Reliance on the single data point of rig count to determine future new production capacity for US Onshore Oil and Gas is something we have been concerned about here at Drillinginfo for some time — see Ramona Hovey’s awesome post Are Rig Counts Dead? from last May and Kevin Thuot’s equally amazing post Beyond the Rig Count: Visualizing Patterns of Rig Activity from August.
The Drillinginfo Index is designed to identify actual drilling locations along with permit and production data in order to track industry activity, and therefore give a much more timely and accurate indication of production capacity.
This video (and the following transcript) is from Drillinginfo CEO Allen Gilmer’s introduction of the new DI Index at our launch event last Wednesday. For insights from the panel discussion that followed (moderated by Ross Ramsey of the Texas Tribune, and including Ralph Alexander, Managing Director of Riverstone Holdings; Lieutenant General (Ret.) John R. Vines; Kenneth B. Medlock, James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics at Rice University’s Baker Institute for Public Policy and the senior director of the Center for Energy Studies), check out the full video from the DI Index Launch panel discussion.
I appreciate everybody taking their time out to come here today. I used to work for these two old wildcatters here in Houston when I first got out of college in 1986, which was also a terrible time to be in the industry, but they had an old saying that I don’t think they made up, and it was, “Buy low, sell high.” I think we can all agree right now that we’re not bad in the buy low part of the whole business. The other thing they told me was, you know, fortunes are made in the down times and they’re only realized in the good times. That’s something that I’ve always paid a lot of attention to.
I understand that there’s a lot of companies that have the liquidity issues with regards to a variety of issues, but I will also tell you that in the last couple of months, there’s been an inflow of capital into this industry that has not been seen for the last three or four years. That is looking at opportunities to come in here because of just that issue of buy low and sell high. The industry right here, I have these discussions with a variety of people. We’ve had a rapid drop in price. This industry has done its usual superlative job in terms of being able to go with it, and we were being able to bring in a panel of people that after I present this, to be able to talk about some of these issues, because it’s very different than what happened in 2009. We can argue as to whether, but not really argue, but is there a geopolitical consequence or not? Is it really just a supply issue, what have you?
How do companies change? You know, what other industry could lose so much so fast in terms of cash flow and what have you, and have the survivability quotient that these industries in the United States have? I think it’s a real testament to the people that are in this room here. Then, of course, you know, we’ve been collecting information now for 14 years. We were all independent oil and gas guys. We started collecting information because we wanted to answer questions and, in the last seven years, we got in the issue of being able to go, we were the very first to go out and look at analytics. You know, really trying to understand statistical plays with using statistics, go imagine, you know.
Everything down from how do you actually do a frac job in this quality of rock and how well does it work? All the way to here’s the basin and here’s who’s doing well. We were the first to identify that guess what? The old world in which it didn’t matter whether Dad Joiner or Humble Oil drilled the first well in East Texas field that was going to come and make them all happy the same way. That there was now the surreal concept of marginal operations starting to come around and we were the first to quantify that. From this effort as we and basically working through these basin by basin, we started noticing that you know, we’d collected enough information, culminating with our getting G.P.S. units on about 85% of the active rigs in the United States, and following another 10% of them by phone. That we get these daily inputs on there because we were trying to understand which rigs were drilling what wells, the horizontals?
Were there two rigs, three rigs being involved in drilling a well? This concept of rig count had become more and more abstracted from production and the kind of production that was coming into play, so as we started looking at a lot of the top-down models that were coming down to try to predict what kind of production is going to be coming in from the actions today, we noticed that most of them weren’t even directionally correct and, the fact is, having way too much knowledge about regulatory information. There’s not a full picture of what’s happening in terms of production that comes on this month, much less what’s being drilled this month, for a year. You have all sorts of variations.
You have operators that report – that actually amend their reports several times over the time frame. You have some states in which you don’t have to report for a year, and it dribbles in over a year, so getting clarity with regards to what our actions are doing today, matters. We figured that we could actually go build a grounds up model of this based off of what wells were drilled this month by what rigs and how much produce ability is that bringing into the system over the next two, you know, one, three, six, nine, 12 months? Because a lot of these cases, they might be held up because of pipeline issues, or they are choked back, whatever, but this is kind of core disability, and we’ve basically been working this for about a year. we’ve been looking at these things and what it is, is on a rolled up basis for the United States.
