Due to the combined global effect of the Covid-19 pandemic and the ongoing oil price war, the American oil and gas industry is stepping heavily on the brake pedal and is reducing drilling at record speed, Rystad Energy research shows, putting the horizontal oil rig count on track to fall by about 65% from mid-March levels.
The rig count is widely considered to be one of the most important indicators of investment appetite by E&Ps. It not only represents the actual drilling activity in the market but is also a key metric of consumer confidence, closely related to price developments.
From a peak of about 620 rigs in mid-March 2020, the oil rig count is forecast to free-fall to a potential bottom of around 200, Rystad Energy estimates, interpreting updated guidance from exploration and production (E&P) companies. Most of the anticipated decline will come already by the end of April. The horizontal rig count has so far dropped to roughly 500, falling by 19% from the recent apogee just three weeks ago.
“The speed of this decline exceeds the initial post-oil-price-crash expectations. This is for sure a much faster industry reaction than during the previous US land rig down cycles, and we will likely see continuous downward adjustments of similar magnitude throughout the next couple of months,” says Rystad Energy’s Head of Shale Research Artem Abramov.
The horizontal oil rig count declined by almost 15% over the past two weeks. In the previous down cycles of early 2015 and early 2016, two-week declines peaked at 11% and 9%, respectively. Over a three-week period since peak activity level, horizontal oil drilling is down by 19%. In the down cycles of 2015 and 2016, it took 10 to 16 weeks after the peak to see the same magnitude of decline.
Rig counts also fell throughout all of 2019, though this should be attributed to a change in the industry business model rather than a real down cycle. That time, it took around nine months for the decline to reach 20% magnitude.
Rig count declines are now happening everywhere, with total SCOOP & STACK activity approaching 20 horizontal rigs, a level never seen in the modern unconventional era (since 2011). Almost 25% of rigs recently active in Eagle Ford are already gone, bringing Eagle Ford drilling to February 2017 levels. Bakken rig activity remains more robust in relative terms, but rig counts are also already down to the low 40s – a level last seen in May 2017.
Among major oil basins (excl. Permian), DJ Basin activity remains similar to the level of the last six months, but we anticipate some additional declines to materialize in the current quarter, potentially pushing the DJ horizontal rig count into the single digits.
Permian horizontal drilling is also declining in all core sub-basins; however, the rig activity in core oil-rich parts of the Permian (Delaware NM and Midland North) has not yet declined towards multi-year lows. Rig activity in these two sub-basins is still little changed since the start of the year. Meanwhile, rig activity in gassier sub-basins (Delaware TX and Midland South) is already down to a level last seen in early 2017.
“Rig activity in the US will inevitably extend its decline into the second quarter of 2020, regardless of how the global macro environment evolves in the short term. This downturn is the real test of US Land industry endurance,” concludes Abramov.