2004 should be a very good year

Jan. 26, 2004
Analysts expect oil and gas companies to increase land drilling worldwide and boost offshore drilling abroad in 2004. In addition, shallow water drilling will be stepped up in the Gulf of Mexico and in both shallow and deep waters outside the US.

Analysts expect oil and gas companies to increase land drilling worldwide and boost offshore drilling abroad in 2004. In addition, shallow water drilling will be stepped up in the Gulf of Mexico and in both shallow and deep waters outside the US.

In a yearend 2003 survey of 224 companies conducted by analysts at Smith Barney, a division of Citigroup Global Markets Inc., 88% of respondents considered the economics of drilling to be more favorable than acquiring reserves, up from 81% in 2002.

The Lehman Bros.'s original E&P spending survey of 335 companies, issued in December 2003, found that 84% of companies considered the economics of drilling in the US more favorable than purchasing reserves, and yet 64% of all companies surveyed were seeking to purchase new reserves. A year ago, only 71% of companies surveyed considered drilling more positive than purchasing reserves.

Additionally, 61% of the surveyed companies anticipate drilling costs to rise by 1-10% in 2004. A year ago, only 37% of companies expected drilling costs to increase.

The Lehman Bros. survey also noted that 30% of operators engaged in deepwater drilling increased their deepwater spending in 2003 and that 32% expected to increase it again in 2004. By comparison, 22% of respondents said they spent less on deep water in 2003, and only 11% said they would spend less on deep water in 2004.

GlobalSantaFe Corp.'s monthly summary of current offshore rig economics (SCORE) for November 2003 was down 3.5% worldwide from the previous month. The SCORE decreased for semisubmersibles to 32.4 from 35.2, but increased for jack ups to 47.2 from 47. SCORE values for the Gulf of Mexico and Southeast Asia showed slight gains, but the North Sea and West Africa showed losses.

US drilling

More companies perceive drilling in the US to have good-to-excellent economic prospects than a year ago. According to the Lehman Bros. survey, 70% of respondents considered US drilling favorably, compared to 63% a year ago.

Lehman analysts estimate 32,500 well completions in the US in 2003, a 16% increase over the 28,056 well completions in 2002, based on the American Petroleum Institute's quarterly well completion reports.

US land rig count averaged 906 rigs working in 2003, a 36% increase over 2002. The rig count rose steadily through 2003, from 726 in January to 1,022 in December, according to Baker Hughes rig counts.

Despite the increased rig count, land drillers have not seen significant price improvement, due to an excess 100-150 rigs in the US market. Drilling companies are keeping rigs stacked in some markets to improve pricing. During high utilization periods, rigs are under daywork contracts, but in softer periods, drillers may take on higher- risk turnkey contracts, which often have higher margins.

Lehman analysts expect the US land rig count in 2004 to increase to 1,016 rigs.

Prudential Equity Group analysts predict a 13% increase in 2004, to 1,025 active land rigs.

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Baker Hughes' statistics indicate that the US land rig count surpassed the 5-year average throughout 2003 and, beginning in October 2003, surpassed the 1994-2003, 10-year range of rig counts (Fig. 1). This is evidence of a strong demand for domestic land drilling services.

The newly built Eht'oni rig on display at the Fort Nelson First Nation before starting work in December (Fig. 3; photo by Wes Raymond, courtesy of EnCana Corp.).
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US offshore drilling

US offshore rig count averaged 108 rigs operating in 2003, compared with 113 rigs in 2002, a 4% decrease.

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Statistics from Baker Hughes demonstrate that the 2003 US offshore rig counts were lower than the 5-year average throughout the year but within the 1994-2003, 10-year range of rig counts (Fig. 2).

The available fleet stood at 115 jack ups at the end of 2003, down 16 rigs since the beginning of the year, with a utilization rate of 85%.

Tom Kellock, a Houston-based analyst at ODS-Petrodata Consulting & Research, presented a midterm market outlook for the US Gulf of Mexico fleet at the IADC Drilling Gulf of Mexico conference in mid-December. He postulated that LNG could entirely replace shallow Gulf of Mexico gas production by 2008, eviscerating the jack up market.

Kellock suggested that the majors are giving up on the Gulf of Mexico, based on their steadily decreasing share of active rigs—jack ups: 21% in January 2003, down from 51% in 1988; floaters: 50% in January 2003, down from 83% in 1988. He noted that offshore activity no longer follows onshore activity, which began to diverge sharply upward in late 2002.

