Efficiency Gains Boost U.S. Oil & Gas Production and Cut Costs

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Efficiency gains are allowing oil and gas producers to increase production while lowering costs, enabling some to reduce their capital budgets. The increased production stemming from technology gains and improved operating practices is good news for producers and consumers. But suppliers of capital may experience decreased demand for their services, a downside of the industry's efficiency gains.

The U.S. Energy Information Administration (EIA) (Washington, D.C.) has documented production gains from newly drilled oil and gas wells in different formations across the U.S., compared with wells drilled previously in those formations. On a percentage basis, year-over-year production of crude oil from new wells is expected to rise most significantly in the Bakken and Niobrara shales. Smaller production gains are expected in the Eagle Ford and Permian plays, according to the EIA's most recent Drilling Productivity Report.

Click on the image at right to view estimated increases in crude oil production from new wells in August 2014, when compared with August 2013.

Natural gas production is similarly trending: The EIA Drilling Productivity Report predicts significantly higher production from new wells in the Marcellus and Haynesville shales, compared to production from new wells drilled there last August. Less-dramatic gains also are evident in the Niobrara, Eagle Ford and Bakken shales.

Click on the image at right to view estimated increases in natural gas production from new wells in August 2014 vs. August 2013.

The efficiency gains are evident when comparing new well production with rig counts in different formations. Since 2012, the number of rigs in the Marcellus has fallen about 37%, from 160 to 100, while production from newly drilled wells there rose by more than 80%, from about 3.6 million cubic feet per day (MMCF/d) to about 6.6 MMCF/d. The efficiency gains also are readily apparent in the Haynesville shale, where the rig count has dropped by 80% since 2010, while per-well production from new wells has soared by about 80%, from about 3 MMCF/d in 2010 to about 5.5 MMCF/d this year.

Click on the images at right to view gas production per new wells plotted against declining number of rigs in the Marcellus and Haynesville shales.

Turning to the Eagle Ford Shale, the EIA report shows rig count peaking two years ago, at about 525. It has since declined to about 500 rigs. But during the last two years, production from new wells has roughly doubled--to nearly 500 barrels per day (BBL/d) from about 250 BBL/d in 2012.

Click on the image at right to view crude-oil production per new well plotted against declining number of rigs in the Eagle Ford shale.

These efficiency gains have been evident for some time. In an earlier Drilling Productivity Report, the EIA noted: "The productivity of oil and natural gas wells is steadily increasing in many basins across the United States because of the increasing precision and efficiency of horizontal drilling and hydraulic fracturing in oil and natural gas extraction. ... The geology of each oil and natural gas resource play is diverse, and individual rig or well performance can vary dramatically. However, drilling activity in U.S. shale plays is now generally producing greater quantities of oil and/or natural gas than in the past."

The agency credits efficiency gains as helping boost U.S. oil and gas production. Efficiency gains come from operators gaining greater experience in the various plays, as well as modifying the ingredients of the hydraulic fracturing fluid to suit local geological conditions. Multi-pad drilling--the ability to drill multiple wells from the same drill pad--also has lowered costs and improved production. Whereas traditional, vertical wells required a separate pad for each well, horizontal drilling allows companies to drill several wells from a single location.

Click on the image at right for a depiction of how multi-pad horizontal drilling allows operators to tap more deposits of oil and gas than was possible with vertical drilling.

Consultant Wood Mackenzie (Midlothian, Scotland) recently said that drilling efficiencies like multi-pad drilling will lower average drilling costs in the Bakken Shale to about $7.5 million per well, reducing the break-even point for crude oil produced there to as low as $58 per barrel, down from about $70 per barrel. Operators are drilling as many as 16 wells from the same pad in the Bakken, Wood Mackenzie analyst Jonathan Garret said.

Drilling rigs are more mobile: today, operators can move fully assembled rigs from one location to the next. In the past, rigs had to be disassembled and reassembled as they moved from one site to the next. That's a lot of work saved, considering the average rig weighs about 40 tons. This video from Range Resources Corporation (NYSE:RRC) (Fort Worth, Texas) demonstrates how a mobile rig operates.

Producers are more tightly clustering their wells these days when compared with prior years. Smaller spacing between wells enables producers to extract more oil and gas from a smaller footprint.

In April 2010, EOG Resources Incorporated (NYSE:EOG) (Houston, Texas) drilled five wells per 640-acre section of land in the Eagle Ford Shale. That worked out to 130 acres of land for each well. But now, the company is drilling 16 wells on that same 640-acre section of land, working out to one well for each 40 acres of land. Closer spacing has driven up the net present value of each 640-acre section of its Eagle Ford land to $114 million, from $23 million four years ago, EOG officials recently told investors. For more on EOG's success in the Eagle Ford, see the July 28, 2014, article - EOG Resources' Fortunes Soar as Production Grows from Eagle Ford Shale.

Sanchez Energy Corporation (NYSE:SN) (Houston, Texas) has a similar story. Efficiency gains will allow the company to reduce its planned 2014 capital spending to the $600 million to $650 million range, from $650 million to $700 million. Sanchez Energy President and Chief Executive Officer Tony Sanchez III told the San Antonio Business Journal the spending cutback comes "after achieving and sustaining significant drilling and completion cost reductions as a result of continued operational improvements."

The move to multi-pad drilling has lowered its well completion costs by 10% when compared with traditional single-well, vertical drilling, company officials recently told investors. Sanchez Energy also is piloting 40-acre well spacing.

Despite the reduction in capital spending, earlier this year Sanchez predicted crude-oil production in the Eagle Ford would double this year, to between 21,000 barrels of oil equivalent per day (BOE/d) and 23,000 BOE/d. At that rate, the Houston-based independent will produce about 8 million BOE this year, up from 3.87 million BOE in 2013 and 469,000 BOE in 2012.

Following that prediction, Sanchez acquired Eagle Ford acreage and producing wells from a subsidiary of Royal Dutch Shell plc (NYSE:RDS.A) (The Hague, Netherlands) that are expected to more than double Sanchez's Eagle Ford production. The company now predicts production will reach between 45,000 and 49,000 BOE/d this year, and 53,000 to 58,000 BOE/d next year.

"Improved technology and greater field expertise with the different shale formations are allowing companies to produce more oil and gas at lower costs," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals. "That's good news for producers, consumers and investors. Efficiency gains are lowering a well's break-even point and extending the lives of oil and gas deposits. Energy self-sufficiency is getting a boost, too.

"Producers can spend more of their capital producing from existing wells rather than acquiring new acreage. That may lead to a reduction in demand for capital to acquire other companies' assets, as well as a reduction in the amount of capital spent extracting oil and gas from new wells. A recent study predicted global spending on oil and gas exploration & production would reach $712 billion this year. Absent the drilling efficiency gains we have seen, we believe the demand for capital would have been quite a bit higher."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.