Continued US oil production during the price downturn has been fueled in part by gains in rig efficiency– producers have been able to do more with less. As the global oil supply and demand picture improves, the question becomes how US drilling activity and production will respond as the market comes back into balance. Three major basins make up nearly half of all lower 48 US oil production: the Eagle Ford, Williston, and Permian. Rig efficiency in these areas increased materially over the past few years and shows no signs of slowing. Today we will focus on historical rig efficiency these plays and what this might mean going forward.
One way to quantify rig efficiency in each area is to look at the total number of wells drilled divided by the number of active rigs per month. The figure below summarizes how rig efficiency has trended over time. Each basin has seen steady gains in efficiency since 2013, and they continue to improve at an impressive rate, increasing between 9% and 21% from 2Q15 to 2Q16.
While the general upward trend in rig efficiency is fairly consistent between each basin, there are clear differences, with the Eagle Ford at a higher efficiency of about 2.5 rigs/well/month, and the Permian lower at 1.5 rigs/well/month. This is because it takes less time to drill a well in the Eagle Ford than in the Permian, currently at 10 and 18 days, respectively.
As to why it takes much longer to drill a well in the Permian versus the Eagle Ford, comparing the average total depth and lateral length for a well drilled sheds some insight, as seen below. The average Eagle Ford well is shallower and has a shorter lateral length. The Williston has the longest average lateral lengths of the three basins, though still takes less time on average to drill than the Permian. This is due to the relative maturity of development in the basin; much of the Permian is still being proved out compared to the other two basins. While average lateral lengths have increased somewhat over the past three years across each basin, the rate to drill a given length has also increased.
Ultimately, increased drilling efficiency has been one knob for producers to turn to decrease drilling costs and improve cash flow in a low price environment. Looking at the average rig revenue per day as reported by several major drilling companies to estimate rig rates, the average rates appear to have increased by 5-9% over the past few years. The decrease in the time to drill a well has been large enough to offset this increase, as seen below. Note, the contract drilling costs are only a portion of total drilling costs, with other items including materials such as mud and chemicals, cementing, site preparation, etc.
As oil and gas service costs are poised to strengthen with increased drilling activity over the next few years, the question is how much more efficient producers can become, and whether these gains will be able to offset rising costs. For additional analysis on these key oil basins, see BTU Analytics’ Upstream Outlook.