The crisis that enveloped the oil industry last year can be measured in various ways, but in the US there might be no better single gauge than the tally of drilling rigs operating across the world’s largest producer.
The weekly data shows at a glance the level of confidence from hundreds of companies that sink shale wells from Texas to North Dakota. As the price of crude plunged amid the pandemic, those operators slashed spending and cut drilling crews.The result was a rig count that collapsed to levels not seen since the advent of the shale era 15 years ago, as crude demand and prices plunged.
While the data has rebounded since August last year, it still remains far below where it began the year. This year is not expected to be much better, with US oil prices widely expected to be stranded between US$40 and US$50 a barrel, forcing explorers to make hard choices about whether new drilling is worth it.
The number of rigs drilling for oil in the US closed out last year at 267, Baker Hughes Co data showed.It is the lowest end-of-year figure since 2005, when drilling and fracking breakthroughs perfected in natural gas regions like North Texas’ Barnett Shale were just beginning to be deployed in crude fields.
The slump reflects a huge readjustment for the US oil industry. Having ridden to a position of global preeminence on the back of the shale boom, the US re-emerged as a major exporter rivaling Saudi Arabia and Russia, but the pandemic hit hard and forced producers to make painful cost cuts.
Domestic output is ending the year steady, but is about 16 percent, or 2.1 million barrels a day, below its peak before the COVID-19 pandemic, a level where it is widely expected to stay absent a dramatic price spike.
In the meantime, OPEC has managed to regain its former position as the dominant player in the global market.On the ground in places like West Texas and North Dakota, the plunging rig count signifies a painful year for the US oil services sector, which does the drilling and fracking. Dozens of companies filed for bankruptcy last year, and tens of thousands of jobs were lost.
Industry giant Schlumberger abandoned frack work entirely in North America, a sign that activity in the US shale patch might never revisit previous highs.
Drilling activity is slowly recovering, partly because output from shale deposits declines more quickly than conventional wells. Simply maintaining production levels requires additional fracking.
Still, US oil executives remain wary of plowing significant sums into new exploration because of the supply glut that began weighing on prices early last year and only worsened as the pandemic paralyzed economies around the world.
“North American E&Ps are in a battle for investment relevance, not a battle for global market share,” Parsley Energy Inc chief executive officer Matt Gallagher told analysts in a conference call in August. “Allocating growth capital into a global market with artificially constrained supply is a trap our industry has fallen into time and time again.”
A week after Gallagher’s remarks, the nationwide rig tally dipped to a 15-year low of 172, and a short time later he agreed to sell Parsley to rival Pioneer Natural Resources Co for about US$5 billion in stock.
Since the August nadir, shale plays in Texas have shown the biggest rebounds. The Permian Basin in West Texas and New Mexico, North America’s most-prolific oil field, has seen 15 straight weeks of rising or steady drilling activity.
The rush has been spurred in part by drillers’ concerns that US president-elect Joe Biden might hinder fracking on federally owned land in the New Mexico section of the Permian.
Meanwhile, places such as the Bakken formation in North Dakota and the DJ-Niobrara in Colorado have been slower to recover because they are more costly and, thus, less profitable to drill.
After US explorers slashed spending almost in half last year, they are expected to raise outlays by a mere 5 percent this year, according to Evercore ISI.In other regions around the world, including Latin America and Europe, expenditures are forecast to grow more robustly, Evercore says.
In the US, much of that new spending is expected to finance fracking rather than new drilling as explorers such as Callon Petroleum Co chew into a large supply of pre-drilled wells that were never finished because of the price crash.
On Thursday, West Texas Intermediate futures were down 0.2 percent at US$48.52 per barrel, up 0.6 percent for the week, while Brent crude was up 0.3 percent at US$51.80 per barrel, rising 0.99 percent from a week earlier.