The North American shale revolution has stood many traditional notions about oil and gas development on end. The rig count as a leading indicator is one of these notions.

Allen Gilmer, chief executive of Drillinginfo, addressed a crowd at Hart Energy's recent DUG East event in Pittsburgh with some rather startling numbers. Effectively, since his company began following activity in the Marcellus and Utica shales, production has ramped up considerably. Marcellus gas production saw the beginnings of an uptick in 2010, with daily production rising from about 500 MMcf in the first quarter to 2 Bcf in the fourth quarter. By the end of 2012, daily gas production was four times that amount.

Yet the rig count in the region is dropping. This would seem to be counterintuitive based on traditional thinking, but new changes in the development of unconventional plays paint a different picture.

One of Gilmer's slides showed a macro view of the movement of rigs in the US By using GPS tracking, Drillinginfo was able to show where the rigs were moving from and to. “There have been some rigs coming into the Utica and the Marcellus, but a fair number are leaving and going to the Rockies and Oklahoma,” Gilmer said.

A closer view of the Marcellus/Utica region indicates a cluster of movement within and between the two plays, indicating that many rigs are being utilized in multiple areas across the region. “It's interesting to watch how successful these rigs are,” he said.

The growth of drilling activity in the Utica has somewhat offset a drop of activity in the Marcellus, but the overall rig count has dropped substantially, with little more than 120 rigs running as of October 2013 compared to almost 160 in January 2012. Additionally, more than half of the rigs drilling in the Marcellus shale are drilling outside of Pennsylvania, the original sweet spot.

The most active operator drilling in the region is Antero, followed closely by Chesapeake and trailed by EQT Production, CNX Gas, Cabot Oil & Gas, Gulfport Energy, and Range Resources. Patterson Energy is by far the most active contractor in the region.

Gilmer noted that, unlike some plays like the Eagle Ford where operators stay with the same contractor and often same crew to increase efficiencies, this is not the

case in this region. “Very rarely do you see an operator with a single contractor,” he said. “Typically an operator uses two or three contractors, and contractors work with a lot of operators. That's good for stability.”

A map of drilling activity in the two shales shows that wells drilled since 2004 are definitely targeting the sweet spots. Gilmer said that the noncore areas should not be overlooked

“My prediction is that in five years, or maybe even two or three years, the areas we think of as noncore are going to have good economic returns because we're not going to be drilling wells with 6,000-foot laterals and 2 million-pound fracs,” he said. “We've spent a lot of time looking at what we call low-effort results, the idea of 1,000-foot laterals and 50,000-pound fracs, looking at what people have done by accident.

“We're seeing that if you're in fantastic acreage, it makes sense to put in long laterals. But in areas that are not very good, the benefit you gain by adding more lateral is minimal.”

The average lateral length in the region is around 5,500 feet, he noted.

Well spacing is another issue that continues to generate debate. Gilmer said that while there is not a specific spacing at which production drops to zero, there is a specific spacing level at which the operator will start to recover less gas per well.

“I think the regulatory bodies need to be familiar with this because we're going to see a steady evolution of drilling more in these noncore areas to extract smaller amounts of hydrocarbons,” he said. “It's something we've seen in every area.”

Of all of the technology and methodology that has caused the rig count to drop, pad drilling is the biggest culprit. Pad-drilled wells have increased from 0% of quarterly rig count total in 2008 to 80% today, Gilmer said. This is particularly prevalent in the southwestern sweet spot, where virtually all of the wells have been pad-drilled from multiwell pads.

“This has made it difficult to understand the rig count,” Gilmer said. “It's not rig count anymore; it's how many wells we are drilling.”

It's also skill and experience. “Given the same geological propensity to produce, the same quality of land, and looking at the difference between the best operators in the play and the average, the best ones will produce 30% to 50% more than the average,” he said. “The worst will produce 30% to 50% less than the average.

“What this really means is that there will be opportunities for people who know what they're doing to pick up acreage that looks to be bad. People are going to mistakenly take good geological areas that aren't producing because of bad operating practices and commit the cardinal sin of selling off their acreage because they didn't drill economic wells.”

—Rhonda Duey

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