Drilling contractors expect rebound in US activity but don't know when

Feb. 6, 2002
US drilling activity is bound to pick up, but no one is quite sure when, said a panel of industry executives Wednesday at the annual health, safety, environment, and training conference sponsored by the International Association of Drilling Contractors in Houston.

Sam Fletcher
OGJ Online

HOUSTON, Feb. 6 -- US drilling activity is bound to pick up, but no one is quite sure when, said a panel of industry executives Wednesday at the annual health, safety, environment, and training conference sponsored by the International Association of Drilling Contractors in Houston.

US drilling for natural gas will rebound quicker than drilling for oil, predicted Dennis Heagney, chief operating officer of Transocean Sedco Forex Inc., Houston.

"If you pay enough, you can find a consultant that will give you a price of oil going out to 2004," Heagney said. In reality, he said, "no one around here" knows "if oil prices are going up or going down."

However, Heagney said, "The oil side of the drilling business doesn't depend on the price of oil so much as on the perception of price." The most prevalent perception at present, he said, is that oil prices will not rise much above $20-$21/bbl over the next 12-16 months.

It's easier to predict a rise in natural gas prices "because we're starting from such a low point, below $2/Mcf," said Heagney.

"We're doing a better job of completing gas wells, but the pockets that we're drilling are smaller and deplete in a couple of years," he said. "A year of that (accelerated depletion) and no new drilling will produce a pretty good kick up in gas prices. But whether that will come in the third quarter of 2002 or the first quarter of 2003, I don't know."

Even with aggressive US drilling activity in 2000 and early 2001, US gas supplies are barely keeping pace with depletion "especially on the land side," said Steve Richards, vice-president of drilling for Key Energy Services Inc. in Midland, Tex. "A big decrease in drilling means supply shortages in the future," he said.

Natural gas is the driver for US land rig utilization and day rates, said Richards. The fall off in gas drilling since last year is the result of a continuing economic recession -- "14 months and still counting," he said -- that has dampened demand.

However, Richards said, "The best cure for low demand for gas is low demand for gas." With new gas-fired power plants being built and no new gas wells yet being drilled to supply them, he expects demand for gas to start increasing soon.

Coping with increased volatility is one of the biggest challenges facing the drilling industry, said Dennis Smith, director of corporate development for Nabors Industries Inc., Houston.

"We're seeing shorter cycles, with higher highs and higher lows in rig counts, mergers, and earnings," he said. "Every time the trough is at a higher point."

Meanwhile, the number of land rigs working each week in the lower 48 states appears to have stabilized at 800-850 units, after a sharp rise and fall in the rig count last year, Richards said.

As a result, he said, "Day rates have dropped drastically but are now holding steady."

Looking at offshore operations, Heagney noted, "The North American jack up rig utilization rate remains in the abysmal 50% range." Moreover, he predicted, "We will see a fall off in world demand for jack ups as more of those rigs move out of the Gulf of Mexico to other markets."

Heagney said 17 "mega" drillships and 21 semisubmersible rigs were built in the last 6 years for the growing deepwater drilling market, compared with 20 newbuild jack up rigs during that same period. Most of those rigs were ordered with drilling contracts in hand, so that there was little speculative construction. However, Smith said, "Those floaters represent a huge investment. Every one saw overruns in their building costs."

Meanwhile, mergers among the major integrated operators have reduced the number of potential deepwater drilling clients, while their quicker reactions to the downturn in commodity prices has triggered changes in drilling programs.

As a result, Heagney expects to see soon "a free-for-all with deepwater floaters clamoring for work." However, he assured IADC members, "That will only last for awhile. The market will recover -- but I don't know when."

The South American offshore drilling market is "almost entirely driven by Petrobras," said Heagney. "There is a lot of political instability in Venezuela."

"The North Sea is weather driven, with many rigs stacked in the wintertime," he said. A shift toward more independent producers operating in those waters is good for the drilling industry. But that also has been countered to some degree offset somewhat by "disappointing results" of drilling programs west of the Shetland Islands and the Faroes. As a result, Heagney said, the North Sea drilling market "is not good, but not bad."

Continuing exploration successes off West Africa also are offset somewhat by "a lot of political instability," strikes, and other problems, said Heagney. The Middle East and Mediterranean offshore market is "relatively small" and characterized primarily by "short-term work, unless you're established with a national oil company," he said.

The Southeast Asian drilling market also has a lot of short-term jobs that force contractors to "hustle all of the time looking for work," said Heagney. "There's not much demand for floaters."

Contact Sam Fletcher at [email protected]