Rig Count Matters: Separating The Signal From The Noise in Oil Market Opinion

Rig count matters. Saying that it doesn’t is like a realtor saying that location doesn’t matter.

Rigs Don’t Produce Oil

The holiest mystery of shale plays is that so much production is possible with ever-fewer rigs.

But if we look at the number of producing wells, the mystery evaporates. That’s because rigs don’t produce oil and gas. Wells do.

Horizontal wells in a few tight oil plays tell most of the story for U.S. production. Figure 1 shows the rig count and number of producing wells for the Bakken, Eagle Ford, Permian, Niobrara, Mississippi Lime and Granite Wash plays.

Tight Oil Rig Count & Number of Prod Wells
Figure 1. Tight oil horizontal rig count and number of producing wells. Source: Baker Hughes and Labyrinth Consulting Services, Inc.

Although rig counts decreased dramatically beginning in late 2014, the number of producing wells continued to increase until very recently. This may be a technical triumph for the drilling industry but it is no cause for oil producers to celebrate.

Average well costs are approximately $6 million so, despite falling rig count, the tab for new producing wells was about $3.9 billion per month in 2015. Add to that the cost of wells waiting on completion and other non-capital costs of doing business.

Many analysts and producers want us to believe that producing tight oil has become almost free thanks to awesome advances in efficiency and technology.

A rough rule of thumb is to multiply the monthly change in tight oil horizontal rig count by $6 million to approximate how much money is spent for new producing wells. There were about 2,400 more producing wells in 2015 than a year earlier in the Eagle Ford ($6 million per well) and 2,600 more in the Permian basin plays ($6.5 million per well). That works out to about $14 billion and $17 billion, respectively. For the Bakken where wells are about $8 million apiece, the cost for 2015 was $13 billion.

$45 billion for new producing wells in the 3 main tight oil plays in 2015—almost free.

Rig Count Matters

Rig counts are sensitive to price changes and generally excellent indicators of future oil production.The 4-week aggregate of weekly rig count changes accurately and quickly reflects changes in WTI price (Figure 2).

Tight Oil Rig Count Change and WTI Price
Figure 2. Tight oil rig count change and WTI price. Source: Baker Hughes, EIA and Labyrinth Consulting Services, Inc.

Oil prices began to fall in October 2014 and reached an initial bottom in January 2015. Monthly rig count change went negative in December 2014 and reached a maximum negative change in February 2015. When prices began to increase in April 2015, rig count change responded almost immediately.

Similarly, oil production followed changes in horizontal tight oil rig count quite closely and this includes total U.S. crude oil production, not just tight oil production (Figure 3) .

Tight Oil Rig Count Change & Crude Oil Production
Figure 3. Tight oil rig count change and U.S. crude oil production. Source: Baker Hughes, EIA and Labyrinth Consulting Services, Inc.

Production began to decline after April 2015 only 2 months after the maximum negative rig count change occurred in February.

Separating The Signal From The Noise

Oil companies tell us stories about new fracking technology, drilling productivity gains, and drilled uncompleted wells. These are mostly noise designed to distract us from the fundamental signal that the companies are losing a lot of money.

In order to navigate the uncertainties of investment, it is essential to separate the signal from the noise.

Companies and the minions of analysts and journalists would have us believe that rig count no longer matters. Pad drilling has relegated it to an anachronistic past that no longer applies in the brave new world of shale production where energy is impossibly cheap, abundant and profitable. This is a magical world where as the number of rigs approaches zero, oil production approaches infinity.

In this brief post, I have shown how that looks against the stark backdrop of facts. Rig count matters but it is only one factor that serious analysts use to try to decipher the signal amidst the deafening noise of oil-industry commentary.

The real signal is that all tight oil plays are losing money at current prices and will continue to lose money until oil prices reach and sustain approximately $65-75 per barrel. That scenario makes the doubtful assumptions that vast amounts of new capital will be available to E&P companies, and that the oil-field service industry will recover quickly.  It is equally probable that oil prices languish well below the cost of production too long and that the E&P and service industries may never be the same again.

Investors should contemplate those alternative realities carefully. That will be possible only if the signal can be separated from the noise.


  • Thomas

    Hi Art,

    Any thoughts on why there hasn’t been a commensurate decline in US natural gas production similar to the magnitude we’ve seen peak-to-current (~10%) in US oil production? Current flows from Bentek suggest we’ve gone from close to 74 bcf/d in Feb to ~70.5 now which implies a ~4-5% decline… perhaps a lag in natural gas because it had a final strong percentage decline in rigs later than oil (ie Dec 15-Feb 16)…?

