Worst year for rigs in quarter century closes with a whimper

By JOE CARROLL on 1/1/2016

HOUSTON (Bloomberg) -- Oil explorers shut down more rigs in U.S. fields to finish out the worst year for drilling cutbacks in almost three decades.

Rigs targeting crude in the U.S. fell by 2 to 536 in the past week, Baker Hughes Inc. said on its website Thursday. Natural gas rigs were unchanged at 162, bringing the total of working rigs to 698. Drillers searching for oil this year idled the largest proportion of their rig fleet since at least 1988.

In the 14 oil- and gas-rich regions tracked by Baker Hughes, rig counts declined or remained the same in all but two. Drillers in the Permian basin of west Texas and New Mexico added five rigs in the last week to boost the total to 217, according to the report. In the Haynesville shale, a source of gas in east Texas and Louisiana, one additional rig was put to work.

“I’m surprised the oil rigs were only down by two, given where prices have been going,” said James Williams, president of WTRG Economics in London, Arkansas. “Unless prices change for some unknown reason, we’re most likely going to continue to decline well into the spring.”

The continued downward slide in working rigs could crimp output from shale fields by at least 400,000 bopd, Andrew Cosgrove and William Foiles, analysts at Bloomberg Intelligence, said in a Dec. 28 report. Rigs designed to drill straight down into traditional fields have been hit harder than those capable of boring sideways through shale, Baker Hughes’ data showed.

Vertical Reductions

Vertical rigs are taking a bigger hit “as lower oil prices pressure development of legacy fields, mainly in Texas,” the analysts wrote. About 70% of the vertical rigs in the U.S. have been dismantled this year, compared with 59% of horizontal rigs, according to the report.

Two-thirds of oil rigs in the U.S. have been parked since drilling peaked in October 2014. Growing supplies of crude outpaced demand, deflating prices below $40/bbl and forcing severe spending cutbacks throughout the industry. U.S. crude dipped below $35—its lowest price in 11 1/2 years—earlier this month.

U.S. oil production rose to 9.2 MMbpd as of Dec. 25, rising from the year’s low of 9.1 MMbpd in October.

Nationwide, crude stockpiles rose by 2.63 MMbbl last week, swelling inventories almost 130 MMbbl above the five-year seasonal average. A 2.5-MMbbl decline had been projected in a Bloomberg survey of industry analysts. Supplies at Cushing, Oklahoma, the biggest U.S. oil storage hub, climbed to a record.

Demand for the costliest rigs—those searching in deep seas for crude—is at its lowest since a 2010 federal moratorium that shut most Gulf of Mexico exploration after the oil spill disaster at BP Plc’s Macondo well.

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