North American drilling to increase in 2004

Dec. 1, 2003
Banc of America Securities analysts last month pointed out a disturbing trend�natural gas production added per year, per rig in the continental US has been declining since 2000. This conclusion was among data presented in the 2004 Natural Gas Price Outlook and E&P Sector Update conference call, held Oct. 22, 2003.

Banc of America Securities analysts last month pointed out a disturbing trend—natural gas production added per year, per rig in the continental US has been declining since 2000. This conclusion was among data presented in the 2004 Natural Gas Price Outlook and E&P Sector Update conference call, held Oct. 22, 2003.

In 2000, the production added was about 22 million cu ft equivalent (MMcfe)/rig, and it fell to about 18 MMcfe/rig by 2002. The analysts predict a further drop to slightly more than 17 MMcfe/rig for 2004.

North American drilling

Houston-based James K. Wicklund, a Banc of America Securities analyst, anticipated an 11% increase in North American drilling in 2004. Despite increasing drilling rates, natural gas production continues to decline.

In a report issued early in November, Wicklund noted that, more than "90% of the largest public producers said that domestic natural gas production declined approximately 2% in third quarter 2003. US natural gas drilling increased 8.5% during the same time period. Wicklund said that if US production declines a further 2% next year, US natural gas drilling should still increase between 6-20%, depending upon rig efficiency and decline rate assumptions." Wicklund believes that North American drilling activity will increase 11% from 2003 to 2004.

US land drilling

According to Richard J. Mason, editor of Land Rig Newsletter, companies with small to medium-size rig fleets are operating at full utilization, and the incremental capacity resides in the larger, publicly held firms. In general, "the contract drilling business is exhibiting stability."

In late October, Mason noted that rig counts were edging up to the year's highest levels but rigs were still available. "It is hard to imagine conditions getting more favorable for operators than they are currently. Commodity prices remain strong, field costs are essentially stable," he said.

More than half of US land rigs are employed by private operators; that is, nonpublic exploration and development firms. Independents employ about a third of the land rigs, and major operators use about 10%. Mason said, "private operators are the dark matter of the land drilling universe. The only place these guys show up is in drilling permits. Otherwise, they are invisible in most portraits of land drilling activity. Yet this group serves as the swing demand factor for drilling rigs. Their actions collectively determine how tight the market will be for rig employment."

Patterson-UTI Energy Inc. leads all other US drilling contractors in domestic footage drilled in third-quarter 2003, followed by Nabors Industries Inc. Patterson-UTI owns 340 land-based drilling rigs.

According to RigData and the Land Rig Newsletter, Patterson leads the regional markets in ArkLaTex, the Permian basin, and South Texas. According to Patterson-UTI's third-quarter report, it averaged 192 rigs running, vs. 195 rigs running a year ago, while increasing its revenue and daily operating margin by $370 to $2,600/day.

Nabors Drilling USA LP leads the land drilling markets in California and the US Gulf Coast. Nabors is the largest drilling contractor in the US Lower 48, with a fleet of nearly 400 land rigs.

Two drilling contractors provide 87% of services in the Alaskan drilling market—Doyon Drilling Inc. (DDI; 55%), a subsidiary of Doyon Ltd, and Nabors Alaska Drilling Inc. (32%). Anchorage-based DDI operates five rigs on the North Slope of Alaska, and its two primary customers are BP Exploration (Alaska) Inc. and ARCO Alaska Inc.

Rockies drilling

Drilling activity in the Rockies is at the highest level in 20 years, despite lengthy waits for some drilling permits. The Rocky Mountain News noted in October that the US Bureau of Land Management (BLM), which approves permits for drilling on federal lands, "takes an average of 187 days to approve drilling permits. In contrast, the Colorado Oil and Gas Conservation Commission [COGCC] takes 30 days or less to process permits for state and private lands."

