Flattened drilling seen challenging US upstream thinking

Drilling activity has flattened in the US despite gyrations of crude oil and natural gas prices in an unusual pattern that challenges managers of the oil and gas producing industry.

At the summer Oilfield Breakfast Forum by Decision Strategies in Houston, Superior Energy Services Pres. and Chief Executive Officer David Dunlap noted that the Baker Hughes rig count for the US has been steady for 9 months and seems likely to remain so indefinitely.

Meanwhile, he said, service companies face immediate needs to reposition assets, deal with continuing inflationary pressures, respond to cuts in capital spending by operators, and improve efficiency of drilling and completing horizontal wells.

Challenging service providers and operators in the longer term, Dunlap said, are safety and two aspects of water—disposing of produced water and acquiring water for completions.

Other long-term concerns of the upstream industry, he said, are remediating environmental effects of produced water, improving recovery rates, and dealing with an uncertain regulatory environment.

Another speaker, Dan Pickering, copresident of Tudor, Pickering, Holt & Co., said that, despite oil and gas price weakness that might linger a further 18 months, “This is a growth business in the US again.”

Eventually, he said, oil prices might stabilize at $90-100/bbl—a range high enough to support activity but low enough to sustain demand. And he said natural gas prices of $5/Mcf or more are possible once US demand increases substantially and exports begin.

Geopolitical shifts

Kenneth Medlock III, a fellow at the James Baker Institute and adjunct professor and lecturer at Rice University, highlighted geopolitical consequences of the potential boost to global gas supplies shaping up from unconventional resources.

Worldwide, large conventional gas resources tend to be distant from demand centers. Potential gas supply from unconventional reservoirs is emerging much closer to markets. If developed, the new supply would reduce long-distance gas trade along with demand for supply from producing countries once thought essential to meeting global gas needs, Medlock said, citing a study the Baker Institute conducted for the US Department of Energy.

The countries that would have benefited most from the once-expected trade now cast in doubt by unconventional gas: Russia, Venezuela, and Iran.

Another speaker, W&T Offshore Pres. Jamie Vasquez, warned of problems federal regulators will have keeping up with future Gulf of Mexico activity after federal agencies were reorganized following the fatal Macondo blowout and oil spill of 2010.

Although drilling is increasing, she said, permits take longer to acquire and cost more than they did before the reorganization.

She called on policy-makers to increase access to oil and gas resources on federal land, ensure “common-sense” regulations, improve and accelerate leasing and permitting, improve the pipeline infrastructure between Canada and the US, and avoid “punitive new taxes.”

Contact Bob Tippee at bobt@ogjonline.com.

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