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Thursday, 11 December 2014

Texas drilling frenzy made oil crash inevitable: Kemp

By John Kemp

Dec 9 (Reuters) - If prices had not crashed over the past five months, the oil market would have moved into a substantial surplus in the first half of 2015, according to a review of drilling and production statistics from major shale plays in the United States.

The pace of drilling and production growth in the Eagle Ford and Permian Basin shale plays in Texas, which together with North Dakota's Bakken account for most of the increase in U.S. output since 2008, was accelerating in the first eight months of 2014.

The combined crude output from the Eagle Ford and Permian Basin surged by 400,000 barrels per day (b/d) in the eight months, compared with an increase of 288,000 b/d in the previous eight-month period, according to records published by the Railroad Commission of Texas, which regulates the industry.

In August 2014, total production of crude and condensates from the two plays topped 2.5 million b/d, up from 1.1 million just three years earlier. Combined output was higher than some members of OPEC.

And the industry was preparing to increase output even further. Exploration and production companies were adding more drilling rigs, especially in the Permian Basin, where the number of rigs in operation exceeded 460 throughout the summer, up from less than 400 in 2013, according to Baker Hughes, the oilfield services company.

Record numbers of applications for permission to drill new wells were being filed with the Railroad Commission. In September 2014, regulators issued almost 2,000 new permits for oil or combined oil and gas wells, up from less than 1,000 in the same month a year earlier.

A Reuters' chartbook "Spotlight on Eagle Ford and Permian Basin" can be downloaded here:

In explaining the sudden drop in prices, analysts have tended to focus on the resumption of Libyan oil exports, which added an extra 700,000 b/d to the crude market between June and September.

But the acceleration in output from the Texas fields played a critical role too in pushing the market toward incipient oversupply.

With so much extra oil hitting the market, a sharp drop in prices had become inevitable as the only way to enforce a slowdown in drilling. (editing by Jane Baird)

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