Oil Rigs Decline in U.S. as Directional-Drilling Advances

Oil rigs in the U.S. dropped for a second straight week as energy producers used more efficient, directional-drilling technologies to extract crude, weakening demand for additional equipment.

The oil count fell by six to 1,402, a four-week low, data posted on Baker Hughes Inc.’s website show. Natural gas rigs were unchanged at 354, and miscellaneous rigs declined by one to six, the Houston-based field-services company said.

The number of directional rigs targeting oil in the U.S. gained to 161 this week, the highest count in at least two years, while vertical and horizontal rigs declined. Producers use directional rigs to drill multiple wells from the same pad, cutting demand for new equipment and helping boost crude production in the U.S., where stockpiles of the feedstock hit the highest level in more than 82 years this month.

“While the overall rig count dropped for oil, we’re seeing a huge increase in the number of rigs drilling directionally,” James Williams, president of WTRG Economics in London, Arkansas, said by telephone. “This is an indicator that companies are drilling more wells off the same site, a much more efficient use of rigs.”

U.S. oil stockpiles climbed to 395.5 million barrels May 3, the highest level since 1931, according to Energy Information Administration data. Last week they were at 394.6 million as oil output slipped to 7.26 million barrels a day, said the EIA, the Energy Department’s statistical unit.

Crude Slips

Crude for July delivery on the New York Mercantile Exchange dropped 10 cents to settle at $94.15 a barrel. Prices have gained 3.7 percent in the past year.

Natural gas for June delivery on the Nymex fell 2.4 cents, or 0.6 percent, to settle at $4.226 per million British thermal units, up 60 percent from a year ago.

Oil futures have traded as much as 24 times higher than gas futures this month, compared with a 10-year average of 15 times, according to data compiled by Bloomberg.

“Gas is nearing the position where drillers may start to re-enter,” Williams said.

U.S. gas stockpiles gained 89 billion cubic feet to 2.053 trillion in the week ended May 17, below the five-year average injection of 90 billion, the EIA said yesterday.

Henry Hub

Henry Hub gas prices are expected to average $3.90 per million British thermal units this year and $4.20 next year, according to a Bank of America Merrill Lynch research note e-mailed yesterday.

“Coal-to-gas switching is still required to balance the natural gas market, and we see risk that gas prices slip to $3.50/MMBtu this summer,” according to the note. “In 2015, we expect demand to improve structurally.”

The total U.S. rig count, which has risen 14 in the second quarter after declining 15 in the first quarter, is “beginning to creep up again after remaining dormant in the first quarter,” Peter A. Ragauss, Baker Hughes’ chief financial officer, said at the UBS Global Oil & Gas Conference in Austin, Texas, May 22.

“Oil prices remain favorable, and U.S. natural gas has been a little better than many would have predicted a few months ago,” he said.

Higher energy prices are driving Baker Hughes’ customers to boost drilling activity “in virtually every oil and gas basin around the world,” Ragauss said.

The percentage of rigs targeting oil in Texas’s Eagle Ford shale play has grown to 87 percent, up from 66 percent a year ago, according to data compiled by Bloomberg. The total rig count there is down 10 percent from a year earlier, “likely due to a focus on pad drilling,” Christian O’Neill, a Bloomberg Industries analyst in Skillman, New Jersey, said in a research note yesterday.

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