Permian drilling productivity will see first-ever decline in June, EIA says

PHOTO BY EDDIE SEAL FOR BLOOMBERG NEWS
ES_OILRIG_19–A floor hand signals to the driller to pull the pipe from the mouse hole on Orion Drilling Co.’s Perseus drilling rig. The Perseus is drilling for oil and gas in the Eagle Ford Shale in Webb County, Texas. 3/26/12

Oil fields in West Texas are teeming with drilling rigs after crude prices shot up to $50 a barrel this year.

But the Energy Department believes a key metric of drilling productivity is about to turn south in the Permian Basin for the first time since its analysts began tracking it in late 2013.

Next month, the daily oil production of a new Permian well drilled by an average rig will decline by 10 barrels to 630 barrels, the Energy Information Administration said in a recent report.

Of course, that doesn’t even amount to a dent in the stunning productivity gains that oil companies have made in the Permian Basin over the past few years, but it’s an ominous milestone for companies that have touted increasingly efficient and productive drilling as a way to offset the financial pain of low oil prices.

Related: U.S. rig count surges to more than 900

It also coincides with another trend: In recent months, oil companies have drilled a lot more wells than they’ve brought into production. The number of so-called drilled-but-uncompleted wells in the Permian Basin is expected to rise to 1,995 in June, up from  1,348 last August, when the EIA first began tracking these unstimulated wells.

Both of these recent developments, analysts said, are signs that drilling rigs are coming back to the Permian Basin so fast that they’re far outpacing the speed at which contractors can ready fleets of hydraulic fracturing equipment needed to blast open dense rock formations and bring the wells into production.

Related: Speed can be a drag on oil output

A big problem is that pressure pumping companies are spending between $5 million to $10 million rebuilding equipment they cannibalized for spare parts during the downturn in oil prices. Another challenge: getting people to come back to the oil patch after severe job cuts to staff up fracking fleets that require around 100 workers. Smaller, local West Texas oil companies have found it especially difficult to find enough skilled labor, analysts said.

“A lot of the older class of the generation is like, ‘you know what, I’ve been through the boom and bust cycle, I’m either retiring or I’m going to move on to something safer,’”said Taylor Cavey, an energy analyst at S&P Global Platts in Denver.

Still, overall production in the Permian isn’t expected to decline anytime soon, even with prices for oil field services set to increase some 15 percent over the next year. In the lucrative Delaware Basin in West Texas, service prices could double and operators could still break even on drilling new wells there, Cavey said.

Related: Oil service costs could rise 15 percent this year, Wood Mac says

The EIA said it expects daily oil production in the Permian Basin to rise by 71,000 barrels next month to 2.5 million. That’s up from 2 million barrels last June.

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