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James Hamilton

James Hamilton

James is the Editor of Econbrowser – a popular economics blog that Analyses current economic conditions and policy.

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Rig Count Irrelevant As US Output Continues To Soar

Rig Count Irrelevant As US Output Continues To Soar

The EIA is now reporting that U.S. field production of crude oil averaged almost 8.7 million barrels a day in 2014. That’s up 1.2 mb/d from 2013, and is only 0.9 mb/d below the all-time U.S. peak in 1970.

Production of oil by means of fracturing shale and other tight formations is the main reason. The EIA drilling productivity report estimates that production from the Permian, Eagle Ford, Bakken, and Niobrara– the main tight oil producing areas– was 1 mb/d higher in 2014 compared to the previous year. I used that estimate to update my graph of U.S. production by source. The tight oil story is pretty dramatic.

USProductionBySource

U.S. field production of crude oil, by source, 1860-2014, in millions of barrels per day. Updated from Hamilton (2014) based on data reported in [1], [2].

And it seems to be continuing. The February drilling report estimates production from those 4 regions will be almost 0.3 mb/d higher this month than it was in December. That’s leading to record levels of U.S. inventories. Related: OPEC Boasts About Pain In U.S. Shale

USCrudeOilStocks

Source: EIA.

How much longer will production keep going up? Much of the new production can’t be profitable at current prices, and the number of drilling rigs operating in the tight oil areas has fallen 12% since September.

RigCount07to15

Combined oil rig count for Permian, Eagle Ford, Bakken, and Niobrara, January 2007 to January 2015. Data source: EIA. Related: Everyone Is Guessing When It Comes To Oil Prices

That presumably means less than a 12% reduction in production from new wells, for two reasons. First, it is the least promising new prospects that will be cut first. Second, there has been a learning curve improving productivity of new wells.

AvgOilProductionPerRig

Average oil production per rig (in barrels per day) across Permian, Eagle Ford, Bakken, and Niobrara, January 2007 to January 2015. Data source: EIA.

Working against these is the fact that production from existing wells continues to decline. But at the moment, it seems further adjustments on the part of drillers will be necessary in order to bring the supply of oil in balance with the demand.

By James Hamilton of http://econbrowser.com/ 

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  • len on March 10 2015 said:
    Unfortuately this article is already missing the mark....goto EIA website and seek tbe 3/9 production report. It is consistant with ND resource mgrs belief that in BAkken if rigs fall below 130 prod will fall as well as CLRs ceo who stated prod declines will begin to be seen by spring....sure enough even EIA thinks both EagleFord and Bakken will see seq declines in April while Permean a gain in oil. So how if oil prices dont recover one could predict flat prod ala EIA from here thru yr end is beyond me.....Depletion rates will only worsen from here.
  • Jim tom on March 11 2015 said:
    This article is so far off the mark is scary. If you want to know the chain of events, it's permits before rigs before completions before production. The drastic drop in permits is now being seen in rigs (the count shown above is 5 weeks stale. Currently 333 permian, 149 Eagleford, 108 Bakken, and 34 Niobrara) which will lead to fewer completions and then less production. Some companies are even putting completions on hold (I believe Anadarko announced over 100 wells that will be drilled but not completed). My guess is production declines beginning in Q2.

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