SPECIAL REPORT: No lulls in dynamic drilling market

Sept. 18, 2006
Drillers are working at or near capacity in most markets, and many operators continue to pursue ambitious drilling programs despite recent fluctuations in natural gas prices.

Drillers are working at or near capacity in most markets, and many operators continue to pursue ambitious drilling programs despite recent fluctuations in natural gas prices. Utilization rates for land and marine rigs remain high, therefore, even with new builds augmenting the fleets.

Around the world, drilling is strong and activity has increased over the past 4 years. The worldwide rig count reached 3,155 in July, a 14% year-over-year increase (Fig. 1). The activity is driven by increasing demand in the face of strong oil and natural gas prices.

Click here to enlarge image

Despite continuing additions to the rig fleets, the rig supply is not meeting demand in all areas, pushing up day rates continually. Manufacturers are building hundreds of new land drilling rigs in North America, China, and to a lesser extent, in Europe. Mobile offshore drilling units are primarily under construction Singapore, in the US, China, and Korea, and the yards are full.

The escalating need for petroleum derives in part from industrialization of China and India. Both countries have increased participation in the rig markets, drilling at home and abroad. China has significantly increased land rig manufacturing and is now producing hundreds of rigs for export, as well as contract drilling services. It would not be surprising to see India gear up to produce modern land rigs.

In order to secure their drilling schedules, operators are taking longer leases on rigs and sharing them in drilling consortia.

Worldwide activity

Baker Hughes Inc.’s international rig count (excluding North America) reached a new record high of 948 rigs in December 2005 but dropped back to 921 in July 2006 (Fig. 2). The North American rig count reached a new, historic high of 2,248 rigs in February 2006, dropping to 2,234 by July. This continues its upward, seasonally cyclical trend (Fig. 2).

Click here to enlarge image

Outside of North America, rig activity has been steadily increasing in Latin America, the Middle East, and Asia Pacific since early 2002 (Fig. 3). All three reached historic highs in the last year: Latin America (333 rigs, May 2006); Middle East (262 rigs, December 2005); and Asia Pacific (244 rigs, January 2006).

Click here to enlarge image

After several years of dramatically increasing drilling, Latin American activity has become cyclical over the past 2 years. This is probably a result of political instability, reticence of operators to drill in the face of a sweeping trend toward nationalization of assets, and better, safer opportunities in other regions.

There was some unexpected drilling in Belize and northern Guatemala this year and continued drilling in Cuba and Trinidad.

Argentina is the largest land driller in South America (84 rigs drilling in July), followed by Venezuela (71 rigs), and Colombia (21 rigs; OGJ, Sept. 11, 2006, p. 33). Brazil will remain the strongest in the region for offshore drilling (24 big rigs drilling off Brazil in late August), followed by Venezuela (27 rigs, predominantly drilling barges).

The greatest increase in rig activity in this calendar year has been in the Middle East, where 242 rigs were operating in July, up from 210 rigs in January (15% increase in 6 months) and new contracts continue to be signed. National oil companies seem anxious to shore up production, with many major fields in steady decline. Saudi Arabia leads drilling and has been absorbing dozens of newbuild rigs. The kingdom plans to increase development drilling by 61%.

Drilling in Asia Pacific region has dropped off about 7% from January-July, although there have been several discoveries announced and development of several major field projects in Australia and Indonesia appears to be proceeding as planned. Drilling in India is steady and should pick up as more operators gain access to acreage through new licensing offered by the Directorate of Hydrocarbons.

In Europe, drilling has fluctuated, averaging 77 rigs working, with a high of 86 rigs drilling in May 2006. Despite ongoing drilling in the North, Norwegian, and Barents Seas, well counts are expected to drop this year.

Activity in Africa is relatively flat, averaging 51 rigs working over the past year, with a high of 59 in July 2006. Egypt is the most prolific driller, followed by Sudan. There has been interesting drilling along the East African rift, particularly in Tanzania and Uganda.

SCORE

GlobalSantaFe Corp.’s Summary of Current Offshore Rig Economics (SCORE) reached and exceeded the 100 benchmark in most categories this past year, for the first time since 1981:

  • Jack ups-jumped to 102 from 91 in November-December 2005 and reached a high of 119 in June 2006. Heavy-duty jack up day rates dropped 22% from June-July 2006.
  • Semisubmersibles-jumped to 101 from 99 in September-October 2005 and reached a high of 140 in July. This is a 10.8% increase month-to-month and nearly 67% year-over-year.
  • North Sea-jumped to 101 from 95 from September-October 2005 and reached a high of 143 in July, up 6% from June. The increase was due primarily to jack up contracts.
  • Gulf of Mexico-jumped to 101 from 96 in October-November 2005 and reached a high of 119 in June. Lower day rates caused the SCORE to drop 6.7% from June-July 2006.
  • West Africa-jumped to 105 from 98 in December 2005-January 2006 and reached a high of 144 in July, up 14.1% because of semisub contracts.
  • Overall worldwide SCORE jumped to 103 from 96 in November-December 2005 and reached close to 124 in July 2006, a year-over-year increase of nearly 59%.

