Friday, February 10, 2012

U.S. Rig Count: -8 to 1,989

The weekly Baker Hughes rig count was down eight rigs to 1,989.  Oil rigs were up 18 to 1,263, gas rigs were down 25 to 720 and miscellaneous rigs were down one to six.  By type, horizontal rigs were down three to 1,171, vertical rigs were down three to 603 and directional rigs were down two to 215.

While it's nice to see gas rig counts drop, it's hard to get excited because there are so many more oil rigs out there, and they are usually producing gas too.  We basically have the same number of total rigs as we did in the peak of August 2008, but the percentage of gas rigs has dropped from 79% to 36%.  Buuuut over that same period gas production has increased.

The current rig count is 55 rigs higher than the recent low experienced in July 2009 and still seems to be heading down.  Good news, right?  But look what happened in 2009.  The gas rig count dropped by 941 from the then recent high of 1,606 in late August 2008.  That's a substantial drop of 59%.  After that rig count crash, the highest the gas rig total got was 992 in August 2010.  The drop from that "peak" to now is only 272 rigs, or 27%.

But look what's going on with the total rig count.  Back in 2009, the rig count plunged from 2,031 in August 2008 to 876 in June 2009, a drop of 1,155 rigs, or 57%.  Since gas rigs bottomed out in July 2009, the total rig count has jumped from 920 to 1,989, an increase of 1,069 rigs, or 117%.  Over that period, oil rigs have increased from 244 to 1,019, an increase of 317%.

While the gas rig count might be dropping, it's hard to produce less gas when the number of oil rigs has seen such growth and they are pumping out gas too.  While the total rig count seems to have plateaued for now at around 2,000, it is chiefly because the decline in gas rigs is approximately matching the increase in oil rigs, which shows no sign of plateauing yet (see black line below).

Of course, over that same period, we saw the explosion of horizontal rigs at the cost of vertical rigs (chart below).  Generally horizontal rigs are going to have a much higher production rate (at least initially), so that also throws off the numbers significantly.

It all paints a grim picture for natural gas supply dynamic and pricing backdrop in the near term.


Anonymous said...

Also in August 2008 most rigs were vertical rigs. Remember 20 acre spacing was the new fad in the Cotton Valley. Also one horizontal rig drills a well that produces as much gas as 5 vertical drilled wells. Finally completions and not drilling is what produces gas and I guess we still have a 3 month backlog of completions.

Robert Hutchinson said...

Thank you for the comment. I updated the post to add a chart showing the proliferation of horizontal rigs. It is yet another factor that makes the belief that simply reducing gas-targeted rigs will decrease gas production unlikely to significantly alter the supply/price dynamic.

The drilling rig count definitely is a lagging indicator for production. What is also telling is the inventory of drilled but uncompleted wells. It is worth watching that figure to see if it swells as prices stay low. Ultimately that is not a driving force to lower production, but it is a piece of the puzzle.

Bill Mendenhall said...

Robert, there is interesting discussion posted on the First Enercast Financial website about the impact of associated gas. It appears that the percentage of associated gas varies greatly from formation to formation. It seems to be as low as 3% is some areas and up to more than 50% is others. In some cases the associated gas drops off very quickly and in others it remains significant. And in some of the high percentage areas, the gas is stranded and will likely be flared. All this is to say that I think it's too early to predict the impact of the quickly dropping gas rig count. 720 is a really low number of rigs.

Anonymous said...

Mr Mendenhall makes a good point, we really dont know how much of an impact associated gas will make. Is there a way to look at the oil rigs per region, compare it with formation characteristics and come up with an assumption on just how much associated gas we could expect?

Robert Hutchinson said...

It is hard to know the amount of associated gas that will be produced. My understanding is that is tends to be front-loaded, so you will see more in a new drill, which is bad for the natural gas supply situation. Long-term, it's not as much of a problem.

My point is that when producers put down the rigs three years ago they didn't start spending the same big budgets on domestic oil. Different situation, obviously, but it's not an apples-oranges comparison to look at gas rig count and feel comfortable that positive steps are being taken to reduce supply and increase prices.

Rig reductions are a good first step, but I don't think you will see any progress towards a "supply fix" - albeit temporary - until you see production curtailments from the big players.