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"The Rig Count Decline Is Not Sufficient To Slow US Production" Goldman Warns

Tyler Durden's picture




 

While so much has been made of the considerable decline in US rig counts as the driver behind the recent price bounce in oil, Goldman Sachs' Damien Courvalin pours cold water all over that narrative as he explains that the rig count decline is still not sufficient, in our view, to achieve the slowdown in US production growth required to balance the oil market. Worse yet, he concludes, with the producer hedging that has occurred over the past weeks and the recent wave of equity issuance, the risk that the US production slowdown will be delayed is high, meaning oil prices will need to remain lower in the coming quarters in order for the announced capex guidance and rig reduction to materialize into sufficiently lower production growth.

 

Via Goldman Sachs,

Current rig count implies US production growth of 600 kb/d yoy by 4Q15

US rig count continues to decline The decline in the US oil rig count continued last week with 84 rigs down, comprising 52 horizontal rigs, 18 vertical rigs and 14 directional rigs. Like the prior week, the Permian basin oil posted another significant decline in horizontal rigs, with large cuts in the counties with the highest well productivity. While the momentum in the US rig count cuts suggests that the US rebalancing is on track, recent comments by E&Ps suggest that these indiscriminant rig cuts reflect an initial focus on cost cutting rather than asset optimization (high grading), providing limited information on the future path of the rig count.

Expanding our analysis to the Niobrara

We expand our analysis to include the horizontal rigs of the Niobrara oil play . This allows us to capture 83% of US production growth, vs. 76% with the three big shale plays previously (Permian, Bakken and Eagle Ford). This larger universe further captures 70% of US horizontal oil rigs.

Current US rig count implies US 4Q15 production up 600 kb/d yoy

Applying the methodology that we introduced last week, the current US horizontal rig count implies that US oil production growth from these four major shale plays will reach 600 kb/d yoy by 4Q15, under our assumption of continued trend growth productivity gains at the well and rig level.

Rig Counts’ Snapshot

Bottom-up Approach: Mapping US production back to the county level

In order to quantify the impact of the oil rig count decline, we decompose oil production from the four shale plays considered (Permian, Eagle Ford, Bakken and Niobrara) at the county level, separating the contribution of well and rig performance. We identify for each of the 99 counties (47 in Permian, 15 in Eagle Ford and 18 in Bakken, 19 in Niobrara) the recent rig productivity (wells drilled per rig per month) and well productivity (well production per month) and use the February 13 county level rig count to estimate production from these oil plays. This bottom-up approach matches the EIA’s measure of production relatively well for the Big 3 and Niobrara shale plays. Our county sample still captures 85% of the production growth of these four plays, and ultimately 83% of the US Lower 48 oil production growth in 2014 (Exhibits 5 & 6). We therefore find this bottom-up production breakdown of these four shale plays as a useful barometer to future US production growth.

Caveats: While our analysis does not include vertical rigs, its low count and the corresponding low productivity wells leave us comfortable in leaving them aside for now. We also do not take into account the backlog of uncompleted wells for now, with this likely to have a significantly larger impact and would bring US oil production growth above our estimates.

 

Which leaves 2 scenarios - one static well and rig productivity and one trend well and productivity growth... both slowing down the decline in production growth

 


 

*  *  *

The Bottom Line - It's Still not enough

The rig count decline is still not sufficient, in our view, to achieve the slowdown in US production growth required to balance the oil market. The flexibility in cutting non-contracted rigs and associated cost deflation along with the producer hedging that has occurred over the past weeks and the recent wave of equity issuance raise the risk that the US production slowdown will be delayed. As a result, we reiterate our view that oil prices need to remain lower in the coming quarters in order for the announced capex guidance and rig reduction to materialize into sufficiently lower production growth.

 

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Mon, 02/16/2015 - 14:53 | 5790645 JustObserving
JustObserving's picture

Fuck Goldman - they must be short oil in massive quantities.

Libya may halt pumping oil as violence intensifies

February 16, 2015 

 

Libya’s National Oil Corporation (NOC) says it could suspend production at all its oilfields if the government fails to curb the rising number of attacks by militants.

http://rt.com/business/232779-libya-oil-crisis-violence/

Mon, 02/16/2015 - 14:58 | 5790669 greyghost
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that's provided the  national oil company is in control of any assets and not local tribes/rebels/militants.

Mon, 02/16/2015 - 15:19 | 5790750 kliguy38
kliguy38's picture

NAHHHHHHHHHHH!!!........SURELY NOT. This is shocking news from GS. Better do the opposite and go long Euro....They'll make the bag drop to the Greeks.