    Thank you for any input,


    • Arthur Berman


      I made similar graphs for natural gas as I show in this post for oil and they show basically the same trends. Shale gas production has declined or at least flattened (see my recent post Shale Gas Magical Thinking And The Reality of Low Gas Prices).

      I believe that natural gas responds somewhat differently to market signals that oil mainly because it is an insular North American market. International investors don’t really understand the pricing dynamics because it doesn’t relate to their prices. They continue to believe the propaganda that the U.S. has centuries of supply at cheap prices. Also, a lot of associated gas is produced from oil plays and especially the Eagle Ford and Permian tight oil plays that has little to do with the shale gas plays themselves.

      Thanks for your question,


  • Sam Viskovic

    Thanks for your excellent articles Art.
    It confirmed my own view that shale oilers are lying to their investors with predictions of decades of sub $50 oil inventory. Analysts with no industry experience are laughable but also the norm unfortunately.
    I have to differ with the idea that the “E&P and service industries will never be the same again” though. I think they can continue to externalise the costs onto shareholders and consumers for some time yet, this bust is certain to lead to another ridiculous boom and more waste.
    Change won’t come until majority owners of fossil fuel companies force their directors to pursue renewable investments that make economic sense (not Solar City).

    • Arthur Berman


      Thanks for your comments.

      It is true that energy companies use selective data to support their claims of abundance and profitability. That has been true as long as I have been following them and it will never change. It is also true for renewable energy companies.

      I hope that you are right about service companies being able to recover. I am not so optimistic. Brexit is the latest evidence that people are in rebellion against the leaders and policies that have made their lives increasingly difficult financially. The likely outcome is more uncertainty and less investment generally and in oil and gas in particular.

      I would like to agree with you about renewable investments but cannot. I am in favor of renewable energy but we must be realistic–it will cost more and deliver less. We cannot simply go from the highest energy density with fossil energy to substantially lower energy density with renewables and believe that the outcome will be the same. It cannot be and technology will not make up the difference–if it somehow does, then the environment is surely doomed.

      We are approaching the limits of growth that data-driven analysts have been warning about since at least the 1970s. Renewable energy is a reasonable approach once we accept living with a lot less. We still won’t get close to being “off” of fossil energy for decades.

      I expect that the rebellion against worsening personal incomes will develop in spades once people realize that renewable energy costs will be much higher than fossil energy. The renewable industry is just as guilty of misleading self-promotion and selective data as the oil and gas industry.

      We simply cannot continue to live the way we have by switching to renewable energy. That paradigm is as much of a mirage as the promise of decades of sub-$50 oil inventory that you correctly criticize.

      All the best,


  • Art, your work is phenomenal. I have read all your articles and presentations, watched all your videos and listened to all your podcasts that I could find on the Internet. Please know I am very grateful for your work.

    Very grateful because until I studied your work I was unable to synthesize oil and gas data and information, markets and economies well enough to understand the truth about the upstream oil and gas industry (upstream). I have been searching for the truth for over 30 years as a veteran upstream degreed petroleum engineer.

    Your work has cohered my numerous pieces of knowledge sufficiently that I am in total agreement with your work. And your work has relieved me of great pain and anxiety. I now use your work and my understanding to guide me in my decision making as a working upstream petroleum engineer. I also share your work with others to help them.

    I learned of you by happenstance searching for answers and to relieve the pain and anxiety of not knowing and/or understanding the truth about the upstream. It is an understatement that I am grateful to you for your work and how much I respect and admire what you have graciously provided me and the public. Thank you.

    I recognize you are very busy, but would it be possible to speak by phone or e-mail to share data, information or have short conversations that may afford us greater clarity? If yes, I would appreciate that opportunity and thank you in advance.

    All the best, Art, and you and yours please stay healthy and safe. Scott.

  • John

    Hi Art,

    Every month I follow current OCTG pipe inventory and consumption. Since the fall in October 2014, we have seen the amount of OCTG tonnage consumed drop by close to 75%. I do not understand how the number of producing wells has been able to grow when there has been such a significant drop in the amount of pipe consumed. The only reason I can think of is producers must be heavily focused on DUC wells, therefore the need for new pipe would be reduced. What would be your thoughts?

    Thanks and I really enjoy your blog.


  • Trevor

    “A new independent estimate of world oil reserves has been released by Rystad Energy, showing that the US now holds more recoverable oil reserves than both Saudi Arabia and Russia.”

    Wow, fantastic, everything is going well then. But, hold on, no mention of the cost of getting it out of the ground, in money terms or EROI. How much of this ‘recoverable’ oil will actually be recovered?

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