oilprice.com | U.S. oil and gas rig counts dropped to their lowest level in over four years, falling by an additional 74 units for the week ending on January 16. The lower count provides fresh evidence that low oil prices are forcing drillers to pare back operations and slash spending.
While that may soon begin to cut into actual production figures, a new Wood Mackenzie report finds a lot of nuance in the oil patch, painting a complex picture of what to expect in 2015. The report identifies several trends beyond the simple narrative that low prices will force a cutback in drilling.
First, Wood Mackenzie estimates that at $40 per barrel, many producing wells could be shut in. In fact, about 1.5 million barrels per day of production would be “cash negative” – meaning it wouldn’t even make sense to continue pumping at the most marginal wells, which tend to have extremely low-output. These “stripper wells,” which only produce 15 barrels of oil per day or less, have high costs given their level of production.
Wells producing such a tiny flow of oil may seem like a non issue, but with hundreds of thousands of them dotting the country, they collectively account for about one-tenth of the nation’s production. As these wells become unprofitable, production should start declining.
Elsewhere, larger projects face a complicating set of factors that could slow drilling, but not as fast as some think. That’s because slowing activity is also pushing down the rental rates that drillers pay for rigs. With weak demand, drillers can negotiate down rig prices. This leads to lower costs, helping drillers stay in the game.
Another interesting twist occurring from lower oil prices is the fact that the economics of natural gas production have been relatively enhanced. To be sure, natural gas prices are also low, but over the last several years, the revenues generated from a barrel of oil were so much greater than the equivalent form of energy in natural gas. That pushed companies to focus on wet gas and oil.
For the equivalent amount of energy, natural gas priced at $3 per MMBtu is equal to about $17 to $20 per barrel of oil. That is still significantly lower than the $50 oil is trading for now, but the disparity is not nearly as severe as when oil was trading for $100.