Mon, 02/16/2015 - 17:01 | 5791230 sun tzu
sun tzu's picture

Any tribes in control will also sell the oil. What else will they do, drink it?

Mon, 02/16/2015 - 17:04 | 5791249 Sudden Debt
Sudden Debt's picture

The rig count is down sufficiently to justify a 75 dollar oilprice. So whoever is short is going to get fucked bigtime.

And GS will be fine, they’ll find enouh morons in time to sell their short positions to.

Mon, 02/16/2015 - 17:42 | 5791491 Carpenter1
Carpenter1's picture

First bounce since $100 and suddenly everyone is calling it a bottom. And they think they're contrarians too, what a laugh.

Look at the chart, textbook dead cat bounce.

Mon, 02/16/2015 - 18:04 | 5791560 Burls
Burls's picture

Just because GS is saying this doesn't automatically mean it is false, folks.

Even a stopped clock is right twice a day.

The problem is ... IT'S OLD NEWS!

David Stockman, Wolf Richter, and others have been saying the same thing for weeks, if not months.

Finally, psychopathic GS jumps on the bandwagon.

BIG DEAL!

Mon, 02/16/2015 - 14:55 | 5790658 greyghost
greyghost's picture

no shit goldman! rig counts falling don't mean shit as to current production, only future new production. price of oil going lower with each new build in inventories. still waiting to jump into oil dividend stocks.....some have already cut dividends more to follow in the next leg down. watch out below...muppets beware

Mon, 02/16/2015 - 18:54 | 5791752 NidStyles
NidStyles's picture

Some people really do not understand time delays in economies. Correction, MOST people do not understand time delays in economies.

Mon, 02/16/2015 - 14:58 | 5790668 firstdivision
firstdivision's picture

All I read was "buy your short wti positions from us".

Mon, 02/16/2015 - 15:24 | 5790768 El Vaquero
El Vaquero's picture

Then, after they've driven the price up and made a profit and everybody decides that the bottom has been found, they'll drive the price back down and the muppits will get screwed both coming and going.  It's the Goldman way.

Mon, 02/16/2015 - 14:59 | 5790673 zeropain
zeropain's picture

wonder if they will tax oil imports if it gets bad.  at least then we may stop getting our soldiers killed in Saudi's fights.

Mon, 02/16/2015 - 15:00 | 5790678 Sir SpeaksALot
Sir SpeaksALot's picture

production of the oil will broadly stay on track, if you let me use Dijsselbloem' term...

Mon, 02/16/2015 - 15:02 | 5790680 Dubaibanker
Dubaibanker's picture

Check this out before anyone believes God's own bank....

Fracking has collapsed

We are back to 2012 in terms of rigs and at this speed we will reach 2011 before mid March and 2010 levels by end of March......

Mon, 02/16/2015 - 17:12 | 5791313 sun tzu
sun tzu's picture

What you don't understand is the old rigs being taken offline are pumping wells that are barely producing anymore. The new rigs being put online are pumping 10x the amount of the old rigs due to fracking depletion rates of 75% after the first 2 years.

Tue, 02/17/2015 - 00:39 | 5792908 Dubaibanker
Dubaibanker's picture

Two things:

1. If the older oil rigs are so inefficient, then why were they not taken off a few months ago? Why now? Because they are costly and losing money, is the answer. That's what the low oil price does or low price of any item. The rapidity of the oil rig decline is what matters, not just the shutting of the oil rigs. If this continues, by next 6 months, oil rigs would have declined by over 75% from its peak in USA. Usually, the oil rigs would be pre planned for clsoure since inception but this time, the rigs are being closed due to 50% to 60% decline and causing turmoil and bankruptcies whereby even the largest oil companies did not anticipate this!

2. Banks and private investors have stopped lending due to losses piling up. Did that cross your mind that this could be a reason for oil rig decline, if what you say is true that new rigs are 1,000% more efficient?

More oil price declines are yet to come....Let's catch up in a few months.

The job losses, the low spending in every country except China, volatile currencies, rising wars and terrorism, weak oil prices will all lead to massive demand destruction and if LENR comes true , it will be the end of oil, which is what Saudi is trying to outfox.

This is what Saudi oil Minister asked last month, according to WSJ.

"But Saudi Arabia’s oil minister, Ali al-Naimi, is also worried about the other side of the equation. At a conference last month, he asked: “Is there a black swan that we don’t know about which will come by 2050 and we will have no demand?”

Against the backdrop of oil’s recent plunge, Mr. al-Naimi was thinking of potentially disruptive trends including new technology and efforts to cut carbon emissions."

