That sharp pop you heard in January was the starter’s pistol as the oil and gas recovery accelerated out of the blocks.
Yes, the recovery has been brewing for some time. There were fits and starts during third-quarter 2016, depending on commodity price. But, once OPEC promised production cuts, E&Ps assembled new capital budgets and moved directly to the field in the Permian Basin, the Anadarko Basin, the Haynesville Shale and the Eagle Ford Shale.
Those tight formation plays experienced significant increases in horizontal rig count rolling into 2017. For example, Permian Basin rig count is up 96% vs. second-quarter 2016’s bottom, but 31% of that gain occurred in January. Similarly, Anadarko Basin rig count is up 66% from the bottom with 45% of that gain occurring in January.
The horizontal rig count has generally been flat in the Denver-Julesburg Basin, the Bakken and the Marcellus, where more activity was directed to a reduction in the backlog of drilled but uncompleted wells (DUCs) rather than adding new wells to inventory.
To date, the recovery has unfolded a little differently than expected. Early activity gains were primarily smaller E&Ps venturing forth early in the second half of 2016 followed by incremental rig gains across multiple programs as the year ended.
It appears that in first-quarter 2017, larger public operators are accelerating capital spending—and this boost is creating the first bottlenecks in service availability.
Anecdotes out of the field indicate that it is taking longer for completion crews at the well site, partly on the basis of longer laterals, larger proppant volumes and more stages, plus an early move to 24-hour work as E&Ps increase the percentage of batch completions.
Completion crews that had been working through a lateral in six days earlier in 2016 were taking nine days on average in the major tight formation plays as 2017 got underway. At the same time, E&Ps were addressing the DUC backlog while simultaneously completing newly drilled wells.
That convergence has kept crews tied up longer at the well site, meaning E&Ps are now faced with scheduling well stimulation services.
This has allowed well stimulation firms to boost pricing, initially on the pass through associated with greater sand volumes, but now on the basis of pushing pricing for the delivery of well stimulation services.
The permutations of a tightening market are evident in batch completions. For the most part, E&Ps had been completing a single well on a pad, then relegating the remaining uncompleted laterals to inventory during the downturn. Batch completions as a percentage of all completions comprised less than 45% of completions in 2016. In January 2017, batch completions jumped to 70% of wells in both the Bakken and Marcellus shales, according to interviews conducted via Hart Energy’s Heard in the Field survey program.
Batch completions, or zipper fracks, generate greater hydrocarbon recovery for operators but also allow service companies to improve margins through greater efficiencies in batch operations at the well site. The steep increase in batch completion marketshare suggests commodity pricing in the low-$50s range has surpassed the economic threshold to reduce the DUC backlog.
Meanwhile, E&Ps are kicking the tires on drilling rig availability. Bid inquiries are up in several regional markets, and actual rig employment broke strong out of the starter block in the Permian, Eagle Ford and Anadarko Basin as 2017 got underway.
Operators are looking for pad-optimal units capable of drilling extended laterals, which usually entails 7,500 psi fluid systems, an extra pump, greater top drive capacity and the mobility to move about freely at the well site.
Utilization for this class of rig, of which there are only a few dozen, is well above 80%. Contractors are moving quickly to upgrade rigs to meet these specs, which now draw a day rate premium compared to the standard 1,500 HP AC-VFD Tier I unit.
Other anecdotes of a strong start to 2017 can be found in comments that the pool of experienced labor is tightening, though it’s a mixed bag depending on region and service provider. Some service companies are reporting difficulty in hiring while others indicate they haven’t had much problem bringing back experienced personnel let go during the downturn.
Spring may be busting out all over in oil and gas.
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