Kellock forecast a drop in North American jack up demand from about 90 rig-years in late 2003 to about 75 rig-years through 2008 (base case), with a low commodity price case of 55 rig-years, and high commodity price case of about 115 rig-years.

US fleet enhancements

Among the largest publicly held land drilling companies in the US are Nabors Industries Ltd., Patterson-UTI Energy Inc., Helmerich & Payne Inc., Greywolf Inc., and Unit Drilling Co., a division of Tulsa-based Unit Corp.

Unit Corp. acquired 12 rigs in its late November purchase of privately held Serdrilco Inc. and its subsidiary Service Drilling Southwest LLC, bringing its total land-drilling fleet to 88 rigs, including a recent newbuild. Unit Chairman and CEO John G. Nikkel said, "Given the declining inventory of rigs available for acquisition, we are pleased to be adding these assets to our fleet."

Pioneer Drilling Co., a small but growing public company, operates a fleet of 30 land rigs in Texas, 4 of them acquired since August 2003. The rigs are capable of drilling from 9,500 to 18,000 ft and were acquired at $2.3 million/rig (excluding newbuilds). The newbuild cost is $7.1 million/rig (six rigs in fleet). Pioneer is building a 1,000-hp electric land rig to be finished in 2004.

Pioneer runs 13 rigs in South Texas, competing with Helmerich & Payne (34 active rigs), Patterson-UTI (26), Greywolf (22), and Nabors (18), the world's largest land driller and which has a significant number of rigs stacked.

Pioneer is also active in East Texas with 10 rigs competing with Patterson-UTI (30 rigs), Nabors (29 rigs), Greywolf (21 rigs), and Helmerich & Payne (11 rigs).

There are about 79 independently held drilling companies of various sizes operating on and offshore US, of which only 19 drill deeper than 7,000 ft (RigData).

Canadian drilling

Drillers set a new record in Canada in 2003, drilling 21,800 wells and surpassing the previous record of 18,255 wells drilled in 2001, based on statistics from Nickle's Energy Group. This includes more than 5,000 exploratory wells. Canadian agencies in 2003 issued 24,409 well permits.

Roger Soucy, president of the Petroleum Services Association of Canada, said, "This past year saw all-time record breaking drilling activity in Canada. A significant element in this effort was a record third quarter which surpassed all previous first quarter (normally the busiest) numbers. We anticipate, with continued strong commodity prices, that the industry in Canada will have another banner year in 2004."

Canadian independent EnCana Corp., based in Calgary, led the pack, drilling 4,115wells, including 3,490 gas and 625 oil completions through November 2003. EnCana runs 80-100 rigs company-wide, including 60 through the summer, traditionally a season of lower activity in northern Canada.

Calgary-based Husky Energy Inc., Canadian Natural Resources Ltd., and Burlington Resources Canada were the other top operators in Canada in 2003.

Oil Drilling & Exploration Ltd.'s Rig 41 (National Oilwell diesel electric E-2000, rated to 20,000 ft) is operating in Indonesia for ExxonMobil Oil Indonesia (Fig. 4; photo from ODE).
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Soucy expects continued strong drilling in 2004 in the shallow gas areas of southeast Alberta, southwest Saskatchewan, and northeast British Columbia. But he said that activity levels may drop slightly from 2003, if commodity prices fall.

PSAC estimates that 18,965 wells will be drilled in 2004: 13,835 wells in Alberta, 1,100 in British Columbia, and 3,800 in Saskatchewan. This represents an estimated 9% increase in drilling activity in BC and decreasing drilling activity of about 8% in Alberta and 5% in Saskatchewan.

Prudential analysts predict 385 active rigs for 2004, up 2% from their 2003 prediction of 376 active rigs. Actual rotary rig count in Canada averaged 372 in 2003, up from 266 in 2002.

Brian Prokop, analyst at Calgary-based Peters & Co. Ltd., expects four US independents, Apache Corp., Devon Energy Corp., Burlington Resources Inc., and Anadarko Petroleum Corp., to spend more than $2 billion to $2.5 billion on Canadian drilling in 2004. This could tie up as many 200 drilling rigs over the peak winter drilling season.

Apache has been aggressively acquiring Canadian assets. In 2000, it purchased Canadian oil and gas properties bought from Phillips Petroleum Co. for $490 million. In late 2003, the president of Apache's Canadian unit, Floyd Price, said it is seeking to expand through acquisitions.

