Permian operators are drilling shorter wells, blunting the effects of rising costs of oil and natural gas production, reports the U.S. Energy Information Administration.
Shorter wells help mitigate higher prices for inputs such as iron and steel tubing. In particular, these operators are moving away from drilling deep wells, which take longer to drill and require more materials, and are instead focusing on short- or medium-depth wells.
Against the backdrop of a decreasing total horizontal oil rig count in the Permian, the rig count for medium depth wells has increased compared to pre-pandemic levels. Each rig in the Baker Hughes rig count is categorized by well depth. According to data as of September 8, 2023, the rig count for wells deeper than 15,000 feet (>15,000) decreased by 69% (58 rigs) from the March 13, 2020, pre-pandemic rig count (Figure 1).
In contrast, the rig count for wells between 10,000 feet and 15,000 feet increased by 2% (4 rigs) compared with March 13, 2020. This decline in >15,000 wells suggests a strategic change. Although deeper wells produce more oil per well—thereby increasing revenue—they are also more expensive to drill. We outlined this trend of rising input costs—which included drilling and other costs—in an earlier This Week in Petroleum article, which showed that the costs of goods sold for large U.S. oil producers remained elevated through 2023.
The permitted depth indicates the total depth of the well, which includes vertical, directional, and horizontal portions. The permitted well depth is the depth that is reported to state authorities as the target depth of the well. Due to the variable nature of directional drilling, the permitted depth is an estimate of the final depth.
Most rigs are permitted for wells between 8,000 feet to 12,999 feet. Notably, the 10,000 feet to 10,999 feet range accounts for 22.9% of the total, or 64 rigs. This distribution underscores Permian operators’ inclination toward medium-depth wells that fall into the 5,000 feet to 10,000 feet or 10,000 feet to 15,000 feet categories.
One of the largest cost components of a drilling program is steel piping. The main drilling use for steel pipe is casing pipe, which is a large-diameter pipe that runs the length of the well and provides structural support to the well hole. Oil and natural gas casing strings are sometimes installed in descending diameters, depending on the operator’s drilling program.
As of July 2023, the Iron and Steel Pipes and Tubes index from the U.S. Bureau of Labor Statistics’ Producer Price Index (PPI) remains significantly higher than before the COVID-19 pandemic, which—because it is one of the largest factors in drilling costs—is having a lasting effect on operator costs and drilling strategies (Figure 3).
The PPI for Drilling Oil and Gas Wells and for Support Activities did not increase as significantly as it did for Iron and Steel Pipes and Tubes, which remains elevated. In contrast, the Oil and Gas Extraction Index has declined since 2022, yet it is still higher than in March 2020. Oil and Gas Extraction costs are operating costs and account for a smaller portion of an operator’s total well expenditure, whereas drilling and support costs tend to be the most capital-intensive part of a drilling program.
Source: EIA
