U.S. exploration and production companies drilled 9,056 wells in Q4. That is a lot of holes and very few of them were dry.
However, production only increased from 7.784 mbpd to 8.044 mbpd. That is an increase of only 260,000 bpd for the quarter. Since there are currently 351 active gas rigs and 1,416 active oil rigs we can assume that 25% of those wells drilled were gas wells and 75% were oil. Obviously some wells produce both but we are going to go with the averages.
That means 6,792 wells or 75% combined to increase production by 260,000 bpd or an average of 38.3 bpd each.
Before everyone starts screaming that is wrong I will admit that you can't use simple math to determine the average production rate of a new well. The average new well produced from several hundred to several thousand barrels per day.
However, that is not my point here. My point is that it took 6,792 wells to increase production by 260,000 bpd because of the rapid decline of all the other wells previously drilled.
In Q3 there were 9,075 new wells drilled and production increased from 7.267 mbpd to 7.784 mbpd or an increase of 517,000 bpd.
I am sure you noticed that production increased almost double in Q3 compared to Q4. There are multiple reasons for that. Completions are harder in Q4 because of the severe weather. The wells are drilled but fewer wells were completed and hooked up to a pipeline. This Q4 production will show up in Q1 as the weather improves and completions are accelerated.
Baker Hughes Well Count
Let's take this analogy one step further. Let's calculate it for the entire year and that will encompass all the various weather delays for all of 2013.
As of December 28th, 2012 production was 6.985 mbpd. As of December 31st, 2013 production was 8.044. Production increased 1.059 mbpd. I don't have the well counts for Q1 and Q2 and we know more wells are drilled in the summer months so let's use an average of 9,075 per quarter or 36,300 wells for all of 2013.
Using the same math of 75% of the wells are oil that gives us 27,225 oil wells in 2013. Guess what? That gives us almost the same 38.8 bpd increase for every new well.
That should give you some idea about the pace of decline in the previously drilled wells. If we have to drill 27,225 new wells to boost production by 1.059 mbpd we are running as hard as we can just to stay even.
Let's assume every new well only produces 367 bpd in real life. There will be some less than that and the majority more than that but I need a starting place for this discussion.
That calculation (27,225 * 367) gives us a total new production rate of 10,000,000 barrels per day.
Think about that for a minute. If we increase new production by 10.0 mbpd but the NET production gain is only 1.059 bpd then nearly 9.0 mbpd is being eaten up by decline rates in previously drilled wells. I know most readers are choking on that number.
The problem is that we can't assume that every new well will produce that 367 bpd for the entire year. If a well comes online on January 1st at 367 bpd it may be 300 bpd by April 1st, 250 bpd by July 1st, 200 bpd by Oct 1st and 150 bpd by year end. Remember, shale wells have a monster decline curve. I am reprinting the chart below based on the Eagle Ford.
The chart shows the anticipated peaking of production in 2015 with about 9,000 wells drilled. However, the number of wells drilled, red line, keeps climbing even though the production, green line, falls off sharply starting in 2016. More wells does not mean more oil. More wells simply slow the decline rate of the field.
To make my point above about having to drill progressively more and more wells just to stay even I am reprinting the decline chart for the Bakken. If a Bakken well comes online at 500 bpd on January 1st it will typically decline -69% (-345 bpd) by year end to produce roughly 150 bpd at the start of the second year. By the middle of the fifth year it will be barely producing.
I get a lot of kick back from readers on this topic. People see the factoid that the U.S. increased production by 1.059 mbpd in 2013 and we are on our way to energy independence and they don't have enough facts to know the truth. Using the numbers above in order to continue increasing oil production we would need to increase the number of wells drilled by a factor of about 10% per year.
We drilled more than 36,000 in 2013. That would need to grow to nearly 40,000 in 2014, 44,000 in 2015, 49,000 in 2016, etc. Obviously that is not going to happen. We are pretty well maxed out at 36,000 without a significant increase in the price of oil. Exploration companies are maxed out on their capex budgets and they are facing the same math as I just explained. Their prior wells are in decline and not producing as much cash as in prior years. This limits the number of new wells they can drill unless they start selling off assets to raise cash and that only works for a limited time.
The second part of this puzzle is the available well locations. Drilling 36,000 new wells a year will max out the available well locations several years from now. The prime spots will all be drilled out and the lesser quality locations don't produce enough oil up front to justify an $8 million dollar well.
Mark my words that the tone of conversation coming out of the energy sector five years from now will be entirely different. We have already seen a significant number of E&P companies report slowing production growth over the last two quarters. This trend will continue for those without prime leases in the various shale plays. The trend will be for smaller wells at a lower cost.
I know I have preached about this before but from the emails I get I know there is still very little understanding of the topic. Spread the word!
The markets rebounded for two days to close just under strong resistance and we are now at the point where investors will have to make a conscious decision to buy or sell rather than just cover shorts or continue being long from a trading bounce.
The markets were oversold. Now they are not. Resistance could be strong ahead of the Yellen testimony to the House Financial Committee on Tuesday. Economics are weakening.
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