Beating A Dead Horse -- June 15, 2019

Updates

Later, 9:09 p.m. Central Time: a reader provides an excellent reply to the original post -- I'll bring it up here for each browsing/search capability:

Rigs matter eventually. Even if they have gotten better. Even if there is some DUC to work off.

I calculate we need about 40 rigs to maintain production.

DUCs are fine, but they are inventory. If you use them up, it's like draining your savings account. If can float you for a while. But eventually, you need to be bringing in as much income as you spend. So, when you look at long term sustainability, I would just ignore DUCs.

Looking at EIA Drilling Productivity Report for Bakken, I calculate about 40 rigs needed to maintain production near current (1.4 MM bopd) level.

The way to do the calculation is explained by EIA and is pretty simple:

Rigs*(new oil/rig) + base decline = 0

Looking at the EIA charts:

https://www.eia.gov/petroleum/drilling/pdf/bakken.pdf

First panel (upper right) shows the new oil/rig is ~1400 bopd/month/rig. Next two panels directly below show the base decline is running about 67,000 bopd/month.

Doing the high school algebra and solving for rigs as the unknown:

rigs = 67,000/1400 = 47.8 rigs

Note, however, that when you lose rigs, you tend to pull the LESS capable rigs first (mechanically, crew experience, and more importantly rigs running in the less desirable areas like Divide, etc.). So there is always an effect of rigs getting more efficient as the numbers get lower.

It's like a class's average height getting larger, when you eliminate the shorter third of the students. You didn't actually make any students taller. But the average got higher because of cutting in a non-random manner.

So given all that, it would be something less than 48. I'm saying 40 as a guess, but it might be slightly higher or lower. Don't shoot me if it ends up being 45 or 35.

There is also another effect that takes place during downturns or plateaus. That is that the decline rate gets gentler as the percentage of new wells drops. (This happens during downturns or flat-turns, since less completions are done per month.) This has no immediate effect the first month of a big downturn, but over a year or two it can be substantial...it can lead to "less Red Queen" which means less rigs are needed just to fight shale decline. [The Rystad presentations on the video show this very nicely for the Permian...it's base decline went down from 2014 to 2016.] This also occurred in the Haynesville where 30 rigs were holding production flat (down from 200 at the peak, during growth).

Other effects that can happen over time include technology improvement (practice, efficiency, completion improvement, knowing where better land is), but they also fight depletion of the best rocks (look at EOG using up the Parshall). In any case, I think both of these effects are more long term and tend to offset each other.

Net/net: sure, dropping a rig or two is no big deal. But if we get into the 40s, we will be hurting for growth and in the 30s probably shrink. 

Original Post 

When rig counts drop in North Dakota later this year, that will be a headline story for some. But rig counts are irrelevant.

From Lynn Helms on the April, 2019, Director's Cut, see video here:

Natural gas capture:

• new all-time record
• oil production stayed flat; even so, natural gas production went up almost 1% 
• even more interesting, natural gas capture increased -- not so much as a percentage change as a raw number change
• due more to large temperature swings in North Dakota than any other factor --this is fairly unique -- not something seen in the rest of the world -- the wide seasonal changes that affect natural gas gathering seen in North Dakota (-40 degrees in the winter to +100 degrees in the summer)
• summer infrastructure season has not yet begun; that is not the reason for increase natural gas gathering

Producing wells:

• all-time high in number of producing wells; reduced the DUCs a little bit and reduce the inactive well count even more 
• inactive wells being put back on stream
• permitting: pretty much steady

Price of oil:

• price of oil in June: problematic; for March, April, and May, above forecast
• state revenue forecast: results above forecasts in March, April, and, May by as much as $8/bbl
• June: revenue only 15 cents/bbl above forecasts

Operators:

• Helms visited a dozen operators in Denver last month
• among the top 25 operators in North Dakota, half are located in Denver
• Helms spent about an hour with each one
• operators are very concerned about WTI price and over-supply
• but, despite that concern, will stay with about the same number of rigs/frack crews through 2020: 
• rigs: 20% improvement in drilling efficiency in last year; one operator will reduce number of rigs from five to four
• each rig: three wells per month (30 days/3 wells = 10 days from moving, rig set-up, drilling to depth, moving rig off site;
• 30% improvement in frack efficiency; that same operator will reduce frack crews from three to two

Rig counts -- beating a dead horse:

• The weekly change in the number of rigs in North Dakota is a relatively meaningless metric. Wouldn't it be great to maintain production of 1 million bopd with one rig vs 218 rigs? Wouldn't it be great to be able to put in pipeline more efficiently? More meaningful metrics:
• monthly production 
• price of oil
• takeaway capacity
• number of DUCs
• number of inactive wells