The effect of oil and gas price and price volatility on rig activity in tight formations and OPEC strategy

Abstract

Exploration of tight oil and gas formations has significantly increased US oil and gas production in recent years. However, detailed economic analysis of this production, including identification of the break-even price (BEP), the measure of price used to plan exploration and development, a synergy between price volatility and the BEP, and a feedback effect of tight oil production on oil prices, has yet to be carried out. Here we show that the BEP for rigs used to drill oil wells is $20 (~$50 nominal), the effect of price volatility on rig activity declines as the price for crude oil or natural gas moves above or below this BEP, firms use futures prices (not spot prices) to plan exploration and development, and new rig productivity affects both drilling activity and oil prices. The latter indicates that increases in new rig productivity can account for much of the 2014 oil price decline.

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Fig. 1: Oil price volatility.
Fig. 2: Natural gas price volatility.
Fig. 3: Determinants of active oil rigs.
Fig. 4: Determinants of active natural gas rigs.
Fig. 5: NRP and prices.

Data availability

The data and computer code are available on request from the authors.

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Acknowledgements

We thank A. Berman, A. Behar, C. A. S. Hall, L. Nogueira Hallack, M. Kah, A. Ali Khalifa, R. Kleinberg and R. Ritz for comments on preliminary versions of this work and J. Lieskovsky and F. Pretis for assistance in accessing data. Any errors that remain are our responsibility.

Author information

Both authors played a role in collecting the data, estimating statistical models, analysing the results and writing the manuscript.

Correspondence to Robert. K. Kaufmann.

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The authors declare no competing interests.

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Supplementary Figures and Text

Supplementary Notes 1–6, Supplementary Figures 1–6, Supplementary Tables 1–4, Supplementary references.

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