Oil’s Black Swans on the Horizon

http://www.wsj.com/articles/oils-black-swans-on-the-horizon-1424108038

All I know is that something is going on behind the scene for such a masive oil price drop in such a short span of time.

Expect more declines and more volatility and more fight between the 2 largest oil producers on the planet being Saudi and USA!

Mon, 02/16/2015 - 15:06 | 5790692 jaxville
jaxville's picture

  We are looking at a minimum of 18 months of over supply for most crude products.  That could easily extend to 36 months if demand collapses due to global economic downturn.

  Oil prices might spike higher in the short term but the trend is down for a few years. 

  Many oil firms are holding off on cutbacks until after the first quarter.  Companies do not want to loose trained employees over a possible short term drop in prices.  For now it is mostly contractors, consultants and outside workers who are being cut as many projects are put on hold.

  Just wait until projects start getting cancelled and liquidated.

 

Mon, 02/16/2015 - 15:44 | 5790834 Handful of Dust
Handful of Dust's picture
Drilling activity declines for eighth-straight week in the Eagle Ford

 

Low crude oil prices are continuing to reduce the number of active rigs operating in the Eagle Ford Shale and the Permian Basin.

 

http://www.bizjournals.com/houston/morning_call/2015/02/drilling-activit...

Mon, 02/16/2015 - 17:17 | 5791346 sun tzu
sun tzu's picture

Drilling activity slows down for 8 weeks after a 4 year boom that saw the number of rigs increase by 800%. The number of rigs is still up over 200% from the pre-2008 collapse. 

Mon, 02/16/2015 - 15:08 | 5790699 herman55
herman55's picture

.........." do not take in to account uncompleted wells"...........Now there is the chink in the pricing armor. In North Dakota, ie the Bakken, there are over 1000 wells bored and not completed. That's how the operators are fulfilling their contracts with the drillers...just making the bore and then capping the well without fracking or completing it. The "uncompleted" wells number is over 4 months of drilling activity in the Bakken. Virtually every operator is doing this. I spoke with a small completions company in Williston over the weekend, a mom and pop outfit in the completions business for over 30 years, and they are or have laid off 50% of their staff in the last 3 weeks. The downside, price wise, is that those well bores sit there like a hammer over the head of any pricing power; those wells can be fracked and completed relatively quickly..............very difficult to see oil over $60 in the next 3 years.

Mon, 02/16/2015 - 15:18 | 5790745 Ralph Spoilsport
Ralph Spoilsport's picture

Interesting you're reporting this. An in-law who was working in or near Williston called his wife last night and said he was out of a job and coming home. He also said there were no good prospects for more work on the horizon either.

Mon, 02/16/2015 - 15:26 | 5790772 techstrategy
techstrategy's picture

Shale is only "peak", not baseload.  As traditional investments drop, those incomplete wells are rounding error.  5% depletion per year traditional and 40% Shale...

Mon, 02/16/2015 - 15:27 | 5790777 El Vaquero
El Vaquero's picture

That still begs the question:  What happens when storage gets full?  The only answer I've got for that is volatility.  Up or down, the moves will probably be rapid and violent. 

Mon, 02/16/2015 - 15:12 | 5790719 MyKillK
MyKillK's picture

The American Oil industry drilled itself right into the grave.

Mon, 02/16/2015 - 16:10 | 5790963 azusgm
azusgm's picture

The American Oil industry drilled itself right into the grave.

Always does.

That's why the State of Texas set up the rainy day fund 25 years ago. Since the shale boom, almost every state legislator and his brother has been trying to drain some of it. The economy has been good in Texas and still the state legislators can't run the place without incurring new debt. Even heard one at the state GOP convention last year say out loud into a microphone that the rainy day fund had too much money in it.

And this is what passes for a Republican in the Big Red State.

In the meantime, the state had been allowing TXDOT (dept of transportation) to issue bonds rather than budgeting and funding our roads, highways, and bridges. Designated streams of revenue were redirected to other budget items. Now TXDOT has tapped out its borrowing ability and it is time to begin to pay up. Instead, the legislators put a constitutional amendment on the ballot last November that would divert money away from going into the rainy day fund. It passed. There is money flowing into the rainy day fund (and now TXDOT) only if there are excess revenues from the severance taxes.

Come back in about three years and let's see where we are.

Mon, 02/16/2015 - 15:16 | 5790730 erk
erk's picture

Considering the numerous references to the "Red Queen" syndrome over the past year, whereby the shale well count has to keep increasing just to keep production running at the same rate, I would say Goldman is either out of touch with reality, or they are trying to talk the market into some direction. Production will fall unless the depleting wells are replaced.

