LONDON, Nov 17 (Reuters) – U.S. shale producers have added extra drilling rigs much more slowly than during the recoveries that followed the last two oil price slumps, limiting output and helping push local prices to their highest level for seven years.
But the number of active rigs and total production are likely to climb next year as the recovery matures and producers unwind some of the disinvestment measures they employed to cut costs in 2020/21.
The active oil rig count was just 454 last week, according to oilfield services firm Baker Hughes, down from 683 immediately before the arrival of the first wave of the pandemic in March 2020.
The rig count is roughly half what it was the last time prices were near the same level in 2018, a sign of the pressure shale firms are under from investors to conserve cash and from OPEC+ not to encroach on market share.
Since the low point in the drilling cycle in August 2020, U.S. producers have added an extra 282 rigs over 65 weeks (an average of 4.3 per week).
At the same point after the two previous slumps in 2014-2016 and 2008-2009, they had added 443 rigs (6.8 per week) and 486 rigs (7.5 per week).
U.S. oil production has recovered to an estimated 11.5 million barrels per day (bpd), from a post-pandemic low of 10.7 million, but still far below the pre-pandemic record of 13.0 million bpd.
However, in response to the slump, producers limited spending and conserved cash by completing previously drilled but uncompleted wells (DUCs) instead of drilling new ones.
Since August 2020, U.S. firms have drilled just under 7,000 new oil and gas wells but completed a total of almost 10,800 and put them into production.
As a result, the inventory of drilled but uncompleted wells has shrunk to just 5,100 from a peak of almost 8,900 in August 2020.
The number of DUCs is approaching multi-year lows. Like any form of inventory liquidation, this is ultimately unsustainable. U.S. producers will have to increase new drilling sharply or face a decline in output.
Oil production is a depleting business: producers must constantly invest by exploring and developing new sites, drilling new wells to offset output declines from older wells.
For every million barrels per day of current production, there are 41 rigs drilling replacement wells, up from just 17 in August 2020, but down from 52 immediately before the pandemic.
During the slump, producers boosted efficiency by retrenching to focus on only the most prolific regions, formations and well sites, employing only the most powerful and modern rigs.
A retrenchment strategy has inevitable limits. Past recoveries indicate producers will have to add extra rigs, including older and less powerful ones, as well as returning to some secondary regions, formations and sites.
Drilling rates are likely to increase next year as the shale sector reaches the end of the inventory liquidation cycle and is forced to boost investment to maintain output.
John Kemp is a Reuters market analyst. The views expressed are his own.