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More Oil, Fewer U.S. Rigs: Hey Saudis, Something to See Here

By Investing.com (Barani Krishnan)CommoditiesJun 07, 2023 09:08AM ET
www.investing.com/analysis/more-oil-fewer-us-rigs-hey-saudis-something-to-see-here-200638800
More Oil, Fewer U.S. Rigs: Hey Saudis, Something to See Here
By Investing.com (Barani Krishnan)   |  Jun 07, 2023 09:08AM ET
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  • U.S. drillers have the potential to double oil output from existing wells, thanks to new drilling efficiencies and innovations such as shale well refracturing
  • Higher drilling efficiency is driving U.S. oil production to new highs while the rig count has decreased, indicating the industry's ability to do more with fewer rigs
  • However, the current political climate poses a challenge to the widespread adoption of refracturing in the U.S. oil industry.

Amid all the anticipation on how many barrels Saudi Arabia will be cutting next month and beyond, a revelation about new drilling efficiencies in U.S. shale surfaced last week — and disappeared almost as quickly.

For those who heard or read ExxonMobil CEO Darren Woods’ comments at the Bernstein Strategic Decisions conference on Thursday, the bet about U.S. drillers having the potential to double output from just existing wells must have sounded as something borderline incredible or incredulous.

Since the fracking boom first caught the Saudis unawares nearly a decade ago with an oil glut they had not witnessed before, evolution in shale had produced wonder after wonder year after year — until the pandemic.

The epic demand destruction and bankruptcy filings in the industry that followed naturally slowed, if not killed, innovation as U.S. production was allowed to plummet from an all-time high of more than 13 million barrels daily to below 10 million at one point. American oil companies went from “Drill Baby, Drill!” to “Dividend Baby, Dividend!” as capex excesses gave way to extraordinary fiscal discipline in a determination to return cash to shareholders (and buy back shares, of course).

More than three years after the pandemic drove a barrel of the West Texas Intermediate crude benchmark to minus $40, the U.S. Energy Information Administration, or EIA, projects production will set new annual records averaging 12.4 million barrels daily in 2023 and 12.8 million in 2024. But that’s still short of the 13.1 million per day high seen in the first week of March 2020 when COVID-19 broke out.

Limiting any optimism of shale overreach are falling numbers for both oil rigs, which are an indicator of future production, and drilled-but-uncompleted wells, or DUCs — whose completion can bring oil faster to the market. Other deterrents are shortages in equipment and workers — two legacies of the pandemic — and fear somewhat of Saudi reprisal: In 2020, the kingdom maxed out production and drove prices to zero after Russia refused to cut output under the OPEC+ pact between them, hastening the demise of most U.S. drillers that might have had a chance of surviving the pandemic.

But if ExxonMobil’s Woods is right, then U.S. oil may be on the cusp of another revolution in production. And it has to do with drilling innovations, including one called shale well refracturing.

To hear energy engineer and researcher Alex Kimani put it, refracturing hasn’t gone mainstream but was quietly producing significant results.

“The technique is seeing higher adoption as drilling technology improves, aging oilfields erode output, and companies try to do more with less,” Kimani said in a post that ran on oilprice.com on Saturday, a day before the latest OPEC+ meeting where Saudi Arabia pledged to cut another million barrels per day in July, bringing its production down to 9 million daily.

Higher drilling efficiency is why U.S. oil production is again heading for annual highs while the rig count has dwindled to 555 from a post-pandemic high of 627 in November 2022 and DUCs fell to 4,863 in April from 4,905 in March.

ExxonMobil (NYSE:XOM) itself is working on two specific areas to improve fracking, CEO Woods says. The first is to “frack more precisely” along the well so that more oil-soaked rock gets drained. The second is to look for ways to keep the fracked cracks open longer so as to boost the flow of oil.

Adds Woods:

“There’s just a lot of oil being left in the ground. Fracking’s been around for a really long time, but the science of fracking is not well understood.”

Nick Dole, an erstwhile commentator on Investing.com’s oil discussion forums, said recently that US oil wells, especially horizontal ones, were being drilled three times deeper now thanks to evolution. He adds:

“When I was a drilling engineer, a well’s max lateral footage was typically about 5,000’, give or take. Now wells are almost all drilled with 10,000’ of wellbore lateral and many are pushing to 15,000’. So, you have effectively drilled 2 wells in a lot less time as the vertical section/rig moves etc time isn’t wasted. So, the ‘productive’ footage is the same with fewer rigs.

That is why U.S. companies are making so much money and can do well in a much lower prices [environment] than when shale well drilling/horizontal with large fracking [was] the normal way to do business. It is … efficiency gain per rig and … fewer are needed.”

Kimani notes that the shale boom was one of the most impressive growth stories ever, from its take-off in 2008 to the Permian stealing the mantle from Saudi Arabia’s Ghawar as the world’s highest producing oilfield in a little over a decade. He alludes to a Reuters estimate that “U.S. petroleum production is at least 10-11 million bpd higher than it would have been without horizontal drilling and hydraulic fracturing.’’

