When oil and gas prices soar, the law of supply and demand would suggest that higher prices should spur increased production. Oil and gas producers, on the other hand, have good reasons not to rush into drilling new wells, an inherently complex undertaking with enormous start-up costs.
Because such decisions and the development of new wells take time, oil and gas production responds to changes in energy prices relatively slowly, just like energy demand.
As a result, oil and gas prices must move more after disruptions to bring the market back into balance. That chronic volatility, in turn, gives producers another reason not to rush longer-term supply decisions.
Below we'll look at how long it takes to develop additional oil and gas production by drilling wells in developed and producing shale fields and offshore. We'll also consider the longer-term development timeframes for developing new oil and gas resources.
These timelines drew attention in March 2022 with crude oil prices at a 10-year high and Russian crude slow to sell as a result of reputational concerns by buyers following Russia's invasion of Ukraine.
- Oil and gas production is a complex, lengthy and costly process that starts long before the drilling begins.
- Shale wells can be drilled in two to four weeks and brought on line within months, while offshore wells are costlier and can take much longer.
- Oil and gas supply is slow to respond to price signals in part because producers know energy pices are especially volatile.
- Oil and gas production depends on the availability of capital, labor and required equipment.
Well Site Selection and Preparation
Identifying new well sites is a complex and time-consuming process even in developed and producing oil and gas reservoirs. To maximize a company's production from a reservoir, petroleum engineers must minimize the extent to which each new well diminishes output from other company wells nearby, while maximizing the inventory of available drilling locations.
In the Barnett shale near Dallas, it takes one to three weeks to prepare the drilling site, including clearing, fencing, excavation of the fracking pond and the mobilization of necessary equipment. This is followed by drilling preparations, which also last one to three weeks.
The drilling of a modern shale well can take two to four weeks. Drilling efficiencies in recent years have generally resulted in longer laterals rather than shorter drilling times amid an industry-wide shift to horizontal wells.
Pioneer Natural Resources Company (PXD), a leading Permian Basin producer, was reportedly taking 14 to 25 days to drill wells 10,000 feet deep with a 20,000 foot horizontal lateral by 2018.
Drilling an offshore well can take three to four months and cost $120 million to $160 million per well, with the most complex drilling projects taking as long as a year. Offshore wells are significantly costlier than those on land, with wells off the coast of West Africa costing up to 30 times more than those drilled into U.S. shale.
After drilling is done, the drilling rig is removed while the well is prepared for hydraulic fracturing. Wells in shale formations require high-pressure flushing with engineered fluids to create fractures in the rock and then hold them open, releasing oil and gas.
It takes about a week after the drilling to prepare the well for hydraulic fracturing and about 10 days to carry out the process, depending on the length of the lateral segments. Adding production tubing takes another week, followed by two to three weeks of flowback, the early production stage in which oil and gas is mixed with water and sand.
Developing New Oil and Gas Fields
While new wells in developed reservoirs can be drilled and brought online in a matter of months, timelines for production from new fields stretch for years because they have complex permitting requirements and require the construction of infrastructure such as pipelines and storage facilities.
One study found the world's largest oil and gas fields averaged 5.5 years from discovery to first production and took 17 years of production on average to reach peak output. Chevron Corporation's (CVX) Gorgon natural gas development project off the coast of Australia took 30 years to progress from discovery to construction and nearly six more years to start producing liquefied natural gas.
Growth Constraints on Oil and Gas Production
Even the shorter timelines for adding oil and gas production from developed fields assume the availability of inputs such as labor and equipment. That availability became increasingly constrained amid supply chain disruptions and tight labor markets in the wake of the COVID-19 pandemic.
In the Permian Basin, the top U.S. production reservoir, delivery delays for materials including pipes and sand were slowing production growth in March 2022, according to Occidental Petroleum Corporation (OXY) Chief Executive Vicki Hollub.
The tight labor market pushed up annual wage inflation for oil & gas support workers to nearly 11% as of December 2021.
Because oil and gas drilling is so capital intensive the availability of capital is another constraint on output. That's especially true for shale, in part because production from shale wells slows faster than from conventional ones. That means more wells must be drilled constantly just to offset the production declines from those already on line.
In the wake of abrupt energy price declines in 2014 and 2020, investors turned skeptical of capital spending beyond that needed to keep production steady, rewarding companies that returned excess cash flow in dividends or share repurchases. That preference persisted even as oil and gas prices soared in early 2022.
The limited inventory of sufficiently lucrative drilling locations serves as another constraint on oil and gas production growth, and was already evident in the Permian in 2022.
The Bottom Line
Producing oil and gas is a complex, long and costly process. As a result, supply is slow to respond to price signals. U.S. drillers face additional production growth constraints because production from shale wells declines more rapidly.