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Texas Drillers Unfazed by Slide in Oil Prices

11/5/2014

Oil prices have dropped 25% as production continues to rise and demand slumps, prompting some analysts to forecast decline in US shale activity, but these arm-chair pundits are getting ahead of themselves: American oil and gas producers have been through down times before and they know how to dig in.

Energy Information Administration (EIA) data shows a steady and consistent improvement in drilling productivity.

An oil rig in the Eagle Ford basin that was producing 396 barrels per day from an average new well in October last year, is now producing 34% moredespite slumping oil prices.

The Permian, which is now producing more oil than any other US basin, has seen an even higher jump. In October last year, a rig produced 79 barrels per day on average from a new well. Twelve months later, we have seen an increase of over 50%, with the average new well now producing 172 barrels per day.

More oil produced per rig allows companies to reduce costs, insulating them from falling oil prices.

The Permian is now producing over 1.7 million barrels per day and the rapid rise largely comes from the Wolfcamp and Sprayberry formations, the new hot-spot venue for oil rigs.

Dallas-based Crude Energy -a small independent exploration company with strong holdings in the Permian-has announced plans for another well here.

Crude's Blue Wolf #1 project is expected to be drilled beginning onDecember 15, and will primarily target the Wolfcamp, with a secondary focus on the Cisco, Canyon, Cline, Strawn, Mississippian, Fusselman, Montoya, and Ellenburger formations. Drilling should take a little over a month.

As Crude Energy President Parker Hallam noted in a statement: "The Wolfcamp continues to impress, but with multiple pay zones along the way, the potential payback looks that much better."

It's all about improving technology and flow rates, which allow companies to keep costs down and dig in when oil prices slump, such as through downspacing and drilling multiple wells from the same rig, as large producers such as ConocoPhillips (NYSE:COP), Continental Resources (NYSE:CLR) and Anadarko Petroleum (NYSE:APC) are doing.

For now, Crude Energy's focus is on shrewdly drilling vertical wells to bring production online near-term, while identifying the most promising acreage for horizontal drilling.