The number of U.S. oil rigs has decreased by 18% since October last year when the number of platforms topped out, from 1,609 to 1,317.
Baker Hughes has said that in previous declines, the number of rigs has declined by between 40% and 60%, so there’s plenty of scope for yet more projects to be shut down – if oil prices stay where they are, this could be the tip of the iceberg.
With rig numbers in decline, common sentiment seems to be that production will fall, too A report last month from Reuters estimated that output will peak between April and May, before it starts to decline in the second half of the year.
Furthermore, the Energy Information Administration (EIA) said that at rates of between $58 and $75 a barrel, oil rigs numbers would fall reduce by a quarter between January and October 2015. This would put incredible pressure on US drillers and have an inevitable impact on production.
On the face of it, this would represent good news for OPEC, whose decision not to cut output is said to have been at least in-part motivated by making a number of U.S. shale plays uneconomical. But do fewer oil rigs really mean lower production? Studies suggest they don’t.
“Historical data on U.S. rig counts appear to have minimal relationship with U.S. crude oil production. A falling rig count during 2012 had no visible impact on production, which continued rising steadily,” a recent report by QNB said. Another example is the global recession in 2008 and 2009, when prices fell by 71% to $39 per barrel, yet, drilling and production continued to increase.
Surprisingly enough, crude started to decline after the oil price climbed back up to $57. Then, a significant number of projects were interrupted and rigs dropped by 62%, but the fall in output “was not nearly as dramatic,” the EIA says.
While the number of operational rigs is important to how much oil is taken out of the ground, there are other key factors in play that are just as important. These are: the efficiency of drilling, the rate of decline in production from existing wells and changes in the amount of time between the start of drilling and the completion of the well.
We also shouldn’t forget those thousands of active oil rigs, which are still drilling new wells, adding more oil to the existing output. The rig count will likely have to fall by the historical level of 40% to 60% to see a deep and meaningful decline in U.S. output.
