oil production. The U.S. rig count, an early indicator of future output, is much higher than a year ago when 683 rigs were active. Energy companies have steadily hiked spending since mid-2016 as crude prices have recovered from a two-year slump.

U.S. crude futures traded at about $67 per barrel this week, their highest since December 2014. Looking ahead, crude futures were trading around $66 for the balance of 2018 and $61 for calendar 2019. In anticipation of higher prices, U.S. financial services firm Cowen & Co. said 58 of the roughly 65 E&P companies it tracks have already indicated an 11% increase this year in planned capital spending. Cowen said E&Ps that have reported capital plans for 2018 expected to spend a total of $80.5 billion in 2018, up from an estimated $72.4 billion in 2017.

Analysts at Simmons & Co., energy specialists at U.S. investment bank Piper Jaffray, this week forecast the total oil and natural gas rig count would average 1,013 in 2018 and 1,129 in 2019, the same as last week. So far this year, the total number of oil and natural gas rigs active in the U.S. has averaged 972, up sharply from an average of 876 rigs in 2017 and 509 in 2016, and not far from the total of 978 in 2015. Most rigs produce both oil and gas.

The U.S. Energy Information Administration this month projected average annual U.S. production will rise to a record high 10.7 MMbbl/d in 2018 and 11.4 MMbbl/d in 2019 from 9.3 MMbbl/d in 2017.       
The current all-time U.S. annual output peak was in 1970 at 9.6 MMbbl/d, according to federal energy data.

The Permian Basin Keeps On Giving

Last week the U.S. Geological Survey (USGS) announced the largest estimate of continuous oil that it has ever assessed. The area assessed is in the Permian Basin, a region that has been producing oil continuously for nearly 100 years.
The Permian Basin lies underneath western Texas and southeastern New Mexico. The geology of the Permian Basin is rich and complex, both horizontally and vertically. The Permian Basin has commercial accumulations of oil and gas in stacked layers, at depths ranging from 1,000 feet to more than 25,000 feet. The greater Permian is made up of several subsidiary basins, the largest of which are the Midland and the Delaware.
The new USGS assessment is of the Wolfcamp shale in the Midland Basin portion of Texas’ Permian Basin. The new USGS survey estimates that there are 20 billion barrels of undiscovered, technically recoverable oil in the Wolfcamp alone. Quoting from the USGS news release:

“The fact that this is the largest assessment of continuous oil we have ever done just goes to show that, even in areas that have produced billions of barrels of oil, there is still the potential to find billions more,” said Walter Guidroz, program coordinator for the USGS Energy Resources Program. “Changes in technology and industry practices can have significant effects on what resources are technically recoverable, and that’s why we continue to perform resource assessments throughout the United States and the world.”
It is important to understand what this assessment actually means. This oil has been assessed as an “undiscovered resource.” This scientific assessment means the forecasters have a certain degree of confidence that the oil is there. For this particular assessment, the 50% confidence level is that there are at least 20 billion barrels there. The study further estimates that there is a 95% chance that there are at least 11 billion barrels there, and a 5% chance that there are at least 31 billion barrels there.
However, the fact that the assessment refers to the “resource” means that they are estimating the technically recoverable oil in place. This says nothing of the economics of recovering this oil. The amount that would be economically worthwhile to recover at prevailing commodity prices — which would be classified as “proved reserves” — will be a smaller subset of the assessed amount. It would even be zero at a sufficiently low oil price. This is merely an attempt by the USGS to estimate the amount of oil that could be extracted over time if cost was not an object.
But given the history of the Permian Basin, it’s a pretty safe bet that there is still a lot of oil still left to produce there. The Permian Basin began producing oil in 1921. The Texas side of the Permian has already produced nearly 30 billion barrels of crude, as well as 75 trillion cubic feet (Tcf) of natural gas. Permian crude oil production has more than doubled since 2010 largely as a result of hydraulic fracturing in six low-permeability formations: Spraberry, Wolfcamp, Bone Spring, Glorieta, Yeso and Delaware.
According to the Energy Information Administration’s (EIA) most recent Permian Region Drilling Productivity Report, the Permian is presently producing 2 million barrels per day (bpd) of oil and 7.3 billion cubic feet per day (Bcf/d) of natural gas. This accounts for more than 23% of current U.S. crude oil production, and exceeds the combined oil output of the Bakken and the Eagle Ford:
Source: Energy Information Administration.

I have heard some dismiss this assessment as much ado about nothing, and I have heard some characterize it as a new oil discovery. It it neither. This new USGS assessment is merely an attempt to put some framework around how much oil may exist in one of the multiple producing formations within the Permian.

Permian Basin, Gulf to lead U.S. to ’18 production record

U.S. daily crude oil production in 2018 may shatter a record established nearly a half-century ago, the Energy Information Administration has suggested.
The average production will be 9.9 million barrels per day next year, the federal agency revealed this week, up from 9.3 million barrels this year and more than the 9.6 million barrels produced in 1970, the landmark year.
Leading the U.S. production charge will be Permian Basin operations in western Texas and southeastern New Mexico and operations in the Gulf of Mexico.

The EIA said production in the Permian will increase to about 2.9 million barrels per day in 2018 as average production ramps up 515,000 barrels per day from June 2017 to the end of 2018. That 2.9 million barrels represents almost 30 percent of expected U.S. production next year.

Specifically, the EIA said lower costs of production have enabled Permian producers to make a profit even with oil prices lingering in the $50-a-barrel range and falling into the mid-$40 range in recent weeks. Baker Hughes’ rig count says there are 366 onshore rigs in the Permian alone; there are 915 onshore rigs in all in the lower 48 U.S. states.
Eight projects came online in the Gulf in 2016; another seven may come online in 2018. That will help Gulf production increase from 1.7 million barrels a day this year to 1.9 million barrels per day next year.
Lower costs made the difference

More: Gulf oil lease sales reflect better market
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Some West Texas producers are producing oil at a cost of about $39, it has been reported.
“In addition to responding to changes in (West Texas Intermediate) price, increases in right counts are related to cash flow,” the EIA said Wednesday. “In the Permian, operators have been able to maintain positive cash flow because of lower costs, higher productivity, and increased hedging activity by producers, many of whom have sold future production at prices higher than $50 per barrel.”
The Organization of Petroleum Exporting Countries launched a price war principally aimed at U.S. shale producers at Thanksgiving 2014. At that time, OPEC nations led by Saudi Arabia vowed to increase their drilling to drive down prices and force U.S. producers out of the global market, experts suggested. Instead, some U.S. producers have become more efficient at producing at lower prices. 
Eric Smith, associate director of the Tulane Energy Institute, told The Daily Advertiser earlier this month that independent U.S. producers have been finding it easier to borrow money of late.
“When they borrow, they drill and drill and drill,” he said.