Gene Isenberg, chairman and CEO of drilling giant Nabors Industries, expects the Canadian division to contribute heavily to overall company performance in 2004. He said it is "virtually certain to significantly surpass its previous record results over the next few quarters and throughout 2004."

Nabors has more than 500 land drilling and 680 land workover rigs worldwide, in addition to a substantial offshore fleet.

Precision Drilling had 52% utilization of its Canadian drilling rig fleet in third quarter 2003, compared with 34% utilization in third quarter 2002. It also runs a service fleet of 239 rigs, and utilization had increased 19% from 2002.

John King, senior vice-president of technology services at Precision, said, "The only limiting factor that I can really see, as we start to pick up momentum, is just the number of drilling tools in our capacity." Precision plans to launch a 6-in. drilling tool during first quarter 2004 and an 8-in. tool later in the year.

Akita Drilling Co., the leading driller in the Canadian Arctic, had a drilling utilization rate of 55% in 2003, compared with 46% in 2002.

Roger Soucy, president of the Petroleum Services Association of Canada
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Canadian fleet enhancements

Canada's drilling fleet grew for the sixth straight year, finishing 2003 with 684 rigs, a gain of 23 rigs from a year ago and an increase of 223 rigs since 1996.

Rockwell Servicing Inc., a subsidiary of Calgary-based Ensign Resource Service Group Inc., purchased 11 well servicing rigs from Edmonton-based Crown Well Servicing Ltd. at the end of December. Rockwell's fleet now consists of 105 well servicing rigs and 11 coiled-tubing units working in the Western Canadian Sedimentary Basin. The Ensign Group's Canadian fleet of 144 drilling rigs is operated through the Ensign Drilling Partnership, Calgary.

Another Ensign Group subsidiary, Oil Drilling & Exploration Ltd. (ODE), had an automated drilling rig under assembly in Canada in 2003, scheduled to begin a long-term contract in Gabon in early 2004.

Eht'oni rig

In December 2003, the Fort Nelson First Nation became the first BC aboriginal community to own and operate an oil and gas drilling rig. The group formed a partnership agreement with Nisku, Alberta-based Ensign Drilling, a division of Ensign Drilling Partnership, which will manage the rig. The partnership gives each a 50% interest in the rig, constructed by Nisku-based Mastco Derrick Services Ltd. at a cost of $8 million (Can.).

Local schoolchildren named the rig "Eht'oni," meaning "arrow" in the Dene language.

Liz Logan, chief of the Fort Nelson First Nation, said, "This rig represents the building of a foundation for us, a foundation for future opportunities and benefits for our community" (Fig. 3). The partnership creates 20 direct and 50 indirect jobs in the area.

The Eht'oni rig is a telescoping double equipped rig with an electric, 250-ton top drive, capable of drilling to 3,500 m. The automated drill floor includes an iron roughneck, auto connections, auto slips, and an automated pipe-handling system.

Bob Johnston, group lead of drilling and completions for EnCana's Fort Nelson operation, told OGJ the rig is being used for underbalanced horizontal drilling in the Jean Marie carbonate. Jean Marie wells have a TVD of 1,400-1,800 m, then kick off for a 1,000-1,300 m horizontal section, for a total MD of 300-3,300 m.

The rig spud its first well in early December and was drilling a second well at the end of 2003. It is intended to work in four seasons, can be mobilized in a half-day, and is light enough to work on wood mats above the muskeg in summer, according to Johnston.

EnCana will utilize the rig through a "best efforts" clause in the agreement that stipulates "first up and last down" priority for the Eht'oni rig.

Johnston said that 99% of the rigs in northeast BC are top drive, useful in difficult formations such as sloughing shales. EnCana was running 32 rigs in the area at yearend 2003 and planned to add 2 more as well as 4 shallow gas rigs later this winter.

International drilling

Australia-based ODE, the international oilfield services division of the Ensign Group, operates 24 drilling rigs and 5 workover rigs in Australia, New Zealand, Southeast Asia, Middle East, South America, and Africa. ODE runs 4 rigs in Indonesia, 3 of which it owns. Indonesian operations are conducted with the assistance of the company's agent PT Daya Turangga.

ODE had a new rig built in Houston in 2002 for Sumatra drilling. Rig 41, a National Oilwell diesel electric E-2000 with a Tesco 900-hp top drive, is rated to 20,000 ft and has been operating in Indonesia for ExxonMobil Oil Indonesia Inc. (Fig. 4).