What we’ve been able to do lately is predict the amount of production that’s going to come in to within a percent for oil and a percent for gas, and being able to look at this as it changes on a month-month basis. We had a short discussion as to whether this should be a product and we decided that actually this is far better to just be an index and let people that actually have their models of core decline for the United States be able to utilize these things and build something in there as an important contributor to our understanding of what U.S. production is really happening. What is the impact of, essentially rig count of dropping them or permits dropping, or what have you, on the deliverability? That’s what’s being released today is essentially the drilling info index.
What you’ll see right over here is essentially on the right, it’s just kind of the rig counts from what we have G.P.S. units on. Our rig count is a little different than the others that are out there. We know we do not have every rig. We know which ones we don’t have in general, along with a lot of the smaller ones, but our rig count is typically about 50 or 60 higher than any of the rig count. This is just a process of understanding these, and we also know where they are on a daily basis as opposed to weekly basis, because a lot of cases, a rig can come in there and start a well. You know, go do the vertical portion in three or four days and then move off to something else, and we were trying to really get an understanding of those kind of efficiencies. If we can scroll down here a little bit, so you’ll see things on the right. This is kind of the rig count this week.
We actually have it on a daily basis for people that are interested in that and other things, kind of the permits filed and the changes over there. Then this might over here is essentially the production that’s added, and this is barrels of oil equivalent per day. Let’s scroll down just a little bit more, and then a comparison to what it was last month, so you can see it from oil and from gas and then if you look at that number right there, you should say, “Wow, that’s a big number,” because if you annualize that number, if in fact the United States is producing 11 million barrels of oil a day, that’s saying that 6 million barrels of new produce ability is coming into the system every year. Then that tells you a lot about core decline rates and what’s happening, because over the last few years we’ve added so much new production that has very high decline rates, that it’s a very telling metric.
I think that over the next couple of months you’re going to see how this actually affects you, so interestingly enough, as we dropped the number of rigs that were producing, that were drilling new wells, the new wells that came on last month were about 15% lower than they were the month before, and yet, the production differential was about half of that. Which tells us, number one, that the issue of, okay, we’re still drilling the horizontal wells, a lot of the verticals have been laid down, but more importantly that operators are doing the rational thing. They’re not just going out there and across the board saying, “We’re going to cut everything by 30%.” They’re actually going and drilling their better locations faster, which has been things that people speculate on, but using the top-down formulations you couldn’t keep up with it.
The methodology we use is taking the permits that are applied that are put in there, the rigs, when they actually hit those locations, understanding because that means that that is now on the process to going into production and then we compare those locations to the recently drilled wells in that area right over there to kind of create a proxy, and then we roll the whole thing out, so every oil company in the United States has some idea what their efforts are going to yield them over the next three, six, nine, 12 months, but no one has ever really rolled the whole thing up to the top level to go out there and look at that and that’s been one of the bigger issues right over here because if in fact people are looking to see whether the price of oil’s going to have an impact on unconventional or US onshore production, this is a way of being able to understand what that impact is very quickly.
So rather than waiting years to get some sort of clarity from that. Does that make sense to everybody? So this is online today. Let’s scroll down, you can get some other interesting graphics with regards to locations that were drilled, the rig movements – getting to see where rigs are moving from one play to another. You know, what kind of variability do we have there? And if we roll down over here, we also provide some information on an operator basis, so this is the last month’s activity by an operator. What it would do to the 100%, you know, assuming a working interest of 100%, which is not exactly the case but what would happen over here and how is that changing relative to the months before? And if we go to the very bottom, you’ll see an archive. Here it is by county, and if you go to the very bottom, we have archives for these going back several months.
And so as time goes on, the time series will be able to be plotted. The beautiful part about this is, it’s directional and we’ve been able to validate this to within about a percent of new deliverability coming in, so we hope that this is of some value to you guys and what you’re using. I know that from our oil field service groups this would help identify areas in which there is less activity versus more. We think it’s helpful with regards to A.N.P. companies trying to understand what areas to go into and see if there’s an area that has less activity, you probably have a little bit more negotiating power with regards to the services within those areas and that there’s, you know, a variety of understanding. Just even the whole kind of hedge aspects of what’s going on little bit better.
What do you think? Leave a comment below.
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