Cutting back

We’ve been down so long it’s starting to look up.

Before the teeming millions think that I’m going to start cheering $100 oil as I did back in 2005, just hold on. I am all about the reduction in oil production in the United States and more declining production in the Lower 48. I’m sure with the rig count here headed to a Spartan 300, we’re not cutting back because we have to, it’s because we’re just smarter than that.

According to the Baker Hughes rig count, we’re just one above a 70-year low at 489. On the other hand, I went into detail last week about the efficiency of the existing rigs, so when I say that the United States is smarter and we’re pulling back production because of our high supply, I’m talking about the whole kit and caboodle. Yes, I’m talking Van Halen with David Lee Roth.

If we’re just going to go the simple route and figure the number of rigs to the barrels per day in the United States, we’re hitting an impressive 18.5K b/d per operating rig. Considering that we’re fresh and new on the scene like a 16-year old Justin Bieber, we’re doing some impressive work. All the while, we’re cutting back on costs and increasing efficiency through technology. Now if we were to look at other countries that have just been sticking to the tried and true, you might get a different picture of what successful oil production comes down to.

In Saudi Arabia, they are pulling oil from some very supply-rich wells and have had a great success rate. On the other hand, as they’ve pushed through these tougher years with falling prices, they have increased their rig count from 98 (Apr 2014) to 128 (Feb 2016). Mind you, their production levels have been fairly steady, around 10M b/d. This means that to maintain that level, they've needed to add 30 more rigs to hit their numbers. This might raise a red flag when you consider that they're adding rigs, equipment and labor during a period when oil prices have dropped from $80 to $30. Call me crazy, but reduction in budget is not quite the time to be increasing OPEX and CAPEX.

I don’t want anyone to think that I am only trying to pick on the Saudis here. There are other countries over the same time period that have increased their rig count. Going against the grain, there was Algeria (+3). Of course, I’m not going to fret too much over Algeria’s 52 operating rigs. I will consider though that we’re seeing enough budget from the Majors that they can find opportunity in areas where there’s high supply and cheap labor. This means that Iran is going to get asked to the prom and it might be that the Saudis are stuck going stag. That might not sit too well in the current landscape of OPEC.

They are being held together by some thin threads here, and seeing Iran getting plenty of attention—resulting in much more secure future supply—might be a tipping point that can break up the cartel. If anything, if you read between the lines of what the Saudis have been saying for some time now, you get the gist of what I’m saying here.

Without supportive oil prices, there is not going to be a lot of budget. Without a lot of budget, there’s not going to be a lot of money spent into new projects (i.e. rigs). Without new projects, when the world comes back, nobody is going to be able to answer the door.