Focus on top spots to boost U.S. oil output even as well permits fall

By Ernest Scheyder and Kristen Hays

WILLISTON, N.D./HOUSTON (Reuters) - U.S. energy firms are swiftly shifting drilling rigs away from less productive areas and hunkering down in sweet spots of North Dakota and Texas shale oil fields as they try to lift output and cut costs in response to the toughest crude market in years.

Rig deployments or applications for new well permits fell by half in recent months in parts of North Dakota's Bakken formation and the Eagle Ford and Permian Basin in Texas, but the most prolific areas are holding up, according to officials and data from the two top crude-producing states.

The numbers show how big companies such as Apache Corp (APA.N) and Continental Resources Inc. (CLR.N) are already implementing plans to focus on the juiciest parts of shale fields. They say the strategy will produce double-digit output growth next year even as they trim rigs.

Overall, new well permits granted nationwide tumbled 40 percent in November according to data firm Drilling Info.

Investment bank Simmons & Co forecast this week the U.S. onshore rig count would fall by 500 through next year from 1,851 now, a 27 percent slump.

In the past, such declines would have led to an inevitable drop in output.

Today, improving technology helps get more oil out of fewer wells and with drilling contracts already signed for the next six months, U.S. output is widely expected to rise.

"You’re upping your capital in your best plays, reducing it in your worst plays," says Vikas Dwivedi, global oil and gas strategist at the investment bank Macquarie, who predicts a further rise in U.S. oil output.

The U.S. Energy Information Administration forecasts 2015 production to average at 9.4 million barrels per day, the highest since 1972 and up from an already a decades-high of 8.9 million bpd in October.

SUPERFRACKS

Advances in horizontal drilling, more horsepower and more intensive hydraulic fracturing mean "supersized" wells are more productive than ever.

"What really matters now is not the number of rigs or wells, but the number of lateral feet drilled and productivity per foot," says Dwivedi.

To be sure, the 40 percent slide in oil prices from above $100 per barrel in June to around $66 now, has made several "fringe" counties in North Dakota and Texas shale fields unprofitable.

For example, the number of drilling rigs operating in North Dakota's Divide County has fallen to four from nine in late September, according to state data.

In Texas, new well permits fell nearly 50 percent in Eagle Ford's Lee County in October compared with September.

Yet even as less drilling is starting to weigh on the market for rig leases and sand used in fracking, producers with prime acreage are still able to crank up output and make money.

SWEET SPOTS

North Dakota regulators say prices would have to slide to $40 per barrel before most producers started losing money there.

Consultants at Woods Mackenzie say the break even level for Eagle Ford in Texas could be as low as $50 per barrel.

"As the oil price falls, producers are going to pull back to their sweet spots more and more," says Vicky Steiner, executive director of the North Dakota Association of Oil and Gas Producing Counties and a state representative.

Most of the state's primary oil producers have already begun shifting resources to the most-attractive counties: Williams, McKenzie, Dunn and Mountrail.

Not only are they more oil-rich, but also cheaper because they have more infrastructure and wells, allowing producers to drill multiple wells from the same drilling pad.

Also in Texas, well permits dipped only slightly or have risen in the most productive counties of Eagle Ford oil fields, such as DeWitt, Webb and Live Oak. Permits were also up in several Permian counties.

Andrews County Judge Richard Dolgener, the top elected official in Permian's prime oil producing county, says the local economy remains strong enough to cope with the challenge posed by the OPEC's decision to maintain output despite a global supply glut.

"The other countries that have been the big dogs, they're going to have to figure out that we're here to stay. We can make money at $60," said Dolgener.

(Additional reporting by Nia Williams in Calgary; Writing By Terry Wade; Editing by Tomasz Janowski)