As rig counts continue to fall. Producers are high grading ie. Shifting to tight oil areas with higher well productivity. High grading is more pronounced thus far in the current price downturn compared to 15/16.
- This has largely resulted in shale companies reporting higher efficiencies (charts below). Lower activity, concentrated on best assets with service cost reductions helping companies to guide for more efficiency gains.
- As of Friday’s data active oil rig counts are now at the lowest levels since before the shale revolution started, implying despite the efficiency gains being reported below – depletion rates will catch up.
As a result of high grading, well cost reductions expected in both Delaware and Midland Basins, more moderate reductions expected elsewhere.
- Producers across the Permian have realized or anticipate achieving ~20% reductions in normalized well costs relative to 2019 levels.
- While sharply lower activity levels and concomitant service price reductions are surely at play, durable process oriented drivers and “creative destruction” from an unprecedented (and virus-driven) downturn also appear to be contributing to this improvement.
- Above improvements partly linked with cyclical service cost reductions and impact from high grading.
- Beyond expected drivers of efficiency gains associated with downturns and through-cycle learning curve effects, more meaningful operational changes also appear to be occurring, with simultaneous hydraulic fracturing (Simul-Fracs) and increased automation/remote operations recently in focus.
- With respect to the former, multiple Midland basin producers have reported utilizing Simul-Fracs, which may be helping that side of the basin keep pace with the relatively less mature Delaware side this year.
