Shale Drilling Revival Seen Taking Hold as Oil Price Recovers

EghtesadOnline: The biggest reboot of U.S. oil and gas rigs in two years will gain traction as higher prices prompt producers to resume investment in the most profitable plays, according to a report by Platts RigData.

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01 October 2016

Demand for land rigs will rise 29 percent next year to 579, the S&P Global Platts unit said in a report released at the Benposium East conference in New York on Wednesday. Platts RigData forecasts average West Texas Intermediate crude prices to climb 23 percent to $52.18 a barrel in 2017. The Henry Hub natural gas benchmark is seen increasing 26 percent to $3.05 per million British thermal units.

Producers from EOG Resources Inc. to Pioneer Natural Resources Co. are putting rigs back to work and buying acreage in some of the higher-return plays as they gear up to resume growth after crude prices rebounded. Oil got a further boost on Wednesday when the Organization of Petroleum Exporting Countries agreed on the outline of a deal that will cut production for the first time in eight years. Futures jumped as much as 6.2 percent in New York, extending their rally from this year’s low to about 80 percent, reports Bloomberg.

"Correlation between rigs and prices is very strong historically," Trey Cowan, senior industry analyst at Platts RigData, said by phone. "The stars are aligning from the seasonal cycles, and the cycle is going to be dictated by recovering oil prices."

Rising Count

Drillers have put 107 oil and gas rigs back to work in the U.S. since the end of May, after idling almost 300 earlier this year and more than 1,100 in 2015, according to Baker Hughes weekly data. That’s the biggest revival since before the oil price crash started in mid-2014.

Oilfield service companies would be among the first to benefit from a steady increase in drilling. Sanjel Energy Services Inc., the closely-held Canadian oil services company formed from assets of bankrupt Sanjel Corp., sees an increase in activity in 2017 as producers consider boosting spending and put more rigs back to work.

"How much is yet to be seen,” said Chief Executive Officer Shane Hooker, in a phone interview Wednesday. Much will depend on the price of oil, with any increase above $50 a barrel seen as positive, he said. Activity ticked up when the price of oil rose briefly above $50 in June, he said.

WTI for November delivery climbed $2.38 to settle at $47.05 a barrel on the New York Mercantile Exchange on Wednesday, the highest close since Sept. 8.

Southwest Focus

Most of the new well activity in the first 18 months of the recovery will spread across the Southwest in Texas, Oklahoma, Louisiana and New Mexico, with a major focus on the Permian Basin, according to the Platts RigData report. However, well activity is expected to shift in the second 18-month period to regions with more gas, such as the Gulf Coast, South Texas and Appalachia.

"The focus is on purely the best well economics," Cowan said. "As oil and natural gas prices improve, you get normalization of industry."

Sanjel Energy Services is backed by ARC Financial Corp. and began operations at the end of May after taking over the well-cementing business of its bankrupt predecessor. Sanjel is operating in a “very difficult environment” that has seen service companies bear the brunt of lower drilling activity and cost cutting by oil companies, Hooker said.

While other service companies have had to slash their prices during the downturn to attract business, in the four months since it began operating, Sanjel has been able to keep the prices it charges customers steady, the chief executive said. For now, the company is “managing toward profitability.”