US drilling climbs from biggest first quarter jump in 15 years

May 5, 2003
Continued robust oil and natural gas prices should expand first-quarter gains in US drilling activity through the second quarter and beyond, with fresh incentives from the US government bolstering the economics of deep gas drilling in the Gulf of Mexico.

This article introduces a biweekly update of drilling market activity and trends.

Continued robust oil and natural gas prices should expand first-quarter gains in US drilling activity through the second quarter and beyond, with fresh incentives from the US government bolstering the economics of deep gas drilling in the Gulf of Mexico.

Marshall Adkins, a Houston-based analyst with Raymond James & Associates Inc., St. Petersburg, Fla., reported Mar. 31 that US drilling activity had increased by 15% since the beginning of 2003 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 said 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."

Where's the beef?

Some analysts believe US drilling gains will persist well into next year. An Apr. 7 report, however, by Jeffrey L. Mobley, also with Raymond James' Houston office, denounced the US Minerals Management Service's new royalty relief program as "all sizzle, no steak."

"The goal of the program is to help increase domestic gas supplies by improving the economics and lowering the risk profile of deep shelf drilling. While the program appears appealing on the surface, as with most government programs, the devil is in the details," Mobley said.

"In our view, the program will not provide meaningful enough incentives to producers to offset the greater costs and risks of deep shelf drilling. Furthermore, even if deep shelf drilling does accelerate, the potential impact is too small in relation to the overall domestic supply to make a material difference. We believe that improved access to federal lands in the Rockies and offshore as well as a return of Section 29 tax credits would have a much greater impact in addressing domestic supply problems."

US drilling increased again during the week ending Apr. 4, 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 that 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 worldwide remained relatively flat, according to the latest tally by Houston-based ODS-Petrodata. Among recent contract awards on the global offshore scene was one for drilling water injection wells in giant Heidrun field off Norway.

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.

"This strong uptick in drilling permits has widened the traditional gap between permits and active rigs." In fact, he said, "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."

2004 growth expected

"The drivers for domestic drilling activity, i.e., natural gas prices, also remain positive, and should provide the catalyst for continued growth," said Banc of America LLC analyst James K. Wicklund in an Apr. 3 research note.

Certain risks, including economic recession, geopolitical concerns, and greater-than-expected gas demand, could "lower the magnitude but not the direction" of this growth. "However, even with these risks, we firmly believe drilling activity should still increase at some level," he said.

The upward trend in US drilling should continue into 2004, Wicklund said. "In each of the last two drilling up-cycles, the US rig count increased for 2 consecutive years before declining. And with spending from [exploration and production] companies expected to be up in 2003 vs. 2002 and 2004 vs. 2003, we expect this trend to continue."

Current prices, however "do not reflect a 2-year up-cycle," he said, and are "discounting expectations of drilling activity only 4-6 months into the future. If today's prices were to reflect a 2-year activity up-cycle, they would need to be at least 30% higher just to remain in-line with historical full cycle multiples."

With the war in Iraq, nobody is indicating an aggressive expansion of drilling commitments. "But we would opportunistically add to positions during the war, with the idea of being overweight when the war is over," said Wicklund.

In a Mar. 26 research note, Jefferies & Co. Inc. oil service analyst S. Magnus Fyhr said, "Although [E&P] companies have been focused on reducing debt and—given conservative guidance for 2003 guidance for 2003 budgets—we believe that sustained natural gas prices above $4.50-5/Mcf should fuel a significant increase in drilling activity by the second half of 2003 and [in] 2004, as operators are likely to reinvest free cash flow into the drillbit."

As the majors and supermajors shift their focus from North America to international markets, he said, "We expect independent E&P companies to drive an increase in drilling activity as they increase their drilling programs in the coming months due to better-than-forecasted cash flow."

At a biannual oil field forum Apr. 4 in Houston, however, John Morgan, executive vice-president of Occidental Oil & Gas Corp., a subsidiary of Occidental Petroleum Corp., said that "not that long ago," US oil prices were less than $20/bbl "and might be that way again. It's a possibility that [operators] have to consider." Morgan also said 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.

Latest rig count

Increased US drilling during the week ended Apr. 4 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 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. The horizontal drilling category increased by 2 units, however, to 66.

