Middle East OPEC Oil Rig Count Jumps 14%

As if to rub salt in the wounds of the US shale industry, Middle East OPEC oil rig count has jumped by 19 rigs to 155 units in February 2015 setting a new rig count record for the region. Since 2005 the supergiant oil fields of the region developed symptoms of mortality and increased drilling has been required to combat natural production declines in order to maintain production at static levels. More on international and US rig counts below the fold.

Figure 1 Middle East OPEC oil rig count for Saudi Arabia, UAE, Kuwait and Qatar. Baker Hughes is not reporting data for Iran and activity in Iraq is affected by ongoing conflict. While the rest of the world is heading for the drilling exits these four Middle East countries are preparing to expand market share. All data from Baker Hughes.

Figure 2 The International oil rig count (excluding N America) has begun to fall and this will inevitably lead to declining oil production. The decline in drilling will in fact be more pronounced than shown here since in offshore areas like the North Sea, rigs are on long-term contracts and companies are currently “stacking” these rigs. A significant part of the drilling cost is men and materials and many companies operating offshore are simply choosing to not use rigs that they have paid for.

Figure 3 US oil rig count continues to plunge and total rigs will soon reach the level of the 2009 lows. Notably gas rig count has now joined in the plunge and one is left wondering where this will leave US plans for self-sufficiency in natural gas let alone plans to export LNG. US natural gas production was still rising in December 2014, according to the most recent data I could find.

The dead cat bounce in the oil price has succumbed to gravity with both Brent and WTI down 4% on Friday. WTI is back to $45, close to its low of $44.12 reached on January 9th. If that does not hold then the industry is in for a renewed bout of extreme anxiety and pain. In yesterday’s Blowout, Roger Andrews kicked off with a story from the IEA claiming that CO2 emissions did not rise in 2014. While the IEA want to claim victory in the war against CO2 I tend to wonder if this is not symptomatic of chronic weakness in the global economy that is implicated in the precipitous fall in the oil price.

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11 Responses to Middle East OPEC Oil Rig Count Jumps 14%

  1. Sam Taylor says:

    It’s been a while since I read twilight in the desert, but doesn’t increased infill drilling generally lead to a faster eventual decline of production from giant fields?

    I do recall reading a comment somewhere in which someone suggested that Saudi would have calculated that one benefit from the price crash they knew their November decision would make would be that they could take advantage of inevitably cheaper rig rates for more reworking and infilling. Whoever it was got the nail on the head.

    Oh, also, eia data for consumption was up over 1mbpd in February. Much more of that and we’ll see a price recovery sooner than some think

  2. Dave Rutledge says:

    Hi Euan,

    With respect to the CO2 emissions fall, it is presumably at least in part due to the reported 2.5% decline in Chinese coal production. This may be correct. However, there is another possibility. There is yet another campaign to shut small mines in China now. The usual response to these campaigns is that these mines stop reporting their production. People then try to sort out what the real production was years later.


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  4. Olav says:

    EIA is estimating US production and it seems they are way off… North Dakota reported a drop in producton in January of 34000 barrels as EIA estimated an increase of 27000. That is 64000 barrels wrong. Notrh Dakota is very good in reporting while the other US plays has a large revision period.Thats why EIA is estimating, it may be so that US production is at or very close to decline as the estimates may be wrong all over. A buldup of storage may have a reason. LTO does not give enough of the diesel component which is needed now as farmers is filling the tanks for spring work. We will see a price rebound soon. The world has now oil at half price and that effect is already comming. A 1% surplus can easily be a 1% shortage and then…

  5. manicbeancounter says:

    I have observed fluctuations in oil prices for well over three decades now. I still have a National Geographic Special on Oil from 1980 that predicted the then $40 a barrel price would shortly hit $80. It took over two decades to reach that price, in between going to below $20.
    Economics determines the volatility. To generate new sources of supply is currently hugely expensive, mostly in exploration and investment. The implication is that supply takes many years to respond to demand increases. But if demand falls the oil rigs are not switched off. Much of the overhead in the oil industry is made up of exploration costs and capital costs. The marginal costs of production are far less. It is only when the cost of oil falls below this for a period that production will be reduced – or when new investment is required. I remember passing the Moray Firth in 1996 on a visit to the North of Scotland. There were about 20 rigs laid up as the oil price was low. Petrol was 49.9p a litre in places, compared with a low of 105p in January.
    The other aspect – shown in the graph above – is how Middle East producers respond. The OPEC cartel no longer operates and did not operate in the late 1980s when prices also fell. In the Middle East production costs are very low, the rigs state-owned and the governments are dependent on oil revenues for most of their income. The revenue-maximizing response to a price fall is to expand output, even for Saudi Arabia or Russia who know that a few hundred thousand bpd change in output will have a material effect on output. An understanding of game theory helps. It might be rational to combine, but there are political aspects which mean that the requisite trust is not present.
    The Chinese aspect is worth considering for its marginal impact. In Blowout, it was reported that coal consumption had fallen. There are two minor aspects here that could decouple in the short-term coal consumption from energy usage and economic growth. First is that hydroelectric has expanded recently, so a wet period could dampen demand for coal. 🙂 Second is that China has been investing heavily in coal-to-liquids. Capacity might be only 160,000 bpd, but I believe it is only viable at $60 barrel equivalent. As this uses huge amounts of coal, a small drop in production could have a material impact.

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