 

 

Mon, 02/16/2015 - 17:22 | 5791388 sun tzu
sun tzu's picture

Production has increased by over 600,000 bpd since last August

There is a lag time of 1-2 years from falling rig counts and falling production. Each new rig that goes up produces about 10x the oil of an old rig that goes down. The reason is 75% depletion in the first two years.

Mon, 02/16/2015 - 17:59 | 5791544 Carpenter1
Carpenter1's picture

Bulls aren't interested in this simple, straight forward logic Sun, they actually believe producers willingly cut rigs that create tons of cash.

This is so obvious a child could understand the concept, but a delusional bull owning 3 long oil futures contracts, envisioning his Ferrari and hookers can't quite grasp it.

Mon, 02/16/2015 - 20:35 | 5792116 lex parsimoniae
lex parsimoniae's picture

Had to log in just to give you an up arrow..

This is what I've been saying since the price started dropping & all the longs began to howl.

Mon, 02/16/2015 - 17:49 | 5791512 Carpenter1
Carpenter1's picture

As I read the comments the first thing that becomes apparent is that the bears quote hard facts and figures, while the bulls spew cynicism and speculation.

Also, there are likely more bulls than bears, yet the bulls believe they're the contrarians. They're not, they're the misinformed knife catchers....again.

Mon, 02/16/2015 - 15:16 | 5790734 roadhazard
roadhazard's picture

If Goldman can't squeeze the People they aren't doing Gods work.

Mon, 02/16/2015 - 15:19 | 5790749 techstrategy
techstrategy's picture

GS is seeming increasingly desperate to create a self reinforcing perception that oil must stay lower for longer... They need to create distress for owners of real c assets and real options because the fractional reserve banking financial asset ponzi is close to failing...

Mon, 02/16/2015 - 15:22 | 5790752 The Shape
The Shape's picture

Tyler sucking goldman dick on the long side now? Posting an awful lot of this goldman jawboning no one buys.

Mon, 02/16/2015 - 15:25 | 5790770 Ralph Spoilsport
Ralph Spoilsport's picture

Nice knowin' ya (not really).

Mon, 02/16/2015 - 17:23 | 5791398 sun tzu
sun tzu's picture

You sucking Saudi dick now? Seems like plenty of people are either long oil and scared shitless or sucking Saudi dick

Mon, 02/16/2015 - 15:40 | 5790818 sirnzee
sirnzee's picture

Using EIA Productivity numbers for March, and latest BHI Well counts for the 4 major onshore fields....

 

          {#of Rigs} X {average monthly addition of barrels of oil per rig} = New production in 4 to 8 weeks

       Subtracting the expected decline in existing well performance should bring us to the expected production gain or loss per field

         {New production} - {Legacy production change} = Expected gain or decline in oil given # of rigs currently operating

 

My calculations of this rig data shows onshore production increases decreased from 26K b/d using Feb 7 rig count to 7K b/d using Feb 13 rig count.  Has anyone else done this calculation?

Mon, 02/16/2015 - 15:48 | 5790846 Hubbs
Hubbs's picture

No. But intuition tells me that if the decreased rig count from this fracking doesn't impact  oil output,  then it might be that the EROEI from fracking is one big hype after all, and the real money to be made is, as usual, in the non productive/non value added activity, like underwriting loans for fracking operations, speculation and selling of drilling rights,  and the usual paper deriveratives from these loans.

Mon, 02/16/2015 - 17:53 | 5791526 Carpenter1
Carpenter1's picture

Rig count isn't going to give you a useful model, because all rigs aren't created equal and don't produce equally. Stop with the rig count= production theories

Mon, 02/16/2015 - 15:48 | 5790853 Bryan
Bryan's picture

It's obvious Goldman wants lower oil prices.  They're talking their book.  I'm sure they're also sending out memos to the muppets -- "Buy oil!  Get it at the bottom!"

 

Mon, 02/16/2015 - 16:08 | 5790951 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

Goldman Sachs sez.....?

 

The World is effin' screwed.

Mon, 02/16/2015 - 16:09 | 5790957 scatha
scatha's picture

They are closing fake rigs, set up just to lie to investors, that never produced anything. That's why production is not falling. They are pumping maximum from the rest of rigs to cover debt payments or their stock purchases or to steal from employees or investors.

In 6-9 months will be over, collapse or FED bailout.

This is a shale game and game is over.

I found interesting summary of what is going on at:

https://sostratusworks.wordpress.com/2015/01/15/the-shale-game/

 

Mon, 02/16/2015 - 19:42 | 5791935 JoWazzoo
JoWazzoo's picture

This has ALL been common knowledge for freaking months!  GS just figures this shit out?  Wonder how much they charge for a repoprt lioke this?

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