More running room in Lower 48 efficiencies?

With development costs coming down, lower 48 oil production is up due to efficiencies and faster drilling and completion operations.

While tech improvements have been transformative, the greatest advances have come from eliminating downtime. ~Maria Peacock

Story By Maria Peacock |Research Director, US Lower 48|Woods Mackenzie| The US is entering an exciting new chapter. It now produces more oil than any nation in history and is still at the beginning of this extraordinary new phase. Production growth increased massively last year, partly thanks to a dramatic improvement in operations.

Interestingly, the growth came despite a massive pullback in activity. The rig count fell by around 150 in 2023, with consolidation, softening prices and high costs all playing a part. However, faster drilling and completion operations offset the decrease in activity, and Lower 48 production still exceeded 11 million b/d last year. 2023 was only the second year in Lower 48 history in which the average annual rig count declined while production grew. And with efficiency factors continuing to improve, this year is set to be the third.

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How tight oil boosted efficiency

Operators have enjoyed even more gains in the past year, with 2023 benefiting from improved costs and accelerated cycle times. High-level well-performance metrics seemed to have moved on from a stagnant period, and rig efficiency continues progressing at pace. Engineering innovations such as trimulfrac have played a key role, and delivery has been boosted by 3-mile laterals requiring fewer wellbores or rig and frac fleet mobilizations.

The latest efficiency gains weren’t possible, even just a few years ago. Part of the success is attributable to increasingly concentrated operations. Before 2018, activity was distributed across wider areas, which created inefficiencies in the supply chain. Now, the physical area of activity is more focused. And while tech improvements – including better fluid design and higher horsepower rigs – have been transformative, the greatest advances have come from eliminating downtime.

All this has to come with some trade-offs, though. Costs remain 15-30% higher than 2020/21 levels, suggesting room for improvement. Larger amounts of capital are also tied up in the new processes, and the lead times for planning are longer. This could put the brakes on sustained progress – but continued improvement looks likely for many operators.

Have investors overplayed capital efficiency worries?

The picture has changed so markedly last year that some recent investor concerns may not be as relevant now. Development costs began to climb after 2020, and many predicted things would only worsen as more development eventually shifts to tier-2 acreage and costs remain stubbornly high. However, the changes brought in last year appear to have reversed this trend. The use of super-spec rigs has certainly helped, along with a renegotiation of OFS contracts post-M&A and, of course, the adoption of new technologies.

What’s next?

We think it’s safe to say that the new cycle times are here to stay. The only recent example of aggregate efficiencies moving backward relates to the 2020 crash when the oil industry had to rebuild its workforce with less experienced crews.

The oil field industry will likely be increasingly careful about adding capacity in the current emissions climate. We don’t think this will significantly affect efficiency, though; the newer units replacing the inefficient, high-emission equipment will generally be faster, cheaper, leaner, and more reliable.

We could see an increase of efficiency-focused land trades. In the past, swaps were done to allow more 2-mile laterals, but more recent trends have shifted to 3 and 4-mile wells.

Data science will be key to unlocking the next set of efficiencies. Although it’s not exactly new to tight oil planning, new diagnostic tools that can aid in completion engineering inspire fresh excitement and opportunity in the industry. Development costs could fall further if unproductive downhole pressure pumping capex could be reduced, for example.

Conclusion: we don’t think 2023 was a one-off

With development costs coming down, after two years of progress being stalled by cost inflation and well performance issues, the signs are good. Variables will continue to fluctuate, but overall, we expect efficiency to continue to build.

While the industry will eventually hit a ceiling of cycle time gains, opportunities remain where unproductive processes need to be addressed. The will and the technology are there for some operators, who should be able to keep cutting capex while modestly growing and maintaining shareholder distributions for a while to come.

CREDIT: Story By Maria Peacock |Research Director, US Lower 48|Woods Mackenzie| and Josh Dixon Senior Research Analyst, Upstream

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