The oil drilling industry has undergone significant changes in recent years. Technological advancements have not only improved drilling program efficiencies but have also transformed the way companies extract oil. A key development is the increased length of drilling laterals in horizontal shale plays, allowing companies to drill more (i.e., access more acres of potential reserves) using fewer rigs.

Historical Perspective on U.S. Rig Counts

Historically, the number of drilling rigs has decreased significantly. For instance, in the early 1980s, over 4,400 rigs were operating in the U.S.¹ Today, that number has dwindled to 586 rigs. At first glance, this might suggest an approximate 85% decline in new reserves being explored. However, this is not the case, thanks to advancements in horizontal well lateral lengths.²

U.S. Crude Oil and Natural Gas Rotary Rigs in Operation³

Does this relationship imply an approximate 85% decline in new reserves being explored? The answer is no, given advances in horizontal well lateral lengths.

Rig Count Composition

Of the 586 rigs currently in operation, most are horizontal drilling rigs used to access shale formations. These formations, when hydraulically fractured (“fracked”), achieve a level of permeability needed to produce economic quantities of hydrocarbons.

US Rotary Drilling Rigs – August 2, 2024

The shale revolution, which began in the late 1990s, transformed the U.S. oil industry. Previously, all wells were vertical, draining an area of roughly 40 acres depending on the formation being drilled.

Horizontal Drilling / Impacts of Lateral Lengths

In a typical horizontal well, the first section is drilled vertically to a desired depth, then the well is then turned (or “kicked”) to go horizontally through the desired formation. When a horizontal well is next hydraulically fractured, high-pressure fluids create cracks in the rock, forming a ring of permeability around the lateral extending hundreds of feet. Sand or another proppant is then injected to hold the cracks open, allowing the well to produce hydrocarbons once the hydraulic pressure is relieved. This action of fracking accesses a significant area around the wellbore, which increases with the length of the lateral being drilled.

These completion techniques enable the extraction of oil from tight rock formations that were previously considered to be inaccessible or deemed uneconomic.

Benefits of Longer Laterals

Longer laterals offer several key benefits:

• Increased Efficiency and Productivity: By extending the reach of each well, companies can access larger areas of the reservoir, leading to higher production rates.
• Reduction in the Number of Rigs: With longer laterals, fewer rigs are needed to achieve the same output. This reduction translates to lower capital expenditures and operational costs.
• Cost Savings: The efficiency gains from longer laterals result in significant cost savings for oil companies. Fewer rigs mean less maintenance, fewer workers, and lower transportation costs.

Permian Basin’s Lateral Leaders

According to a recent article from Hart Energy, Exxon Mobil is responsible for five of the Permian Basin’s longest lateral wells, three of which are in Poker Lake, New Mexico, and were drilled by Nabors rigs.⁴

The table below summarizes the ten longest lateral wells in this region:

Permian Basin’s Longest Lateral Wells

Only a few years ago, a one-mile lateral was considered to be noteworthy. Today, as shown, many horizontal wells are being drilled with laterals in excess of three to four miles.

Technological advancements in drilling have enabled companies to do more with less. The increase in lateral lengths being drilled today has enabled higher production efficiency and cost savings. These technological changes are making it possible for U.S. exploration and production companies to drill more with fewer rigs.

WTI Strip Prices Decrease

Spot prices and futures prices for the West Texas Intermediate (WTI) contract decreased approximately $2.75 per barrel in the near term and decreased approximately $1.75 over the longer term.  As of last week, the decline was more severe, but prices increased over the last few days given concern over increased tensions in Israel and the Middle East.

WTI Strip Prices – One Month Change

As shown, the oil price curve remains in a state of “backwardation,” reflecting the market’s expectation of lower future spot prices.

Oil Price Outlook

The price distribution below shows the crude oil spot price on August 14, 2024, as well as the predicted crude oil prices based on options and futures markets. Light blue lines are within one standard deviation (σ) of the mean, and dark blue lines are within two standard deviations.

WTI Crude Oil $/BBL

Based on these current prices, the markets indicate there is a 68% chance oil prices will range from $64.50 and $88.50 per barrel in mid-November 2024. Likewise, there is roughly a 95% chance that prices will be between $49.5 and $120.00. By mid-January 2025, the one-standard deviation (1σ) price range is $61.00 to $90.50 per barrel, and the two-standard deviation (2σ) range is $44.00 to $128.50 per barrel.

Key Takeaways

Remember that option prices and models reflect expected probabilities, not certain outcomes, but that does not make them any less useful. Throughout most of 2023 and 2024, crude oil spot prices have primarily fluctuated within the range of $70 to $90 per barrel. During that time, we observed general increases in futures price volatilities as prices neared the upper bound of that range, as evidenced by the futures price ranges observed. For mid-January 2025 pricing as of August 14, 2024, the 1σ range had a spread of $29.50 per barrel, and the 2σ range has a spread of $84.50 per barrel. For comparison, in 2022 we observed 1σ and 2σ price ranges in excess of $65.00 and $150.00, respectively.

1. “Rig Count Overview & Summary Count,” Baker Hughes.
2. Ibid.
3. “U.S. Crude Oil and Natural Gas Rotary Rigs in Operation,” U.S. Energy Information Administration.
4. “Beyond the Horizon: Exploring the Permian's Longest Laterals,” Jaxon Caines, Hart Energy, July 17, 2024.