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Two rigs, four rigs, six rigs, a dollar, all for rig count projections, stand up and holler.
If you want to start a spirited conversation, ask peers to predict the rig count as the market recovers. Everyone agrees that the industry will not need 1,800 rigs, a level last seen in 2014 before commodity prices gave up the ghost. Several, perhaps a majority, will nominate a figure around 1,000 rigs. But some of the most aggressive forecasts now call for rig counts as low as 600 units.
Those low estimates are stunning and originate from operations personnel at successful E&P firms, who cite improvements in drilling efficiency and completion effectiveness. Right now, longer laterals and greater proppant loading translate into lower well costs when measured in dollars-per-foot and greater productivity when measured as initial production and estimated ultimate recovery.
The irony is that the industry is drilling fewer wells at lower cost and becoming more homogenous in well completions. Think of a standard recipe involving slickwater, plug and perf, closer stage spacing, longer laterals and greater proppant loading. Chesapeake’s second-quarter earnings comments on 30 million pounds of sand in a 10,000-foot Haynesville lateral may have generated surprise, but the volume was not far off an emerging trend that sees proppant loading rising from 1,200 to 1,500 pounds per lateral foot to 2,500 or 3,000 pounds per lateral foot in leading edge completions.
Discussion about productivity enhancements from homogeneity in drilling and completion suggests the industry has come full circle. For perspective, consider the view during the boom when operations personnel said the thing that made all tight formation plays the same was the fact that they were all different, with rock quality varying significantly not only between basins but within plays over short geographic distances.
That led to a multi-pronged development philosophy in which the industry focused on completion designs tailored to individual wells. The process grew more complicated as the industry incorporated evolving spacing patterns along the lateral, between laterals in a given formation and with nearby laterals accessing adjacent formations in stacked plays.
That’s why it is hard to let go of the idea that an industry in recovery may be more complex than what is suggested in a model built on a dwindling well pool where operators have high-graded to the best rock in a low price market. The fact is, excellent reservoir characteristics respond favorably to high-intensity completions. More sand creates greater near-wellbore complexity, particularly as operators steer the lateral through the reservoir’s sweet spot to generate high initial production numbers, which are turned into projections of rising estimated ultimate recoveries for the benefit of Wall Street.
In other words, as the pool of wells shrinks, the possibility of an overemphasis on a single solution expands, and this is evident in expectations of very low future rig counts.
Indeed, today’s enhanced completion techniques are encouraged in part by lower cost inputs in materials and services. Bulk commodity sand is 25% below the 2014 peak and back to 2010 levels. Will an operator continue using 30 million pounds of sand when the price rises, or will that operator preserve capital efficiency by testing what’s effective at lower thresholds?
Secondly, the oil services sector has aggressively discounted pricing. Ultimately, service pricing follows commodity price. One sign is emerging in the sand market, where operator interest in term contracts increased recently. Generally, operators eschew term contracts in a deflating price environment but are quick to act when sensing a tightening market.
Meanwhile, there is growing tension in pricing for services, particularly in well stimulation, as the service sector grapples with sustainability issues, even as operators aggressively seek to squeeze additional cost out of the system. In a rising market, something is going to give: count on it.
As for future rig count, it is still premature to generate a definitive number. If commodity prices rise, as many forecasts suggest, operators will expand their focus beyond a homogenized set of techniques that work for a small cohort of wells in the very best rock. This implies a future pool of wells that display greater diversity. As costs rise and economic thresholds expand, future discussions will evolve from the homogeneity of capital efficiency to the heterogeneity of capital effectiveness.
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