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The Paradox Of US Oil Production: More Drilling, But Fewer Rigs

Oil drillers in the United States suspended production at 29 rigs during the week ending Dec. 12, the highest number taken out of service in nearly two years, according to the oifield services company Baker Hughes Inc.

The number of oil rigs had reached a record high of 1,609 in mid-October, but last week dropped to 1,546, declining during six of the past nine weeks due to the near fifty percent drop in the price oil since mid-June, Baker Hughes reports.

“It’s starting,” Robert Mackenzie, oilfield services analyst at Iberia Capital Partners in New Orleans, told Bloomberg News. “We knew this day was going to come. It was only a matter of time before the rig count was going to respond. The holiday is upon us and oil prices are falling through the floor.”

Related: Looking At The Data Behind Low Oil Prices

Already Houston-based Oasis Petroleum Inc. reports a cut in 2015 capital expenditure, or “capex,” by fully 44 percent for exploration and production. And the much larger ConocoPhillips, also based in Houston, reports it will be cutting spending by about 20 percent in the United States.

The same is true for Murphy Oil Corp., based in El Dorado, Ark. “Our capex will be lower,” said Murphy CEO Roger Jenkins. “I think this idea of lowering capex 20-something percent is going to be pretty common in the industry.”

Some observers, however, say that despite these reactions, it may be too early to say for certain that oil companies will be retrenching en masse, especially since there are more than 100 more oil rigs in operation in the United States than there were a year ago, when 1,411 rigs were operating.

Baker Hughes’ report said that of the 29 oil rigs that were shut down, 21 were in the Permian Basin that spans Texas and New Mexico, the largest shale field in the United States. Drilling there, as with most shale fields, is more expensive. Shale oil extraction tends to become less profitable if the price of oil drops closer to $60, where it is hovering now.

Hit hardest were vertical rigs, which fell by 24 to 330, the fewest since 1999, Baker Hughes said. Vertical rigs are less efficient than horizontal rigs at extracting oil from shale, and as a result only one horizontal rig was taken off line last week.

Related: Oil Wars: Why OPEC Will Win

“[I]t certainly makes economic sense that if indeed this decline was a rapid response to the crude price drop, then [vertical rigs] are the ones that are going to come off,” Kyle Cooper at the consultancy IAF Advisors told Reuters.

Nevertheless, oil extraction in the United States is still very strong, according to the US Energy Information Administration (EIA). It reports that record production is expected in January 2015 from new wells in shale formations such as Eagle Ford in Texas and Bakken in North Dakota.

Overall, US oil output rose to 9.12 million barrels per day during the week that ended Dec. 5, the highest measured by the EIA since 1983. And the agency forecasts American production to rise to an average of 9.3 million barrels per day next year.

By Andy Tully of Oilprice.com

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