New Mexico led the latest increase in drilling activity, up 7 rotary rigs with 74 working. 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, 3 fewer than the previous week. Wyoming and Alaska were down 1 rig each to 37 and 11, respectively.

Gulf of Mexico

ODS-Petrodata reported 3 fewer mobile offshore rigs under contract in the Gulf of Mexico in the week ending Apr. 4, down to 119 out of 182 units available for work. The fleet utilization rate dipped to 65.4% in those waters.

Despite current uncertainty in the gulf market for jack ups, however, Fyhr said US offshore drilling will recover by the second half of this year. "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," he said.

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. Fyhr said, however, that "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." Jefferies estimated there are 25-30 jack ups in the US Gulf of Mexico capable of drilling and completing such wells.

"After peaking at 154 jack ups in summer 2001, the supply of jack ups in the gulf has declined 16% to 130 rigs, as contractors have mobilized rigs to more attractive international markets for long-term commitments," said Fyhr in his Mar. 26 report. The primary destination for US jack ups over the last 15 months has been Mexico, where Petroleos Mexicanos SA has been extremely active in offshore drilling to boost its oil and gas reserves.

According to Fyhr, Pemex has contracted 15 jack ups during 2002-03 and has tendered for another 9 jack ups to start work over the next year. "With possibly 7-8 additional jack ups leaving the gulf for work in Mexico and 2-3 three jack ups also leaving for work in Trinidad [and Tobago], the supply of jack ups in the gulf could decline below 120 units for the first time since the early 1990s," he said.

Global offshore

In European waters, ODS-Petrodata reported the available mobile offshore rig fleet increased by 1 to 99 during the week ending Apr. 4, 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%.

Meanwhile, Statoil ASA awarded a letter of intent to Stavanger-based offshore drilling contractor Smedvig ASA for a contract, estimated at $15 million, for its fourth generation West Alpha rig to drill two water injection wells at Heidrun field in the Norwegian Sea.

The drilling period will be 5 months with an option for an additional 30 days. Start-up is scheduled for late June, after the rig completes an assignment for Pertra AS. West Alpha currently is drilling on the UK continental shelf in Britannia field, operated by Britannia Operator Ltd., a ConocoPhillips-ChevronTexaco Corp. joint venture.

Mar. 28 rig count

During the week ending Mar. 28, US drilling increased by 16 rotary rigs to 962, up from 761 during the same period in 2002. All of the gain was in land operations, which were up 18 rigs to 842. Inland waters operations declined by 2 rigs to 16. Offshore activity declined by 1 rig to 98 in the Gulf of Mexico but was unchanged at 104 active rigs in US waters as a whole.

Canada's rotary rig count plummeted by 165 to 288 as a result of the seasonal spring thaw. Canada's rig count, however, was still up from 251 in 2002.

The heavy-duty, harsh-environment jack up rig Monitor, owned and operated by Houston-based offshore drilling contractor GlobalSantaFe Corp., is working in the North Sea under contract with BP PLC.
Click here to enlarge image

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Among US rigs, the number drilling for oil increased by 11 to 178. Drilling for natural gas was up 5 rigs to 781.

Texas led the week's increase, up 18 rigs with 428 working. New Mexico's rig count increased by 4 to 67, while Oklahoma was up 2 to 120. There were 12 rotary rigs working in Alaska that week, 1 more than previously. California's rig count remained unchanged at 19. Louisiana's rig count dropped by 10 units with 151 still working. Wyoming was down 1 to 38.

The number of contracted rigs and the total fleet of mobile offshore rigs available in the US Gulf of Mexico again decreased by 1 each, officials at ODS-Petrodata, Houston, reported Mar. 28. That dropped rig utilization to 67% in those waters.

In European waters, the number of contracted rigs increased by 1 to 84, while the number of available rigs decreased by 1 to 98, boosting utilization to 85.7%. Worldwide, there were net declines of 1 unit in the fleet of mobile offshore rigs available for work and of 1 among those contracted.

Global utilization dipped to 80.5%, with 530 mobile offshore rigs contracted out of an available fleet of 658 during the week ended Mar. 28.