US oil, gas rig count unchanged on week at 693, lowest level since year-end 2021

The US oil and gas rig count was unchanged for the week ended Sept. 27, the lowest level of activity since the last week of December 2021, an analysis by S&P Global Commodity Insights showed Oct. 5.

Most of the eight largest unconventional domestic basins either gained rigs or were unchanged.

Oil-oriented rigs dropped by four to 563 while gas-focused rigs rose four to 130 on the week. However, US oil fields were down nine horizontal rigs, but picked up five vertical rigs, suggesting that private companies were doing some extra drilling in the lesser-known plays where vertical rigs are typically deployed by smaller operators.

The stable week-on-week total rig count is in keeping with analysts' and drillers' belief for the past couple of months that US activity is bottoming after having lost more than 170 rigs so far in 2023, and that more drilling will occur in the weeks and months ahead.

While a continued rig count softness "did catch us by surprise, we would note that both drillers and upstream operators alike are pointing towards higher activity heading into year-end," investment bank Pickering Energy Partners said in its daily note to investors Oct. 2.

But current relatively low activity levels may tick up soon, Reed Olmstead, S&P Global Commodities Insights executive director of North American upstream research, said.

Activity may inch up at current prices

"If commodity prices remain where they are, I'd expect to see a bit of activity creep [in the coming weeks and months] – preferentially weighted to private operators," Olmstead said. "We may see some public operators selectively add a rig or two in select areas, but the majority of the increases will come from private operators."

Crude oil futures settled at five-week lows Oct. 5 as a steep slowdown in US gasoline demand has raised recession fears and broadly weighed on sentiment. NYMEX November WTI settled $1.91 lower at $82.31/b and ICE December Brent declined $1.74 to settle at $84.07/b.

"This will surely keep inflation rising on a consistent pace," Olmstead said. "Currently we expect inflation to temper some, but if [oilfield service] costs remain high, that likely won't happen."

However, if oil prices fall back to the $70/b area oil activity will likely remain "pretty flat," he said, adding natural gas activity is expected to increase since gas prices are expected to rise next year in anticipation of additional exports.

Analysts at investment bank Piper Sandler, in an Oct. 1 investor note, said the rig count will see "some modest adds" of about 40-75 rigs with higher commodity prices. However, the bank believes generally 40 rigs isn't enough to hold current US production levels of about 12.9 million b/d of crude and 103 Bcf/d of dry gas.

Piper Sandler noted US E&P operators have kept their production levels up by completing unfinished wells, known as drilled but uncompleted wells, or DUCs, but since that has continued for the past few years, "a shift higher in oilfield services activity" will eventually be required.

'Rubber hits the road' on DUCs in 2024

"The rubber hits the road in terms of the industry's ability to survive by completing low-cost DUCs," the bank said. "All of our scenarios assume that DUC inventory falls to 4,000 wells," although it cautioned that possibility won't necessarily occur.

In August, upstream producers drew down, or completed, 39 DUCs, leaving 4,749. During July, producers had drawn down 27 wells from the domestic DUC inventory, and in June, completed 53 DUCs. The August DUC figure of 4,749 compares with a high of 8,817 in June 2020.

As for oilfield services and equipment costs, these have dropped somewhat this year, particularly for tubular goods. However, the most recent Dallas Fed survey found 60% of executives expect drilling and completion costs per well to be higher in 2024 on the year. Analysts trace that expectation to higher commodity prices.

Piper Sandler noted that in the Dallas Fed Survey, "expectations for 2024 capital expenditures among [E&P] producers increased."

"As we've heard throughout the oil patch, there are only modest expectations for price relief from services next year (i.e., mid-single digits)" or around 5% lower than in 2023, the bank said.

For the week ended Sept. 27, the Williston Basin showed the largest loss of rigs of any domestic play, shedding four and leaving a total 33. Also, the SCOOP-STACK play lost two rigs, leaving 24.

But four basins – the Permian Basin, Eagle Ford Shale, Haynesville Shale and Marcellus Shale, each gained one rig on the week. That pushed the Permian to 320 rigs, the Eagle Ford and the Haynesville to 52 rigs apiece and the Marcellus to 28 rigs.

The DJ Basin and the Utica Shale were unchanged on the week at 17 and 10 rigs, respectively.