There’s not much money in new well drilling these days. In fact, the latest figures from the American Petroleum Institute (API) reveal a 70 percent annual decline in new natural gas well completions along with a staggering 90 percent drop in new oil wells as of the start of April.
The drop hardly comes as a surprise, especially in the light of the continual reduction in active drilling rigs across the U.S. as reported on a weekly basis by Baker Hughes. As of April 8, there were 354 active oil rigs—8 fewer than the week before, and 406 fewer than a year ago. The number of active gas rigs was 89, down from 225 on April 8, 2016.
Given the low oil and gas prices that have pushed many energy firms to the brink of bankruptcy, these developments were only to be expected, although they are certainly worrying with regard to the resilience of some players in the sector. Yet, gloomy as the news seems, its implications for the future are rather positive. Related: How The Oil Crisis Has Impacted Military Spending
Prices of crude oil and natural gas are at multi-year lows. Producers are not just shrinking production; they are also laying off staff in the thousands. Over the short-term, this will help them, or at least some of them, to survive. In the medium-term, however, production curbs and layoffs will benefit the energy industry in another way: it will make them temporarily less capable of responding to the growing demand for oil and gas. And demand will grow. Related: Crude Charging Higher Ahead Of Big Week
A report from Bernstein puts the mean growth rate for oil demand at 1.4 percent annually for the next five years, up from 1.1 percent for the last decade. The International Energy Agency expects average annual demand growth of 1.3 percent, much of which will come from non-OECD economies. Related: BP Shareholders Revolt Over CEO’s Salary
What about natural gas? Gas prices are at historic lows thanks to the oversupply and the sluggish global demand. For the U.S., at least this may very soon change because of the weather. In an article for Seeking Alpha, energy expert Robert Boslego explains the possibility of a perfect storm that would send gas prices sky high is very real: hurricanes and a superhot summer, followed by a much colder-than-last winter would have a significant effect on natural gas prices.
The best course of action for troubled E&Ps would be to outwait the downturn and resist the urge to start drilling as soon as prices inch up by a penny or two. Unfortunately, many of them are so deep in debt that they can’t afford to wait. Those who can have a very good chance of seeing oil return to three figures, exotic as this idea may seem today.
By Irina Slav for Oilprice.com
More Top Reads From Oilprice.com:
- Oil Up As Bullish Sentiment Returns To Markets
- Struggle For Libya’s Oil Wealth Reaches Climax
- How Realistic Is Saudi Arabia’s $2 Trillion Sovereign Wealth Fund?
Exploratory drilling accounts for a small part of the overall oil and gas drilling.
And almost all wells drilled in shale formations are developments wells.
So a 70% decline in exploratory gas wells completions and 90% in exploratory oil completions will have no impact on near-term oil and gas production volumes.