Oil Price Drop Not Affecting US Drilling

The drop in oil prices caused by a supply glut hasn't daunted US drillers.

Oil companies are still drilling in the United States at the highest rate in more than 30 years even as demand in China and Europe sags. In fact, the Houston-based oilfield-services giant Baker Hughes is reporting that the number of active US rigs saw a net increase of three to 1,575 the week ending Dec. 5.

This defies predictions that drilling, much less exploration, would decline because of OPEC's decision on Nov. 27 not to reduce its production limit of 30 million barrels of oil per day. The move was orchestrated by Saudi Arabia and other extremely wealthy Persian Gulf oil producers despite the pleas of poorer members such as Venezuela and Libya.

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The wealthier OPEC members are defending their market share and apparently challenging American shale oil producers, whose methods, including hydraulic fracturing and horizontal drilling, are more expensive than conventional extraction methods and unsustainable if prices drop too low.

It's too early to say whether this modest increase is a signal that US producers are fighting back against OPEC. Although the American rig count reached a record 1,609 in mid-October, the number has receded in five of the past eight weeks, according to the Baker Hughes report, issued on Dec. 5. Still the count is more than 200 rigs higher than in December 2013 when 1,397 rigs were drilling.

In the week ending Dec. 5, the oilfields with the most new rigs were the Granite Wash in Texas and Oklahoma, according to the Baker Hughes report. At the same time, some rigs were removed from the Cana Woodford field in Oklahoma, Eagle Ford in Texas and Williston, spanning areas of North Dakota and Montana.

Meanwhile, Baker Hughes reports that the number of vertical gas-drilling rigs remained static at 344, down by 11 from the same week in 2013. The number of these rigs had peaked at 1,606 in 2008. And the net number of horizontal rigs for both shale oil and gas dropped by three to 1,368 after peaking at 1,372 in mid-November.

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The question remains: How low can the price of shale oil drop before it becomes too expensive to extract? The conventional wisdom is that the threshold is $60 per barrel.

One consulting firm, Wood Mackenzie of Edinburgh, says American producers should be able to profit from exotic drilling techniques for the near term. It sets the threshold at $70 per barrel for West Texas Intermediate, the US benchmark, but adds that the low prices are "so far not a material threat to U.S. [shale] oil or the industries that surround it."

And perhaps the United States and OPEC aren't playing exactly the same game. That's the view of one analyst, Kash Kamal, of Sucden Financial Ltd. in London. "U.S. producers are more focused on preserving profitability, while the Saudis and Iraq are interested in preserving market share," he told Bloomberg News. "Until we see an increase in demand outlook, it will be hard to pin down prices."

By Andy Tully of Oilprice.com

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