US drilling activity, especially on land, increased rapidly during the first few months of 2003 as exploration and production companies stepped up their drilling programs to take advantage of firm commodity prices, said analysts at Jefferies & Co. Inc. in a recent report.
The weekly rig count by Baker Hughes Inc. reported 1,001 rotary rigs working in the US in early May, marking the first time in 18 months that the US rig count had exceeded 1,000 active units.
"We expect the rate of increase in drilling activity to pick up in coming weeks," said James L. Williams, president of WTRG Economics and publisher of Energy Economist Newsletter.
"Gas drilling activity should approach 1,000 [rigs] by the end of summer and should be enough to boost gas production and refill abnormally low inventories in preparation for next winter's heating season. But the increase needs to come earlier than the normal response of rig count to prices."
Analysts at Lehman Bros. Inc., New York, reported US drilling contractors "are beginning to push day rates" early in the current cycle of increased drilling. "Leading edge day rates have risen by $300-500/day," they reported.
Competition for rig hands also is driving up wages, they said, especially among those contractors who cut wages during last year's downturn.
Lehman Bros. analysts said Patterson-UTI Energy Inc., Snyder, Tex., the second biggest US land drilling contractor, is "well positioned to benefit from the continued gains in domestic gas drilling activity" through its "mid-depth fleet that meets the needs of its small independent and 'mom-and-pop' operators."
Drilling activity so far has been driven primarily by the activity levels among small independents. Lehman Bros. analysts said, however, "We eventually need to see some of the mid to larger independents also begin to increase drilling activity to give further duration and strength to the cycle."
Troublesome migration
A continuing migration of mobile offshore rigs out of the US sector of the Gulf of Mexico may trigger a major shortage of jack up units in those waters if drilling activity picks up in the second half of this year, as some expect, said an assortment of industry experts.
A total of 31 rigs left US gulf waters from January 2001 through April 2003, and more are likely to follow, said Paul L. Kelly, senior vice-president of Houston-based Rowan Cos. Inc. at an annual international offshore industry outlook conference in Houston in late April.
It's not the first time that US rigs have been lured to more lucrative foreign markets. Kelly said, however, "the important difference this time" is that most of those rigs are leaving on contracts that run for a year or more.
Moreover, 17 of the rigs that have left were cantilever jack ups designed to work in 300-350 ft of water. That, said Kelly, is the most popular class of rig in the gulf, the kind that will be needed for deep gas drilling in the relatively shallow gulf shelf waters if the US Minerals Management Service's proposal to expand royalty relief to natural gas wells sparks an anticipated increase in drilling activity (OGJ Online, Apr. 24, 2003).
He said 19 more jack ups are likely to leave US waters for international markets through 2004. These include 5 to Mexico, 4-5 to Trinidad and Tobago, 2-3 to West Africa, and 5-6 to the Middle East.
Kelly said, however, "The numbers for Trinidad and Mexico could be conservative." He said a recent meeting of Mexican government and industry officials indicated another 15 rigs might be contracted through 2004 to step up Mexico's exploration and development program for natural gas.
Available rigs
Of the 129 jack up rigs supposedly available for the gulf market in late April, Kelly said, 15 were cold-stacked, leaving only 114 in ready-to-work condition.
If drilling activity in the US gulf were to rebound to the level of the 1998 up cycle, he said, the industry would need a total of 128 rigs working—14 more than were available through April—to satisfy demand.
If rig demand in the gulf jumped to the more vigorous level seen in 2001, however, the industry would need 145 rigs, 31 more than it had in April, he said. And if 19 more rigs leave the gulf before drilling rebounds, the industry would face a shortage of 33-50 rigs to meet those previous levels of activity.
There are 24 new offshore rigs under construction though 2006, Kelly said, including 10 jack ups, 11 semisubmersibles, and 3 tenders. Only half of these, however, "are likely candidates for work in the US Gulf of Mexico," he said.
Rowan is building the first of four jack ups in its new Tarzan class. These rigs have the same heavy drilling equipment as the company's Gorilla class rigs but are smaller and not designed to work in harsh environments. However, they are perfect candidates to drill for deep gas deposits in gulf waters of 250 ft or less, said Kelly.
Gulf of Mexico lags
"Despite firm natural gas prices above $5/Mcf, drilling activity in the Gulf of Mexico has remained surprisingly soft during the past few months," said Jefferies analysts.
They too noted that several rigs have mobilized from the US gulf to international markets "for attractive term-contracts" and predicted "additional rig mobilizations to Trinidad and Mexico" in response to Petroleos Mexicanos SA's stepped drilling program to develop natural gas for that market. The expected shift of rigs to Mexican and Caribbean waters should balance the supply and demand for US mobile offshore rigs in the second half of this year, Jefferies analysts said.
"In fact, assuming 10 jack ups leave for Mexico and Trinidad during the next 12 months and 15 rigs remain cold stacked [in US waters], the effective marketed utilization would increase to 84% without an increase in demand," they said. "If jack up demand increased by seven rigs, utilization would exceed 90% and would likely put upward pressure on day rates."
Jefferies analysts said in their report, "After several months of firm natural gas prices..., we believe that the Gulf of Mexico jack up market is poised for a recovery, as strong natural gas fundamentals and higher-than-projected cash flow should prompt E&P companies to increase their drilling budgets by the second half of 2003."
The resulting increased demand, coupled with the exodus of rigs, should push up rig day rates in the gulf.
International markets
Meanwhile, Jefferies analysts said, "Jack up markets in the North Sea and West Africa will experience some moderate near-term weakness due to several rigs becoming available over a short time frame, as well as political unrest in Nigeria."
In early May, the Nigerian navy evacuated some 100 foreign workers from four offshore rigs working for Shell Petroleum Development Co. of Nigeria. News reports said the foreigners were believed to have been held hostage aboard the rigs by about 500 local workers, who also were removed by the Navy.
Elija Okugbgo, deputy secretary of the National Union of Petroleum and Natural Gas in Nigeria, however, claimed it was "an industrial action" by striking workers and not a hostage situation.
Apparently workers had gone on strike about 12 days earlier to protest the dismissal of five workers and to push for improvement in working conditions and especially in the crew changeover procedure. About 50 UK and 20 US citizens were among those aboard the four rigs.
