More running room in Lower 48 efficiencies?

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, thanks in part 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. But faster drilling and completion operations more than 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 that 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 mobilisations.

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 there’s still room for improvement. Larger amounts of capital are tied up in the new processes, too, 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 get worse, as more development eventually shifts to tier-2 acreage and costs remain stubbornly high. However, the changes brought in last year do appear to have reversed this trend. The use of super-spec rigs have 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.

In the current emissions climate, the oil field industry is likely to be increasingly careful about adding capacity. We don’t think this will affect efficiency significantly, though; the newer units replacing the inefficient, high emission equipment will be generally 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 unlock the next set of efficiencies. Although it’s not exactly new to tight oil planning, new diagnostic tools that can aid in completion engineering are inspiring 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.

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

Fill in the form at the top of the page to download the report for our oil efficiency predictions in more detail. This includes graphs showing how production correlates to rig numbers – and the trends we expect to see in 2025.