International rig count hits 5-year high

Oct. 6, 2003
More cash flow from higher oil prices this year will fund an increase in international drilling, particularly in Mexico, India, Iraq, and Russia, analysts said.

DRILLING MARKET FOCUS

More cash flow from higher oil prices this year will fund an increase in international drilling, particularly in Mexico, India, Iraq, and Russia, analysts said.

Analysts at Prudential Insurance Co. of America expect a gradual increase to 580 active foreign land rigs by mid-2004, from 563 rigs in early September. They predicted that the number of offshore rigs working in foreign markets would increase by 34 to 250 in that same period.

At the end of summer, the international rig count was already at its highest level since June 1998. Worldwide offshore rig utilization remained flat, however; as reductions in jack ups and semisubmersibles in the Gulf of Mexico offset international increases in jack ups and drillships.

International activity

In August, the latest period available, Baker Hughes Inc. reported 563 land rigs were operating internationally, up 63 from August 2002. There were 216 offshore rigs operating internationally in August, down 6 from the same period a year ago.

Drilling activity in Africa increased slightly during that period, but rig utilization in the Asia Pacific area has been flat this year. European drilling was down slightly in August. However, Latin American drilling has increased substantially this year, offsetting its drop during the political turmoil that disrupted that area in 2002. Rig utilization in Latin America was back to normal levels at the start of September, with 195 land rigs and 55 offshore rigs working.

KCA Deutag Rig T51 (Emsco C-3 III) drilling an exploration well in South Oman for Petroleum Development Oman (PDO). Photo from KCA Deutag Drilling Ltd.
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In the Middle East, drilling increased in Oman, with six new land rigs added in August. KCA Deutag Drilling GmbH, the onshore drilling subsidiary of Abbot Group, has been drilling continually in Oman since 1964 and currently operates eight rigs there. Most of the company's drilling involves conventional sidetrack wells, dual-lateral wells, and multilateral wells with up to 11 legs.

However, drilling in other Middle East countries declined slightly, with a total of 209 rigs working in August.

International analysis

"We are probably halfway through the North Sea, [but] it's still an exciting business in the UK," said Mike Salter, chief operating officer of the Abbot Group, in an Aug. 31 interview with the Newsquest (Sunday Herald) Ltd., Glasgow. Abbot controls 36 offshore platforms and 60% of the UK platform drilling market for the North Sea. Salter views these as stable assets but anticipates a slow decline over the medium to long term, hence Abbot's move toward international asset diversification. The holding compay acquired Deutag in 2001 and merged it with KCA Drilling to create KCA Deutag, now the UK's largest drilling services contractor.

"The largest foreign investments in Russia today are on Sakhalin Island," said Elena Sorbinova, who runs Russia's counterpart to the US Commerce Department on Sahkalin Island, in the Russian Far East. Exxon Neftegas Ltd. (ENL), a subsidiary of US-based ExxonMobil Corp., is the operator of the Sakhalin-1 project and holds a 30% interest.

The Sakhalin work involves a large-scale offshore development in arctic conditions. ENL contracted with Parker Drilling Co. for the specially engineered Yastreb rig, previously known as Parker Rig No. 262 (OGJ, June 17, 2002, p. 41) and a 10-well drilling program.

Phase 1 drilling began on July 12 at the Chayvo drillsite; ultimately 34 wells will be drilled in three fields.

North America

Drilling activity in North America has been robust this year, with the US rig count topping 1,100 units in late August for the first time since early October 2001 (OGJ Online, Aug. 29, 2003).

Permit activity increased in three states in August: Utah (up 102%), Montana (up 84%), and California (up 24%). Analysts at Lehman Bros. Inc., New York, said in mid-September that "gradual increases in permitting activity in recent months suggest a modest increase in the domestic rig count over the remainder of 2003."

However, permit activity in the US was sluggish in early September and is expected to remain flat in the near term, said James Wicklund, an analyst in the Houston office of Banc of America Securities Ltd., New York. On the other hand, Prudential Financial analysts noted an "upward trend" in the number of offshore drilling permits issued during the 4 months through August and predicted that Pemex (Petróleos Mexicanos, Mexico's national oil company), will contract "an additional 3-5" offshore rigs before the end of this year."

Therefore, they expect that the second half of 2003 "should exhibit marked increases in day rates and utilization." They said an "improvement in domestic offshore drilling is just beginning and should gradually increase from 110 rigs currently to about 120 rigs by mid 2004."

Canadian drilling activity has been impressive. The Petroleum Services Association of Canada predicts a total of 18,470 wells will be drilled this year, exceeding the previous record of 18,255 wells drilled in 2001. During the first week of September, the Canadian rig count was 42% higher than in the same period in 2002, even though it had dropped by 40 rigs from the previous week.

Canadian operators may be motivated by the continuing high natural gas prices and eager to use the resulting cash surplus for additional drilling, said analysts. Utilization of Canadian rigs was unusually high during the summer and is expected to increase even further as the traditional winter drilling season approaches.

MMS lease sales

The volume of bidding at Western Gulf of Mexico Lease Sale 187 in August indicated a continued industry interest in deepwater drilling. The sale attracted $148,715,127 in high bids (OGJ Online, Aug. 20, 2003).

Most of the blocks that attracted attention offer prospects in the deep shelf gas trend (completions 15,000+ ft TVD). The focus was on High Island Block 170, which received 13 bids; LLOG Exploration Offshore Inc. had the winning bid of $22.6 million.

Some 800,000 acres of federal leases in the Eastern Gulf of Mexico are tentatively scheduled for sale in December. Another lease sale in the eastern gulf is tentatively scheduled for March 2005.

DD/MWD market

Analysts at Simmons & Company Intl. expect directional drilling and measurement while drilling technologies to continue their historical growth rate of 5-10%/year over the next several years. "The size of the DD/MWD business was over $2.6 billion in 2002," compared with $3.7 billion estimated market size in 2002 for electric-line logging services.

Based on data from Spears & Assoc., the leading service providers for DD/MWD are Schlumberger (28%), Halliburton (27%) and BHI (27%), with the remaining 18% of the market held by 30 to 35 smaller service providers.

Simmons analysts say that "margins and returns will continue to contract over the next two to five years due to competitive pricing pressure, capacity expansion and ultimately slower demand growth.

At this time, however, demand exceeds supply, and Simmons analysts say that the "return on investment on rotary steerable technologies approximates 16%."