Natural gas production and rig counts have "diverged materially since 2008," suggesting that "rig productivity" is the force behind massive supply growth, Barclays Capital energy analysts said last week.
In a note to clients, energy analysts Jim Crandell, Biliana Pehlivanova and Michael Zenker said producers are drilling wells that produce more gas initially, on average, than they used to, lifted by horizontal drilling and hydraulic fracturing (hydrofracing).
"It used to be that simply tracking the rig count would give you a reasonable idea of where production was headed," wrote the trio. "Too low and supply would shrink; too high and supply would grow. In other words, rig productivity, the amount of new gas supply that a rig adds in a certain period of time (e.g., MMcf/d per rig-month), was taken as constant. That production and rig count have diverged materially since 2008 suggests that something else drove supply growth, namely gains in 'rig productivity.'"
Using data on every well drilled, analysts usually take the initial production (IP) rate normalized by the amount of time needed to drill the well, and they average it for all of the wells drilled in a given year. What has changed rig productivity, said the Barclays team, is that there are higher IP rates today, which add more gas supply per rig, and there are faster drilling times, which allow a rig to complete more wells in a certain period of time.
Barclays and other analyst teams have written extensively about the high IP rates achieved in selected shale gas areas and the rig movement to those higher producing areas. Industry sources suggest that the "previous norm" for a well was one that produced on average 1.5 MMcf/d in its first month, "a mere fraction of those in various shale basins," noted Crandell and his colleagues.
Today improved IP results have followed migrating rigs to more prolific areas where operators are able to extract more gas with the same tools or more gas with more tools (hydrofracing, for example).
"We think that rig productivity shifted materially in 2009 from trend, picking up as much as a 20% improvement from 2008 and a slightly larger gain from earlier in the decade," said the Barclays analysts.
"By comparison, if rig productivity in 2009 registered 5% higher incrementally, it would have translated to another 0.7 Bcf/d more production. For 2010 and 2011, we estimate that gains in rig productivity are maintained rather than further improved upon. This is conservative, representing upside risk to our supply outlook. The shift toward horizontal drilling in prolific areas is still under way. Moreover, producers continue to tweak techniques with better performance to show."
There are, of course, "practical limits" to rig productivity, said the trio.
"At some point, increasing laterals and fracturing stages is no longer possible, and drilling times reach bare minimums. To be clear, we do not think that point has been reached yet, particularly with early stage drilling in some shales and new operators trying their hand in new plays."
Some confusion exists over Energy Information Administration data, which indicates gas production is growing more slowly and "even declining at a rig count of more than 950," they wrote. But the data "go against previous trend and pipeline data that suggest continued increases...We think that a rig count of roughly 850 (perhaps even lower) keeps production flat at current estimated rig productivity. As long as the rig count remains over this target, gas production is likely to grow."
©Copyright 2010 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.