Rigs used in shale play are most active in slowdown

Fuel Fix:

Producers have begun dropping drilling rigs, and it’s vertical rigs they’re laying down first.

Of the total 85 rigs laid down since Nov. 7, oil service company’s Baker Hughes’ figures indicate that 51 — about 60 percent — were vertical rigs.

On Nov. 7, Baker Hughes reported a directional rig count of 203, a horizontal rig count of 1,362 and a vertical rig count of 360. Since then, Baker Hughes data shows the rig count falling across the board, but with the sharpest falloff in vertical rigs.

The count on Dec. 26, the most recent reporting period, puts directional rigs at 181, horizontal rigs at 1,350 and vertical rigs at 309. The numbers have declined by 22 directional rigs, 12 horizontal rigs and 51 vertical rigs. Directional rigs are capable of drilling at an angle and horizontal rigs are rigs that are capable of drilling at near 90 degree angles.

R.T. Dukes, of energy consulting group Wood Mackenzie, said that the fall off in vertical rigs was to be expected to come first for a variety of reasons, including the industry’s outlook on its most valuable plays as well as the greater relative production for horizontal wells.

“Most of these companies strategies are to drill horizontal wells in shale plays and they’re going to stick to that,” he said. “It’s not necessarily that economics are bad for vertical drilling, it’s that the reserve base is smaller and the production is smaller.”

If a company sees a shale play as its future, Dukes said, they’re more likely to quickly drop vertical drilling programs that are going on on the side and hang on to horizontal rigs.

In a Tuesday note to clients, investment bank Tudor Pickering Holt highlighted another reason: contracts for vertical rigs are often made on a well-to-well basis, meaning they can be dropped more quickly.
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This suggest that the shale wells are providing the most production  and are still cost effective.  It is the marginal vertical wells that are the first to go as the price drops.  If those in OPEC thought the drop in price would stop production of shale oil they were mistaken at this point.