Southeast Asia is the only SCORE category that did not reach and surpass the benchmark this past year. It did reach a historical high of nearly 90 in May 2006, up from 61 a year earlier. The SCORE dropped to 87 in July from almost 90 in June, predominantly due to an exodus of jack ups greater than 300-ft from the region. Day rates remained the same.

The SCORE reports compare the profitability of current mobile offshore drilling rig day rates to the profitability of day rates at the 1980-81 peak of the offshore drilling cycle. In 1980-81, SCORE averaged 100%, and new contract day rates equaled the sum of daily cash operating costs plus about $700/day/$1 million invested. The SCORE database begins in January 1981.

US drilling

In early August, Baker Hughes Inc. said that US drilling activity had reached a new 20-year high of 1,728 operating rigs.

The top 50 operators drilled about 21,706 wells this year (through Aug. 17) deeper than 2,500 ft, totaling about 156 million ft (Table 1).

Click here to enlarge image

Only about eight operators drilled 100 or more directional wells through the year:

  • Encana Oil & Gas USA Inc. (296).
  • Devon Energy Production Co. LP (292).
  • Williams Production RMT Co. (251).
  • XTO Energy Inc. (205).
  • EOG Resources Inc. (198).
  • Chesapeake Operating Inc. (149).
  • Burlington Resources Oil & Gas Co. LP (140).
  • BP America Production Co. (112).

Rig utilization is improving for the top 25 drilling contractors in the US.(Table 2).

Click here to enlarge image

Once again, Patterson-UTI Drilling Co. LP and Nabors Drilling USA LP each averaged more than 200 rigs working though the year, with 307 and 264, respectively.

Other top drillers include Grey Wolf Drilling Co. LP and Helmerich & Payne IDC, tied at 113 rigs, and Unit Drilling Co., with an average of 106 rigs.

The North American land rig market is near capacity. For the week ending Aug. 11, 2006, the Baker Hughes rig count listed 1,611 land rigs drilling in the US. (Table 3) There were 18 rigs drilling in inland waters and 99 rigs drilling offshore. Baker Hughes data undercount the actual number of rigs working, as it does not include rigs in transit, testing, rigging up, or rigging down (see sidebar).

Click here to enlarge image

According to RigZone, there were 429 drilling permits filed and approved for the Gulf of Mexico from Jan. 4-Aug. 4 of this year. Most (75%) can be drilled with jack ups. Only 115 of the permits are for drilling in water deeper than 350 ft; only 98 are for drilling in water deeper than 600 ft; only 70 are for drilling in water deeper than 2,000 ft.

Eight wells are permitted for water 7,500-10,000 ft deep, and four are being drilled with Transocean’s Deepwater Millennium drillship:

  • One well for Anadarko Petroleum Corp. in Lloyd Ridge Block 399; 9,026 ft water.
  • Three wells for Kerr-McGee Oil & Gas Corp. in Atwater Block 37; 7,933 ft water.

Another two of the deepwater wells are being drilled by Transocean’s Discoverer Spirit drillship for Shell Offshore Inc. in:

  • Walker Ridge Block 508; 9,576 ft water.
  • Mississippi Canyon Block 701; 7,546 ft water.

The remaining two deepwater wells are being drilled from the Stena Tay semisub for Total E&P USA Inc. in Alaminos Canyon Block 856, in 7,812 ft and 7,869 ft water depth.

Offshore

Rigzone reported that offshore rig utilization has been consistently high this year. Semisubs ranged 92-93%; jack ups 93-96%; drillships 77-82%, through July.

According to Ocean-Resources.com, operators are planning to spend $2.4 billion on drilling in the UK sector of the North Sea over the next 2 years, based on a report from industry consultant Hannon Westwood.

Parker’s 2,000-hp Rig 122 began working under a 1-year contract with Golden Gate Petroleum Ltd. in April. The rig was drilling horizontally into an offshore field from its land location on Padre Island, Tex. (Photo from Parker Drilling Co.)
Click here to enlarge image

This is a substantial increase from the $900 million spent on drilling in 2005. So far, 112 wells are planned, but rig and supply shortages may prevent operators from achieving that number.

European rig counts, driven largely by North Sea drilling, have been relatively flat for the last 7-8 years.

