Drilling for Dollars

Jim Brown
 
Printer Friendly Version

With crude prices comfortably over $50 and active rig counts surging higher, where are those rigs going?

Just because you have some drilling locations in inventory it does not mean you are going to rush out and start drilling with oil at $50. The object of the game is to make a profit. Everyone seems drawn to the Permian for its low cost of production. The Permian covers part of West Texas and Southeastern New Mexico. Within the Permian are other smaller formations with the most recognizable the Midland Basin and the Delaware Basin.

To complicate things even more, inside those various geographic areas are horizontal areas with different types and rates of production. Those various layers are like a giant layer cake with each layer a different flavor. Producers can choose the layer they want and drill down vertically until they reach it then drill horizontally inside that layer for long distances.

The names of some of these layers are Wolfcamp, Bone Spring, Upper Spraberry, Lower Spraberry, Dean, Pennsylvanian, Clear Fork, Upper Leonard, etc. Each layer has its own geologic traits and production challenges.


This graphic shows the general trend being reached by each well. This slide is several years old but the concept is the same. Each colored dot is a well and the color indicates which layer they are drilling.


The Spraberry and Wolfcamp are three of the least expensive formations to drill. The average total cost per barrel including taxes is roughly $32. This is down considerably from the work Art Berman did in early 2016. His take on the Permian at the time was a $61.25 breakeven price for production.

Since then the cost of drilling and fracking has come down and the infrastructure has been improved significantly. The graphic below is based on data from Emerge Energy Services, a major frac sand provider. They are using this data to determine which formations they want to target because of the cost effectiveness.

You can clearly see that with oil prices volatile in the $50 range, exploration companies are not going to be throwing a lot of money at any area that costs more than $40 to produce. The risk is too high. Instead, they will be concentrating on the areas closer to $30 to give themselves a profit cushion.


Another factor to consider is the large number of drilled but uncompleted wells (DUC). Producers were forced to drill wells to hold the leases but they did not frack them and turn on production because oil prices were too low. At the end of December, the EIA said there were 5,379 DUC wells in seven shale areas. There is a time limit on how long a drilled well may be left uncompleted before it has to be abandoned. That means producers are being forced to complete these wells and that is where the rigs are going. The Permian has the most uncompleted wells because producers were drilling the cheapest cost wells first. That is followed by the Eagle Ford at an average of $39 per barrel.


The large number of uncompleted wells suggests U.S. production could rise rapidly. It is much simpler to complete an already drilled well than drill a new well from scratch. This has become the low hanging fruit for the producers but until oil prices rise another $5 to $10 the activity level will remain subdued.


The weekly OilSlick Newsletter is a publication of OptionInvestor.com. Please visit OilSlick.com to sign up for the free email newsletter that comes out weekly.

This is a publication of the Option Investor Newsletter. Learn how to profit with options on stocks and indexes. If you would like daily market commentary and option recommendations you can sign up for a free trial and have the daily plays and commentary delivered to your inbox. No credit card or phone number necessary.

Free Trial Now

  Active Rigs

Active drilling rigs rose +12 to 741 for the week ended on Friday 2/10. Oil rigs rose +8 for the week to 591. Active gas rigs rose +4 to 149. Active rigs peaked at a high of 1,931 in September 2014. Active offshore rigs were declined -1 to 21 after peaking at 61 in 2014.


Oil Inventories Week Ended 2/7/17

Crude inventories rose +13.8 million barrels to 508.6 million. This was a week that normally sees gains. The prior four weeks added 16 million barrels. The historic high at 543.4 million was on April 29th.

Refinery utilization declined from 88.2% to 87.7% as refiners begin to enter the spring maintenance cycle and shift to summer fuel blends starting in March.

U.S. production rose +60,000 bpd to 8.98 mbpd. That is a decline of 632,000 bpd from the peak in 2015 of 9.61 mbpd.

Cushing inventories fell +1.2 million barrels to 65.3 million.

Gasoline inventories declined -900,000 barrels to 256.2 million and should continue to decline over the coming weeks as refineries shutdown for spring maintenace.

Distillate inventories were flat at 170.7 million barrels and a multi-month high.

Details in the graphic are for the prior week. All numbers are not available until the Friday of the following week. In the graphic below, green represents a recent high and yellow a recent low.


The weekly OilSlick Newsletter is a publication of OptionInvestor.com. Please visit OilSlick.com to sign up for the free email newsletter that comes out weekly.

This is a publication of the Option Investor Newsletter. Learn how to profit with options on stocks and indexes. If you would like daily market commentary and option recommendations you can sign up for a free trial and have the daily plays and commentary delivered to your inbox. No credit card or phone number necessary.

Free Trial Now

Archives:200920102011201220132014201520162017