Seeking Alpha
Macro, economy, Professor
Profile| Send Message| ()  

Baker-Hughes, one of the world's largest oilfield services companies, releases data every Friday on rig counts for the oil and gas industry in North America, with detailed breakdowns by active rigs per U.S. state, by the split between oil and gas rigs, by offshore vs. onshore rigs, and by rig drilling type (horizontal vs. vertical). Based on the rig count data released last Friday, here are some highlights, including a few new noteworthy milestones:

1. There were a total of 1,748 active rigs last week, 389 drilling primarily for natural gas (22.25% of the total) and 1,354 drilling primarily for crude oil (77.5% of the total, see chart below).

(click to enlarge)

2. Over the last four years, there has been a complete reversal in the rig share between oil and gas, as can be seen in the chart above. In 2008 and 2009, about 80% of the rigs were being used to drill for natural gas and 20% for crude oil. Now it's almost exactly the opposite -- 77.5% of the rigs last week were drilling for oil and only 22.25% were drilling for natural gas.

3. The share of rigs drilling for gas at 22.25% last week was the lowest in the history of Baker-Hughes rig count data back to 1987, and the number of gas rigs (389) was the lowest since June 1995 (see blue line in chart below). Over the last year, the number of rigs drilling for natural gas has declined by 41% from 658 at the end of March last year. Last week's rig count of 389 was less than half the number of rigs two years ago of 880, and less than 25% of the peak of more than the 1,606 rigs that were drilling for natural gas in August 2008, less than five years ago.

(click to enlarge)

The dramatic shift in rig share between oil and gas over the last four years, and the decline of the gas rig share to the lowest in history has come about for several reasons.

4. The recent advances in drilling technology unlocked previously inaccessible oceans of shale gas starting about 2008, and the abundance of domestic gas brought the price down by 85% between the summer of 2008 and the spring of 2012. During that same period, the price of oil doubled in 2009 from $37 to $75 per barrel. Since October 2010, oil hasn't been below $80 per barrel, and has been trading above $90 per barrel for all of 2013. The dramatic decline in gas prices and the rise of oil prices in recent years explain much of the increase in the share of oil rigs going from only 20% of the total in 2009 to a 77.5% share last week, as energy companies have targeted the higher valued oil for drilling.

5. At the same time that the number of active gas rigs has declined by more than 75%, the amount of natural gas produced has continued to increase. The chart below shows the significant increase in the amount of natural gas produced per active rig over the last five years. In the first part of 2008, there was an average of about 1.4 billion cubic feet of natural gas being produced monthly for each rig, and now about 6 billion cubic feet of gas is being produced monthly per rig. In less than five years, there has been more than a fourfold increase in the amount of gas per rig.

(click to enlarge)

As noted previously, a recent Forbes article was quoted that explained why we're getting more gas from fewer rigs -- because energy companies are "getting better over time at maximizing recoveries from each well" and those efficiency gains translate into the significant increases in gas output per active rig (as illustrated in the chart above). Increased gas output with fewer rigs also translates into lower production costs for domestic producers and helps to offset some of the loss of revenue from lower gas prices. The fact that we're able to continue to produce record amounts of natural gas with only 389 active rigs (which is 25% of the active rigs that were in use at the peak in 2008, and 1,217 fewer) is another part of the amazing energy story in America, which came about because of the breakthrough drilling technologies and the many "petropreneurs" who used those revolutionary techniques to rejuvenate U.S. oil and gas production.

Source: America Is Producing More Natural Gas Today Than In 2008