RJ Energy Group analysts pointed to the new contracts between Statoil AS, Baker Hughes International, and Schlumberger Ltd., announced in mid-July, as additional evidence that the current energy cycle will be long-lived and that “more difficult prospects will drive the need for greater technology.” Statoil let a $289 million, 2-year drilling contract to the two companies, with an option for a 2-year extension.

New yards

Rig construction, upgrades, and repair work are constrained by available yard space, resulting in the establishment of new yards, expansion of existing facilities, where possible, and the outright purchase of smaller yards by larger, established fabricators.

Two large acquisitions were announced in July.

In the US, New Iberia, La.-based Dynamic Industries Inc. purchased the assets of Mid-Fab (formerly UNIFAB), increasing its acreage to 274 acres from 107 acres. Dynamic Industries builds production equipment and designs, builds, repairs, and retrofits offshore jackets and decks, and repairs and refurbishes offshore drilling rigs.

Click here to enlarge image

In Asia, SembCorp Marine acquired two fabrication yards for $116 million in Singapore and Indonesia in order to expand rig construction.

Hantong shipyard is one of the new yards in China, currently working on the new Sevan stabilized platform (SSP) cylindrical design drilling unit. Sevan Marine is leasing parts of the Hantong yard through 2012.

Newbuilds, land

Drilling contractors are using the up cycle to renew their fleets, both in upgrades and newbuilds that incorporate new technologies to increase operational efficiency.

Two large drilling contractors, Helmerich & Payne Inc. and Nabors Industries Ltd., are outfitting their latest rigs with AC power, top drives, and automated control systems to reduce handling and promote a safer working environment. H&P fabricates rigs in Houston, averaging about two new programmable AC electric (PACE) rigs a month. Nabors builds rigs in the US and Canada; the company has about 75 on order from China (OGJ, Feb. 20, 2006, p. 39).

National Oilwell Varco builds IDEAL land rigs for drilling market. At 1,500 hp, they are well suited to a range of drilling requirements.

In the Land Rig Newsletter, Richard Mason estimates that about 270 new land rigs are being built for the US this year. A great many rigs are being built in China for several different drilling contractors and shipped worldwide. Mason estimates that Chinese-made rigs cost about 25% less than those manufactured in the US.

The first Chinese built rig arrived in the US last year for GTS Drilling Co. and went to work in Colorado for Presco (OGJ, Sept. 26, 2005, p. 39). It drilled five wells in 2005. At least 12 other Chinese rigs have been delivered since last summer. Houston-based Parker Drilling Co. is also building rigs in China.

The Trend news agency reported last month that Turkmenistan President Saparmurat Niyazov authorized the state corporation Turkmengeologiya to purchase three drilling rigs, type ZJ50LDB, and field houses from China National Petroleum Corp.(CNPC) at a total cost of 200 million yuan ($25.1 million).

CNPC is operating three rigs drilling in the US.1

China is not a panacea for the drilling industry. Despite quick turnaround now, the low costs may eventually have an adverse effect on rig fabricators everywhere else. Manufacturing quality is an issue with the Chinese rigs and there is little protection for intellectual property. Chinese yards pattern their equipment after US and Canadian designs, and there appears to be little, if any innovation at this time.

Germany’s Bentec GMBH Drilling & Oilfield Systems designs and builds about 10 custom, built-for-purpose rigs each year. The company is currently building cluster-slider arctic rigs for TNK-BP’s Russian projects (OGJ, Aug. 14, 2006, p. 39).

Newbuilds, offshore

About 100 new mobile offshore drilling units are currently under construction worldwide (Table 5) and new contracts seem to be announced weekly. As of mid-August, there were 59 jack ups, 29 semisubmersibles, 9 drillships, and 3 drilling tenders under construction.

Click here to enlarge image

Three of the semisub contracts were announced in June-July, augmenting the 26 under contract for about $13 billion (OGJ, June 19, 2006, p. 35). Five of the drillships have shipyard contracts worth about $2.5 billion (OGJ, May 8, 2006, p. 43).

Fewer than a third of these will be delivered in 2006 (6 rigs) and 2007 (24 rigs). Most of the new rigs (44) will hit the market in 2008, followed by another 22 in 2009. According to ODS-Petrodata Inc., 71 of the 100 new MODUs are being built on spec and have no drilling contract.

Singapore yards are building the majority: 38 jack ups, 12 semisubs, and the 3 tenders. New yards in Korea and China are building 4 jack ups, 12 semisubs, and 8 drillships.

Only 12 jack ups are under construction in the US, all along the Gulf Coast. No additional work appears to have gone to the Cianbro Corp. yard in Maine that finished the two Amethyst floaters for Petrodrill Offshore Inc. in 2004 (OGJ, Nov. 22, 2004, p. 51).

One jack up is under construction in Russia; one semisub in the Caspian (Sadra shipyard at Nekkairan, Iran); and one drillship in Europe.

