DRILLING MARKET FOCUS
US drilling activity continues climb from biggest first quarter jump in 15 years

By OGJ editors

HOUSTON, Apr. 4 -- First-quarter gains in US drilling activity are poised to expand further in the second quarter and beyond.

Expected continuing robustness in oil and natural gas prices underpin that outlook, as does the prospect of fresh incentives from the US government bolstering the economics of deep gas drilling in the Gulf of Mexco.

In a Mar. 31 report, Marshall Adkins, a Houston-based analyst with Raymond James & Associates Inc., St. Petersburg, Fla., reported US drilling activity expanded by 15% in the first quarter of this year vs. fourth quarter 2002 and was up 26% from the same period in 2002. Such an increase, he said, "is especially impressive, given the fact that the rig count typically declines by 10% during this time frame."

Adkins noted the number of US rigs drilling for oil "improved a whopping 40% to 178 rigs during the first quarter. That being said, we expect natural gas drilling activity to be the key driver of rig activity growth going forward."

US drilling increased again this week, continuing what analysts previously described as the largest first quarter jump in rig activity for the past 15 years.
Baker Hughes Inc. reported 972 rotary rigs working in the US and its waters this week, 10 more than the previous week and up 24% from the 738 active units during the same period a year ago.

Meanwhile, offshore drilling action worldwide remains largely flat, according to the latest tally by Houston-based ODS-Petrodata.

More drilling permits
A 30% jump in the number of US drilling permits issued during the first 3 months of 2003 also indicates continued growth of drilling activity this year, said Adkins. In contrast, he said, "Last year, drilling permits didn't once increase (through any) 2 consecutive months, generally following a pattern of up 1 month, down the next."

Adkins said, "This (current) strong uptick in drilling permits has widened the traditional gap between permits and active rigs. In fact, the only other time in the past 3 years that we have experienced a similar disconnect was in mid-2000, when coalbed methane activity created a surge in drilling permits, but even that disconnect was short-lived. History suggests that this gap will not last long and indicates that drilling activity should continue ramping up over the foreseeable future."

Uncertainty remains
Yet despite those impressive gains, some analysts and oil field service company executives claim most operators have not yet increased their 2003 exploration and production budgets to reflect higher commodity prices for oil and gas this year.

At a biannual oil field forum Friday in Houston, John Morgan, executive vice-president of Occidental Oil & Gas Corp., a subsidiary of Occidental Petroleum Corp., noted that "not that long ago," US oil prices were under $20/bbl "and might be that way again. It's a possibility that we (operators) have to consider."

Morgan also pointed out that widespread consolidation among major and independent operators in recent years was stimulated largely by their need to reduce costs. "If we can keep costs under control, we have a better chance of being around later," he said.

Increasing production while reducing costs requires "an 'end-to-end' perspective, intelligent risk-taking, and innovation," Morgan said. "I'm open to radical ideas; I'm not open to radically trying new ideas unless there is some chance it will work."

Latest rig count
This week's increased US activity was all in land operations, which were up 14 rigs with 856 units working. The number of offshore rigs in the process of drilling was down 1 to 97 in the Gulf of Mexico and down 2 to 102 for the US as a whole. Drilling activity in inland waters also decreased by 2 units to 14.

Canada's seasonal thaw triggered a drop of 67 rigs, with 221 still active in that country, up from 178 a year ago.

Among the rigs working in the US, 187 were drilling for oil, 9 more than the previous week. Drilling for natural gas also increased, up 1 rotary rig to 782. Three rigs were unclassified. The number of US rigs involved in directional drilling slipped by 4 to 238. However, the horizontal drilling category increased by 2 units to 66.
New Mexico led the latest increase in drilling activity, up 7 rotary rigs with 74 working this week. That followed an increase of 4 units the previous week. Oklahoma increased its rig count by 3 to 123. Louisiana and California added 1 rig each for respective totals of 152 and 20.

Texas had 425 rotary rigs working this week, 3 fewer than the previous week. Wyoming and Alaska were down 1 rig each to 37 and 11, respectively.

Gulf of Mexico
ODS-Petrodata, Houston, reported 3 fewer mobile offshore rigs under contract in the Gulf of Mexico this week, down to 119 out of 182 units available for work. The fleet utilization rate dipped to 65.4% in those waters.

But despite current uncertainty in the gulf market for jack ups, Jefferies & Co. Inc. recently reported US offshore drilling is expected to recover by the second half of this year (OGJ Online, Apr. 1, 2003).

In that report, Jefferies oil service analyst S. Magnus Fyhr said, "The demand for premium jack ups remains strong, as utilization is close to 92% compared (with) only 61% for commodity-type jack ups. As the reserve size in the shallow-water gulf continues to get smaller, we expect demand for premium jack ups to remain strong, as operators search for new production in more-nonconventional niche markets."

According to Jefferies, deep gas drilling will be one of the "most promising prospects" for growth in reserves for the majors and larger independents drilling in the gulf's mature, shallow water.
"However," said Fyhr, "due to the significant cost and risk association with deep gas plays, operators require high-specification rigs that are capable of drilling and completing high-temperature, high-pressure wells at depths exceeding 15,000 ft."

Global offshore
In European waters, ODS-Petrodata reported the available mobile offshore rig fleet increased by 1 to 99 this week, with the number of contracted rigs unchanged at 84, slipping the utilization rate to 84.8%.

Worldwide, the group reported a net decline of 4 rigs to 526 under contract out of a total available fleet of 658, for an overall utilization rate of 79.9%.

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