Why horizontal rigs are increasing and vertical rigs aren’t

By

Jul. 25 2014, Updated 8:00 a.m. ET

Rig coutns

For the week ending on July 18, 2014, the number of horizontal rigs increased by 12, from 1,276 a week ago to 1,288. This total broke the record number of horizontal rigs set during the previous week. The number of vertical rigs, on the other hand, decreased by 11, from 377 to 366. The decrease is also the main reason for the drop in the total number of rigs this week. Year to date, horizontal rigs are up by 12% (+140), while vertical rigs are down 3% (-9).

Article continues below advertisement

According to Baker Hughes, a horizontal well is a type of directional well in which its surface location is not situated directly above the reservoir that it targets. A horizontal well has an inclination that exceeds 80 degrees from the vertical, or its lower part runs parallel to the pay zone—the reservoir. To increase production, horizontal wells are redrilled to increase the length of the well exposed to the reservoir.

In vertical drilling, a well is drilled straight down into the earth until it reaches the formation being developed. The well is then completed and starts producing oil or natural gas.

According to Baker Hughes, horizontal drilling has become the more popular form of drilling over the past few years in the U.S. By the end of June 2014, the number of horizontal rigs has increased about 280% since January 2007. During the same period, the number of vertical rigs has decreased by about 62%.

The discovery of huge quantities of oil and gas in shale formations in the U.S. caused the spurt in horizontal rigs. The type of drilling combined with hydraulic fracturing of unconventional oil and gas formations resulted in large amounts of U.S. oil and natural gas being developed and produced.

Article continues below advertisement

The Permian Basin has the highest number of rigs in the U.S. The share of horizontal rigs in the Permian Basin has also increased substantially over time, along with the advent of new technologies such as hydraulic fracturing. Of the 556 rigs in the Permian as of July 18, 56% are horizontal, 39% are vertical, and about 4% are directional. In contrast, as of July 22, 2011, only about 19% of the rigs were horizontal versus about 77% of them were vertical rigs. The share of directional rigs has remained almost unchanged.

Rig counts can be useful indicators to gauge the activity levels of upstream companies such as Exxon Mobil Corporation (XOM) and EOG Resources, Inc., (EOG), which are also part of the Energy Select Sector SPDR Fund (XLE). Rig counts can also gauge the activity levels of oil services companies such as Halliburton Company (HAL) and Schlumberger Limited (SLB), which are part of the VanEck Vectors Oil Service HOLDRS Exchange-Traded Fund (OIH).

Continue reading the next part of this series to learn about U.S. oil rig counts.

Advertisement

More From Market Realist