Adelaide, Australia-based Santos Ltd. has also been active in Sumatra, where it has a 20% interest in the Warim Production Sharing Contract (PSC) and a 61.1% interest in the Bentu and Korinci-Baru PSCs.

Santos also operates the Madura Offshore PSC (75%) and the Sampang PSC (45%) in the Madura Strait, East Java. Santos (Sampang) Pty Ltd. operates the latter concession on behalf of Coastal Indonesia Sampang Ltd. (40%) and Cue Sampang Pty Ltd. (15%). The successful Mangga-1 well was drilled in October 2003, and one or two exploration wells will be drilled in 2004.

2004 capex estimates

Prudential analysts expect a 6-10% increase in capital expenditures worldwide by oil and gas companies, to $139-145 billion from $131 billion in 2003. Among western oil and gas companies, they expect an increase of 1-9%, to $88-94 billion from $87 billion in 2003. For state-owned and emerging companies outside the US, they expect a 15% increase in capex in 2004, to $51 billion from $44 billion.

Lehman Bros. analysts surveyed 335 companies worldwide and report a 4% increase in planned capex, to $144.3 billion in 2004 from $138.7 billion in 2003.

Analysts at Citigroup's Smith Barney surveyed 224 companies and reports a 4.4% increase in capex for 2004.

Analysts agree that the majority of new activity will be outside North America where Lehman projects a 6.1% rise in spending and Smith Barney projects a 6.4% increase. Exploration and production spending in the US will decline 0.1% to $32.6 billion in 2004.

Petroleum News, a weekly newspaper based in Anchorage, Alas., ranked the top 70 E&P companies in North America.1 It listed eight companies with capital spending of $2 billion or more in 2002: BP PLC, Royal Dutch/Shell Group, EnCana Corp., ExxonMobil Corp., Canadian Natural Resources Ltd., ConocoPhillips, El Paso Corp., and ChevronTexaco Corp.

Canadian capex

Canadian E&P spending will decline 0.2% in 2004 to $13.6 billion.

Only three companies spent $1 billion or more on Canadian E&P in 2002: EnCana, Canadian Natural, and Royal Dutch/Shell. And another seven companies spent between $1 billion and $500 million in Canada: Husky Energy Inc., Burlington Resources Inc., PetroCanada Corp., Imperial Oil Ltd., Devon Energy Corp., Suncor Energy Inc., and ExxonMobil.

Imperial announced last month that it acquired exploration rights for eight deepwater parcels in the Orphan basin, offshore Newfoundland, in partnership with ExxonMobil Canada (25%) and Chevron Canada Resources (50%). The companies plan total exploration spending of $673 million (Can.) in the area.

Floyd Price, president of Apache Resources' Canadian unit (17th in 2002 Canadian capex), said Apache's 2004 Canadian spending will match or exceed the $470 million spent in 2003. At Peters & Co.'s investment conference in Toronto in November he said, "This is still the best gas market in the world. We can wonder about the exports and the pipelines and everything, but in no place else in the world can you get this kind of price and access to infrastructure as you can in Canada."

2004 drilling market

Increased capital spending plans imply increased drilling activity. Prudential analysts estimate an 8% increase in worldwide rig count to 2,355 in 2004, from 2,177 in 2003 (Table 1).

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Prudential's Grant Borbridge thinks the bulk of spending increases in 2004 will be on international drilling, particularly in shallow water, and land drilling in South America and Southeast Asia. In North America, he predicts a gradual increase in drilling on land and in shallow water Gulf of Mexico for natural gas. He sees a continuing soft market for midwater rigs and gently increasing deepwater rig demand.

Borbridge expects spending increases by state-owned oil and gas companies, primarily from Russia's OAO Gazprom, Mexico's Petróleos Mexicanos (Pemex), Venezuela's Petróleos de Venezuela SA (PDVSA), Nigeria's Nigerian National Petroleum Corp. (NNPC), and India's Oil & Natural Gas Corp. (ONGC).

Nine newbuild offshore rigs are scheduled for delivery in 2004, including four jack ups (the two Constellations for GlobalSantaFe Corp., one each for Perforadora Central SA de CV and Rowan Companies Inc.), four semi-submersibles (two for GlobalSantaFe; one each for Maersk Contractors and National Iranian Oil Co.), and one tender rig (Smedvig ASA).

In 12 months, perhaps we will be able to say 2004 "was a very good year."

Reference

1."Top 70 E&P Spenders," a special supplement to Petroleum News, Dec. 28, 2003.