Despite the historic increases in production across nearly every major play in the U.S., Oklahoma’s drilling activity is fading. After relatively stable rig count numbers week over week from May 2017 to January 2019 (ranging from 120 to 140), a steady decline since the first of the year has seen tallies hovering just over 100, a decline of 30%.
Rig counts across every other oil and gas producing state have either remained steady or grown during the same period.
After a peak of 431 monthly issued permits in December 2018, monthly permits have been below the 12 month average (June 2018 to May 2019) of 259 each of the past 4 months (Feb to May 2019.) Current drilling activity mapping reveals an absence or virtual absence of rigs in areas where over the previous 12 months completions were significant. For instance, in the Woodford plays in northern and eastern Oklahoma, only 1 gas rig was drilling in June while over the previous 12 months over 30 completions were recorded.
According to a recent Reuters report, the problem is that, what was once referred to as the “Permian Basin Jr.”, Oklahoma’s SCOOP (South Central Oklahoma Oil Province) and STACK (Sooner Trend, Anadarko, Canadian and Kingfisher) basins are proving troublesome for producers. It seems the multiple stacked plays in Oklahoma are more geologically inconsistent than previously assumed, resulting in higher costs.
According to consultants RS Energy Group, Oklahoma is proving to be a complex mix of hydrocarbons that change across the play. Compounding the problem is that though initial production rates from so-called parent wells were very good, subsequently drilled “child”, or secondary well production has disappointed.
Further, a rather surprising completions statistic for the 12 month period from June 2018 to May 2019 revealed that of the 1470 wells drilled, 27 resulted in dry holes, according to Oklahoma Minerals’ website. In comparison, the Texas Railroad Commission reported that of the 3,514 completions in Texas for the 6 month period from January to April 2018, only 4 were dry.
The production disappointments in Oklahoma are prompting producers to downsize. According to the Reuter’s article, Devon Energy cut capital spending in it’s STACK position by 11% while Cimarex has cut 15% from its 2019 commitments, moving those investments to its Permian operations. Producers are also reportedly narrowing their drilling focus on the western Woodford play and away from pay zones in the north and east.
Break even points in the region are also proving much higher than in other regions hovering around $54 a barrel. With WTI prices also hovering in that range, Oklahoma’s oil profit margins are thin.
Despite being the nation’s 4th largest oil producing state (increasing from 5th over last year), and record oil production in 2018 (and a recording breaking month in March 2019), the problem may simply be a relative one. If not for the nearby Permian and other plays showing more promise, Oklahoma’s oil future likely would not be in question.
The good news is that Oklahoma’s Sweet Crude benchmark remains one of the best price per barrel deals as its discount to WTI is around 3.3%, nearly 7% better than the average 10% discount of the 130 sub-market benchmarks combined. With production being up 46.6% from 2015 to 2018, Oklahoma may be seeing rough days ahead, but it certainly won’t fade into the back of the pack.