Oil prices have swooned since the summer as production continues to rise and demand remains soft. In response, analysts of all types are forecasting the decline of various oil producing regions because of high costs, not least of which is the unconventional drilling sector in the United States.
But arm-chair pundits are moving too quickly when they predict the fall of U.S. shale. American oil and gas producers have been through down times before. Prices are notoriously volatile, so price wings are to be expected.
More importantly, U.S. shale companies continue to see their costs decline as they learn more about the geology in which they operate and the technologies they deploy to tap new sources of crude. Nowhere is that more apparent than in the monthly drilling reports put out by the U.S. Energy Information Administration (EIA).
EIA data shows a steady and remarkably consistent improvement in drilling productivity. For example, a rig drilling for oil in the Eagle Ford basin produced 396 barrels per day from an average new well in October 2013. That figure jumped to 532 barrels per day in October of this year, an eye-popping 34% gain in drilling productivity per rig in just one year.
The Permian, which is now producing more oil than any other basin in the United States, saw an even higher jump, although starting from a lower base. One year ago in October, a rig produced just 79 barrels per day on average from a new well. That level surged by more than 50% in just 12 months, with the average new well now producing 172 barrels per day. More oil produced per rig allows companies to reduce costs, insulating them from a sudden drop in oil prices.
Oil production in the Permian is now over 1.7 million barrels per day, making it more productive than either the Eagle Ford or the Bakken. The rapid rise in production in the Permian largely comes from the Wolfcamp and Sprayberry formations. And these formations are just getting started, with oil rigs having flocked there in droves over the past year.
One company active in the Permian is Crude Energy, a small independent exploration company headquartered in Dallas, TX. Crude Energy participated in wells in the Permian before, and it has strong holdings particularly in areas where it can target the Wolfcamp.
In fact, Crude Energy just announced plans for its latest project –another well with a primary objective of targeting the Wolfcamp.
The project, the Blue Wolf #1, is expected to be drilled beginning on December 15. It is located in Permian Basin, TX, near some of the company’s other projects. It will target the Wolfcamp, but will also have secondary targets in the Cisco, Canyon, Cline, Strawn, Mississippian, Fusselman, Montoya, and Ellenburger formations.
“We expect to continue to build our production portfolio with our exciting new project, the Blue Wolf #1,” Crude Energy’s President Parker Hallam said in statement. “The Wolfcamp continues to impress, but with multiple pay zones along the way, the potential payback looks that much better.”
Crude Energy’s Parker Hallam is a big believer in technology and experience driving down the cost curve and opening up new resources for development. Innovative techniques and replicating drilling successes can extend the life of the drilling boom we are currently witnessing across the United States.
“I think it’s going to last for a long time to come,” Hallam told Business in Focus magazine during an interview, referring to period of expanding production. “The amount of oil that they are actually getting out of the formations with the new technologies – like fracking – only represents a small percentage of what is actually in place within that rock.”
One example of improving flow rates is a practice known as downspacing, in which drillers space wells closer together and drill multiple wells from the same rig. This reduces production costs on a per well basis, and more importantly, on a per barrel basis. Some of the big oil players in Texas are experimenting with this technique, such as ConocoPhillips (NYSE: COP), Continental Resources (NYSE: CLR), and Anadarko Petroleum (NYSE: APC), as Bloomberg reported.
Such innovations, unthinkable just a few years ago, have Crude Energy’s Parker Hallam thinking about the long-term. It also means that many exploration companies are not rushing to any conclusions about the current downturn in oil prices – the long game is the key.
ADVERTISEMENT
For now Crude Energy is shrewdly drilling vertical wells on its Permian holdings, which will allow the company to bring production online in the near-term, while also identifying the most promising acreage for horizontal drilling at some point in the future.
Drilling for its Blue Wolf #1 project is expected to take a little over a month, and should be completed by the end of January 2015.
By. James Burgess of Oilprice.com
Legal Disclaimer/Disclosure: Blackbird Energy is an Oilprice.com client. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. No information in this Report should be construed as individualized investment advice. A licensed financial advisor should be consulted prior to making any investment decision. We make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Oilprice.com only and are subject to change without notice. Oilprice.com assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.