Two contracts for drilling equipment packages for new drillships were announced in July.

Aker-Kvaerner signed a NOK 450 million ($71.5 million) contract with MPF Corp Ltd. to deliver a full drilling equipment package suitable for harsh environment and ultradeepwater drilling operations for the Multi Purpose Floater (MPF) drillship. The equipment includes derrick and associated equipment, drillfloor and pipedeck equipment with control system, tensioning systems, mud handling and subsea handling equipment, all to be delivered sequentially starting fourth-quarter 2007.

The Yastreb drilling rig, designed, constructed, and operated for the Sakhalin-1 consortium by Parker Drilling, is shown at Chayvo beach in summer. Out of the top 20 well trajectories ranked by departure, nearly half were completed by the Yastreb, with six wells ranked in the top 10. (Photo from Exxon Neftegas Ltd.)
Click here to enlarge image

National Oilwell Varco Inc. has a contract to provide a drilling equipment package for a drillship to be constructed by Daewoo Shipbuilding & Marine Engineering Co. Ltd., Korea, and delivered to Transocean Inc. in 2009. The equipment package is “almost identical” to the equipment that NOV agreed to provide Daewoo under a separate contract for the Discoverer Clear Leader drillship, said Pete Miller, chairman, president, and CEO of National Oilwell Varco. The combined value of the contracts is about $280 million.

In July AP Moller-Maersk announced it bought two jack ups under construction for Petrojack at Jurong Shipyard in Singapore, for $420 million total.

Handbook

The familiar Drilling Data Handbook was completely revised, expanded, and published in its eighth edition earlier this year. Editors at Editions TECHNIP, Paris, considered moving to electronic format but ultimately decided to retain the recognizable “green book” print format. This is the first update since 1999.

Looking ahead

If prices for oil and natural gas hold, we can expect to see rig rates continue to climb until many of the newbuild rigs enter the market and fleets are upgraded.

Operators may continue to push to increase drilling density to accelerate field production, as Ultra Petroleum Corp. and Shell Oil Co. have done in the Pinedale Anticline gas-condensate field, Wyoming (OGJ, July 24, 2006, p. 36).

Drilling contractors appear to be thriving in this active drilling market, but speculation on expensive offshore newbuilds and the burgeoning Chinese construction are possible danger points.

And it is not entirely a sellers market for drilling services. Petrobras and other national oil companies continue to demand substantial price incentives for long-term contracts. It is questionable whether the current boom will foster true research and development collaboration between contractors and operators.

It is interesting to study how operators are changing their approach to capital projects, based on limited or constrained rig availability and other resource limitations. How are they addressing future supply? Is true global procurement on the rise?

Reference

  1. Ryst, Sonja, “In Oil Rigs, it’s China to the Rescue,” Business Week Online, Aug. 21, 2006, www.businessweek.com/investor.

How Baker Hughes, Smith figure drilling rig counts

OGJ routinely reports drilling rig fleet counts in its Industry Scoreboard at the front and Statistics section at the back of every issue. We follow the Baker Hughes Inc. and Smith International Inc. counts, which have slightly different criteria.

Baker Hughes

The Baker Hughes rig count (www.bakerhughes.com/investor/rig) provides data on US and Canadian rig counts from 1944 and international rig counts from 1975 (and workover rig counts from 1987).

In North America, BHI counts only rigs that are drilling (“turning to the right”) under permit, from spud to TD. The US rig count distinguishes between rigs drilling for oil, natural gas, or other, as well as directional or horizontal drilling. Baker Hughes publishes a weekly US and Canadian rig count on Fridays.

Internationally, BHI counts rigs as active if they are working at least 15 days during the month. The rig count distinguishes five regions: Latin America, Africa, Europe, Middle East, and Asia Pacific, and does not include (nor guesses) the number of rigs working in Russia or onshore China. The international count provides rig counts by region and by country, for onshore and offshore wells, and distinguishes between oil and gas drilling.

Baker Hughes counts are used in the OGJ Industry Scoreboard

Smith

The Smith Tool division of Smith International Inc. rig count provides rig count data from 1984.

Smith counts rigs as active if they are drilling, rigging up or down, fishing, testing, or at TD; so the numbers are generally higher than the BHI counts.

Smith distinguishes between US land and inland waters, US offshore, Canada, and between drilling and rigging time.

The Smith Quality rotary rig count delineates between US oil, gas, and other types of drilling; US deep drilling (greater than 10,000 ft); US exploration, directional, and horizontal; and Canadian directional and horizontal wells. The directional counts do not include horizontal wells.

The Smith database can be queried with the Smith Tool activity tracking system (STATS) report center, www.smith.com/stats/new.

A full explanation of these and other rig count systems can be found in OGJ, Sept. 22, 1997, p. 45.