Refracturing particularly helps shale operators return to existing wells and apply a second, high-pressure blast to increase output for a fraction of the cost of finishing a new well.

It is an operation designed to restimulate a well after an initial period of production and can restore well productivity to near original or even higher rates of production as well as extend the productive life of a well.

Says Kimani:

“Refracking can be something of a booster shot for producers — a quick increase in output for a fraction of the cost of developing a new well.”

According to the Journal of Petroleum Technology, new research from the Eagle Ford shale patch in south Texas shows that refractured wells using liners are even capable of outperforming new wells despite the latter benefiting from more modern completion designs.

The Journal also estimates that North Dakota’s Bakken Shale straddles some 400 open-hole wells capable of generating an excess of $2 billion if refractured, based on estimates of just $60 per barrel.

Garrett Fowler, chief operating officer for ResFrac, said a refractured well can be up to 40% cheaper than a new well and double or triple oil flows from aging wells.

The most common refracturing method involves placing a steel liner inside the original well bore, then blasting holes through the steel casing to access the reservoir. The process typically uses half as much steel and frac sand than a new well.

Refracturing particularly would make sense in the current inflationary environment for oil. Back in April, Texas shale producer Callon Petroleum Company (NYSE:CPE) revealed that frac sand, drill pipe, and labor costs have increased drilling and well-completion service costs by about 20% year-on-year.

Callon Petroleum and Hess Corp (NYSE:HES), both of which drill in North Dakota's Bakken shale, have been forced to hike capital spending budgets over the costs with Callon adding $75 million to its original budget while Hess added $200 million to its spending.

Said Stephen Ingram, a regional vice president at hydraulic fracturing firm Halliburton Company (NYSE:HAL):

“Techniques like refracturing will allow the industry to continue to harvest the oil and gas out of these reservoirs.”

Another key benefit of refracturing is that it does not require additional state permits or new negotiations with landowners. It is also less disruptive to the environment because well sites already have road access.

Matt Johnson, CEO of energy consultancy Primary Vision Network, said in a recent article by Reuters:

“Considering inflation, supply chain issues, and rising wages, now is a great time for operators to start looking at wells for refrac opportunities.”

But for all the opportunities, Kimani notes that refracturing remains a fringe technology in U.S. drilling. Norwegian energy consultancy Rystad Energy estimates that out of all the U.S. horizontal well stimulations performed through September, out of the 8,900 total stimulations from January to September, only 200, or a little over 2%, were refractured wells. The vast majority were in the Permian Basin spanning Texas and New Mexico and involved wells drilled before 2018. Rystad also estimates that the count will rise to about 400 refractures by year’s end, or a little over 3% of total completions and comparable to last year’s final tally of 409 refractures.

Justin Mayorga, a senior analyst of shale research for Rystad, told the Journal of Petroleum Technology:

“It’s a very niche market. The companies that are doing it are probably going to continue to do it, but I don’t think refracs are going to explode in numbers next year. I see stable activity that is very similar to this year’s 2–3% of total completions,”

Many U.S. shale producers use refracturing to protect the outcomes on new child wells that share the same pad rather than to boost production from older wells. Despite that, in the Permian Basin alone, tens of thousands of wells are good candidates for refracturing, estimates Alfredo Sanchez, CEO of oil field equipment supplier MorphPackers.

I can cite two other reasons for the snail’s pace in refracturing growth.

The first has to do with money. This is just the sort of technology that if not handled carefully could return the industry to the “Drill Baby, Drill!” ways of the old and sink crude prices again. With shale companies enjoying record profits now, that’s the last thing they want. Also, the Saudis are watching the U.S. industry like hawks and the threat of reprisal from them is greater than ever.

The second is politics. The U.S. oil industry is virtually a sworn enemy of President Joe Biden due to the fossil-unfriendly policies in the early days of his administration. For many in the industry, going gangbusters with production would mean rewarding him politically in the current inflationary environment. That would be too much.

***

Disclaimer: The content of this article is purely to educate and inform and does not, in any way, represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.

More Oil, Fewer U.S. Rigs: Hey Saudis, Something to See Here
 

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More Oil, Fewer U.S. Rigs: Hey Saudis, Something to See Here