Rich Griebling, COGCC director said, "Drilling is directly correlated to natural gas prices. We believe we are in for a period of high natural gas prices. That could take the well count to more than 25,000 by the yearend." Colorado had a record number of active wells, 24,655 as of Aug. 30, nearly 1,000 more than anytime in 2002.

In the past 5 years, the US Rockies have the highest production growth rate of any region in North America, followed by Canada, at 4.3%/year. Drilling activity in the Rockies has been fueled by high gas prices and expanded gas transportation capacity, focused on the widespread, low cost, low-risk, unconventional natural gas reserves. Denver-based Caza Drilling Inc. and Nabors Industries Ltd., the largest onshore driller in the US, lead the drilling in the Rockies at 22% and 17% of the market, respectively.

Offshore rig markets

Grant Borbridge, analyst at Prudential Financial, noted in November that the worldwide shallow water drilling market was robust and deepwater markets are strong, but "the mid-water market continues to be poor, with total utilization at 55% and effective utilization at 75%," according to Prudential's Offshore Drilling Update.

The jack up market has high activity levels with "potential for further improvement in almost every global region," and Borbridge expects "the global jack up market to strengthen further through gradual improvement in the Gulf of Mexico and early 2004 improvement in West Africa and Southeast Asia and (post winter) in the North Sea." Rowan Companies Inc. and Ensco Offshore Co. Inc. are poised to benefit, with large fleets of shallow water rigs.

Ensco's average jack up rate for third-quarter 2003 was $47,800, vs. $46,900 in second quarter, and $48,000 a year ago. The company's jack ups were 88% utilized in second and third quarters, up from 83% a year ago. Ensco noted softness in the Southeast Asia and North Sea jack up markets but expected improvement.

Deepwater drilling is strong; the overall utilization rate is 83% and the effective utilization, 91%. There has been an increased demand for floaters in West Africa, India, and Mexico, benefiting Transocean Inc., Noble Drilling Inc., and GlobalSantaFe Corp.

GlobalSantaFe updated its fleet status on Nov. 12. Eight of the company's 31 land rigs are in Venezuela; the other 27 are scattered in the Middle East; 15 are available.

The sole platform rig is working in the UK North Sea, along with four of the company's 9 semisubmersibles.

Two semis are off Equatorial Guinea, another two are in the Gulf of Mexico, and one is off eastern Canada.

Two of the 3 dynamically positioned drillships are working in the Gulf of Mexico, the other is in.West Africa. The sole moored drillship is cold-stacked in Malta.

GlobalSantaFe has 44 cantilevered jackups contracted throughout the world; two others in Gabon are available and one is idle in the North Sea. Jackup day rates vary from the high $20,000's to high $120,000's."

Borbridge believes "that in the short term, utilization and dayrates should fall, as roughly half of these [deepwater] rigs will roll off contract before the end of first-quarter 2004. However, we also believe that if we look past the anticipated short-term weakness, the deepwater market may not be nearly as bleak as the short-term rig rollovers might suggest."

The least positive outlook is in the midwater market. Borbridge sees "little chance for a catalyst for substantial improvement in this group until into 2005."

Internationally, service companies expect to see increased activity in Mexico and Russia in 2004. But Mexico and Russia combined account for no more than 15% of any company's revenues.

One less rig

In an October story by the Press and Journal, Aberdeen Journals Ltd, Harrods' owner Mohamed al Fayed is reported to be in the market to purchase an offshore drilling rig in Cromarty Firth, Scotland, with the intention of opening it to the public as a tourist attraction in Easter Ross.

Al Fayed already owns a tourist center at the Falls of Shin in Sutherland, between Invershin and Lairg. The rig will have a visitor center to explain the history of the oil industry, as well as a museum on the naval history of Invergordon, and the expanded center is scheduled to open in 2005.

Victor Gibson, publisher of The Marex Offshore Review, Aberdeen said, "Such a plan would at least remove a rig from the market without it having to be taken away and cut up into pieces."