US oil to gas drilling ratio is poised to hit an all-time high

Dedicated US oil drilling activity is surging, and poised to eclipse a 24 year high relative to dedicated gas drilling.  

On December 4th, 1987, the ratio of active deployed oil drilling rigs to natural gas rigs stood at 65.7%.  In the 24 years since, the ratio has declined, hitting an all-time low of 10.5% on June 10th 2005.  It appears, as of the latest Baker-Hughes rig count taken January 27th, that the ratio which currently stands at 61%, could be eclipsed this year.  If oil continues its price resiliency (and the geopolitical tensions in Iran and Nigeria suggest that it will), and natural gas prices continue to sag below the $3/MMBtu mark (which they should), the trend of shifting from dedicated gas drilling to dedicated oil drilling should continue in ernst.

To put this in perspective, reference the below graphic.  Oil drilling had been in a steady 18 year decline since 1987, while natural gas drilling activity picked up substantially over that timeframe, fueled by new US non-conventional discoveries and rapid advances in innovation.  But since June of 2005, oil drilling activity has increased exponentially.

Oil drilling activity has increased at an exponential rate since June 2005, and is on pace to set a new record

Compare the ratio to the total number of rigs deployed over that same timeframe.  When oil drilling reached its last peak in 1987, there were 1094 total rigs deployed in the US.  Compare that to today, where 2,008 rigs are currently active.  Not only is the ratio of oil to gas rigs higher, but the total number of dedicated oil rigs has more than doubled since activity last peaked.  That’s a massive amount of domestic oil coming online.

Linear regression suggests that the growth in total US rigs since 1987 can be modeled by f(x) = .76x + 605.62, but the R square value for the fit is low at 52%

When exactly will oil activity hit the all-time high?

The increase in oil drilling activity relative to gas drilling is quite literally, exponential.  Since the low in June of 2005, activity relative to gas has drilling has surged at an increasing rate.  Standing now at 61%, it has typically taken oil drilling from 6-12 months for rig activity to shift positively in the 5% range relative to natural gas.  That suggests that by summer of this year, given continued natural gas and oil dynamics, that oil drilling will reach a new 24 year peak in the US.   The below graphic depicts the surge in activity since the low point in 2005.

US Oil drilling activity relative to natural gas is poised to hit a 24 year high this year. Activity has surged since hitting a low in 2005.

Summary:

The trend has been accelerating, and is likely a reflection of sustained high oil prices, increased energy independence initiatives and policies and improvements in non-conventional oil drilling.  The current geopolitical landscape has and will continue to play a major supporting role in this trend.

Sources:

Baker Hughes International: http://files.shareholder.com/downloads/BHI/1596981459x0x537277/0C434685-8D3A-4AA4-BB86-C5BE29C96519/US_Rig_Report_012712.xls