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Comments (15)
amjad ali
amjad ali Jun 07, 2023 7:59PM ET
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any idea about silver sir
Stan Flation
Stan Flation Jun 07, 2023 4:48PM ET
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Great! I Imagine that doubling production with new tech is in speed terms, not related with volumes! Greetings!
Barani Krishnan
Barani Krishnan Jun 07, 2023 4:48PM ET
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Both speed and volume, But take up is extremely slow. Read the last 3 paragraphs on why that's so.
Ac Tektrader
Ac Tektrader Jun 07, 2023 2:34PM ET
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the arabs are again underestimating American ingenuity... with the Saudi cuts it will allow the Americans to grow market share as they did in 2019-2020....as usual Saudis arrogance will be their undoing.
NK Dole
NK Dole Jun 07, 2023 2:20PM ET
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Mr. Barani, thanks for mentioning my comment.  I will  have to make sure and keep my grammar in order going forward lol.
Barani Krishnan
Barani Krishnan Jun 07, 2023 2:20PM ET
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Apols for any error on my part, chief, I tried capturing it as error-free as I could. And multi thanks for that great insight ... truly fabulous!
NK Dole
NK Dole Jun 07, 2023 2:20PM ET
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No apology necessary. I would just add that the US rig count doesn’t carry the weight it used to. A better metric would probably be weekly drilled footage or for shale perhaps horizontal footage drilled per week. With the rigs getting so efficient it would be interesting to see how that looks.
Barani Krishnan
Barani Krishnan Jun 07, 2023 2:20PM ET
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NK Dole  Great! Kindly point me in the search for that. EIA's drilling productivity report?
Syed Viquar Ahmed Quadri
Syed Viquar Ahmed Quadri Jun 07, 2023 11:31AM ET
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US will benefit from Saudi Production cuts. Globally OPEC+ will also follow Saudi, they may also cut production as they want to see Crude between $90 to $92 in July.  Their Revenue will remain the same with reduced production and reduced shorts. Shorters may get stuck here
Barani Krishnan
Barani Krishnan Jun 07, 2023 11:31AM ET
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This is certainly the time of the year to expect higher oil prices, which was why the so-called Saudi "put" (in terms of a deeper cut) is even more surprising. There's certainly more than a modicum of ego and at least a mild sense of greed here.
hacob findeisen
hacob findeisen Jun 07, 2023 10:31AM ET
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yb uouyf7f9bijoug kvff9y7k kbu ric ligiub jkhtof7tovjytit7v7 jlhfo7t7h nlvhytdirv jbljdt9f7bnmnlgouf7tf7tvu njbmnvofo7tft7vub vigdvunlgo8t87b bkyidcumnbjho87f97fubjngkhf7ofvubjlbyob kgyfi6rdbubnbjhoufth nghdi6dnm g8ybjnkgiytitubnmluogy jkckyiv jn nvkyitvnkiriryuhnlvgoy8b ,vyicc7yjkn kvouftvjn fkotvij blguyyh hulugcybhu jhvytv hjvkgvyybhjlgftiuj bkhgyii b gcyif njvkycivvh jkvgyiibnj ,jhjguh jmnkhgitv mciyftc bl jlbuvoyiuuifty kjhuyfytfty ljuyguy cyyi kgfygiybnj hkfyvoyu hkgfyb kviy kuoyu iliui kviyviy kjhvu ufu uk
John Catalano
John Catalano Jun 07, 2023 10:04AM ET
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A lot of hopium and Bearish wishful thinking in here. The July and August US draws will be something never seen before in history. Fantastic opportunity for bulls.
Barani Krishnan
Barani Krishnan Jun 07, 2023 10:04AM ET
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This is an innovation story; it outlines the possibilities for crude production with amazing economics, if there's adequate will in the industry to. You have to understand it first for what it is, instead of putting on your bull cap right away. Cheez!
John Bozanich
John Bozanich Jun 07, 2023 10:00AM ET
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article way too long. Eyes glazing over
Ge K
Ge K Jun 07, 2023 10:00AM ET
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Ditto
Barani Krishnan
Barani Krishnan Jun 07, 2023 10:00AM ET
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It is no longer than what a long WSJ read or Bloomberg magazine piece be on the same subject.
Barani Krishnan
Barani Krishnan Jun 07, 2023 10:00AM ET
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Ge K  Interesting that for someone who has SO MUCH to say all the time, a dismissive "ditto" is all you could come up with on this occasion -- particularly when the Exxon CEO himself feels more articulation is needed on the subject. Really amusing the bent you guys have.
Maurice 2
Maurice 2 Jun 07, 2023 10:00AM ET
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But No one ask you to Read it.
Robert Flores
Robert Flores Jun 07, 2023 9:36AM ET
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Wow! The oil indistry, us innovation, never fail to amaze me. Your journalistic prowess is impressive as well! Let me short every swing high and go buy me an AWD luxury full size SUV……lol
Barani Krishnan
Barani Krishnan Jun 07, 2023 9:36AM ET
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I wanna truck in that truck when you get it! LOL :)))
Rubbing Hands
Rubbing Hands Jun 07, 2023 8:54AM ET
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last year 75% of the oil added was from previously drilled wells. drilled and incomplete wells went from like 4000 to 1400. Don't be deceived thinking we can produce double with less rigs.
Barani Krishnan
Barani Krishnan Jun 07, 2023 8:54AM ET
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Had you understood the article in its entirety, you'd see that's exactly the point: There is SO MUCH more oil that can be excavated through the refracturing process compared to conventional methods or drilling new. And it's incredibly cost efficient (savings) and so much less an environment risk. What's preventing it from scaling is fear that mass adoption will again lead to the freewheeling production days of the yore. The deliberate intent of not helping this administration's energy needs sits on top of that.
 
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