While the OPEC+ group discussed historic output cuts last week, independent US oil and gas producers kept lowering their capex and activity for financial reasons as a response to lower oil prices. Last week we saw US horizontal oil drilling falling 20% from the mid-March peak, a record-fast decline for a three-week period. Activity has now shrunk by another 45 to 50 rigs, which brings the drop from the peak to 26% within four weeks. Such a low rig activity level is already substantially below the maintenance activity requirement for the US Land region with a six- to nine-month horizon. Regardless of ongoing output shut-ins, US Land has now lost its production growth momentum. A rebound in rig activity will be needed if oil prices recover for US Land to enter a renewed production growth phase in the future.
The rig activity declines continue at a rapid pace across all core parts of the Permian basin (Delaware New Mexico, Delaware Texas and Midland North), though the gassier Delaware Texas exhibits a somewhat steeper pace of decline over the recent four-week period. The horizontal rig count in Delaware Texas is already down by 25% from the peak, while rig activity has dropped 22% in Midland North and 20% in Delaware New Mexico. The latter region is the only sub-basin in the Permian with relatively flat rig activity year-on-year. While nearly all operators in the Permian are reducing rig activity now, the industry seems to be split in two as some producers are able to reduce rig count significantly (due to either early contract terminations, or successful timing of term expirations, or high exposure to spot agreements), while others choose a gradual decline profile guided by the timing of contract terminations. We therefore expect significant weekly rig declines in the Permian to continue for two to three weeks. After that, the pace of the decline will slow down, but we expect to see a strong lag effect with continuous modest rig declines in the Permian for at least four to five months.
Outside of the Permian, horizontal oil rig activity is declining in all major regions, though the pace of decline in Eagle Ford and SCOOP & STACK is higher than in Bakken and DJ so far. Horizontal rig activity in Eagle Ford is down by 30%–35% from the peak in mid-March, while SCOOP & STACK rigs are down by more than 50% from the previous low level of late February.
From a long-term perspective, the pace of the rig decline in this down cycle keeps beating historical records. The two-week decline pace reached almost 19% as of the last week, easily outperforming the previous two-week decline records of 14% and 11% achieved in 2015–2016. The horizontal oil rig count in the whole US Land is already down by 26% from the peak level on 13 March, 2020, four weeks ago. During the previous downturns of 2015–2016, it took three to six months to reach cumulative rig declines of the same magnitude. During the capital discipline environment of 2019 it took the whole year to see such a reduction in total rig activity.
Another way of looking at the scale of rig activity in US Land is the number of counties with active horizontal oil drilling (i.e. counties with a at least one rig drilling horizontal oil wells). In 2014, it peaked at about 130 counties and declined to about 60 counties by mid-2016. The recovery phase of 2017–2018 increased the spread of rig activity, but the count of active counties never returned to pre-2015 levels and peaked at about 90. As of now, almost every week we see some counties in Texas and other states losing their last rig activity and exiting from this count. The total number of active counties is already down to 57 – a level not seen even in 2016.
Texas hosts about 60% of the remaining horizontal oil rig activity in terms of number of rigs and active counties. During the last downturn, a combination of significant high-grading and overall acceleration of the learning curve in a low price environment resulted in significant drilling efficiency gains in the states. As a result, the number of drilled or spudded wells did not decline as quickly as the number of rigs in 2015–2016. It is likely that these trends will resurface again this time, but we need to be three to four months into the rig-decline phase before we can start seeing them. As of March–April, we see statewide horizontal drilling efficiency in Texas trending down from the peak levels achieved in December 2019–January 2020. This is driven both by an anomaly in the number of new drilling cycles in December–January and by an indicative continuation of rig declines throughout the second half of April and May. Many rigs finish their last drilling cycle before they get removed, which is why the number of spuds decline faster than the number of rigs in the first weeks of the downturn when the overall pace of decline is high.