Rig activity drops as oil prices decline

Sept. 21, 1998
Rig activity continues to drop as a result of depressed oil prices. During July, the number of rigs drilling for oil and gas worldwide fell to 1,764, a 19% reduction from last year ( Fig. 1 [40,542 bytes] ). The worldwide rig count has not been this low since May 1996 when 1,677 rigs were in operation. October 1997 Brent spot crude averaged $19.97/bbl, falling to $12.17/bbl in July of this year ( Fig. 2 [47,714 bytes]
Dean E. Gaddy
Drilling Editor
Rig activity continues to drop as a result of depressed oil prices. During July, the number of rigs drilling for oil and gas worldwide fell to 1,764, a 19% reduction from last year (Fig. 1 [40,542 bytes]). The worldwide rig count has not been this low since May 1996 when 1,677 rigs were in operation.

October 1997 Brent spot crude averaged $19.97/bbl, falling to $12.17/bbl in July of this year (Fig. 2 [47,714 bytes]). Brent spot crude prices have not been this low since July 1986 when it averaged $9.41/bbl. Even relatively strong gas prices have not slowed the downturn in drilling activity with July 1998 natural gas spot prices (Natural Gas Clearinghouse) rising 11% over a year ago to $2.26/MMBTU.

Most operators have minimized their drilling activities, concentrating on keeping leases and maintaining obligations to the exclusion of further exploratory and development work. In addition, some OPEC and non-OPEC members have announced they will reduce drilling programs in response to falling oil prices.

Worldwide activity

According to Baker Hughes Inc., the international rig count, excluding the former Soviet Union, communist countries, Iraq, and North America, averaged 731 active rigs in July, down 131 rigs from last year (Fig. 3 [47,362 bytes]). From June to July 1998, international rig activity dropped by 59 rigs.

The Baker Hughes North American rig count averaged 1,033 rigs in July, a 23% decline from last year. The U.S. rig count for July averaged 816 rigs, down from 969 rigs last year.

For the week of Aug. 21, 1998, 771 U.S. rigs were running, down 28 rigs from the prior week and 206 rigs a year ago. It was just last December that U.S. rig activity reached a 7 year high with 1,013 working rigs as compared to 1,068 rigs in January 1991.

The Canadian rig count averaged 217 rigs in July, down from 373 rigs last year. For the week of Aug. 21, 1998, 223 Canadian rigs were drilling, down 156 rigs from a year ago.

In the major international regions (Fig. 4 [40,834 bytes]), Europe had 86 rigs working - 40 onshore and 46 offshore. The Middle East had 171 rigs drilling - 140 onshore and 31 offshore. Africa had 68 rigs working - 39 onshore and 29 offshore. Latin America had 241 rigs working - 187 onshore and 54 offshore. Asia Pacific had 165 rigs working - 92 onshore and 73 offshore.

Offshore drilling activity also continues to fall. According to Offshore Data Services, as of Aug. 15, 1998, 550 of the world's drilling fleet held contracts out of a total mobile fleet of 609 (Table 1 [138,666 bytes]). A year ago, 578 rigs held contracts out of a total rig fleet of 605.

The U.S. picture

OGJ estimates operators will drill 24,750 wells in the U.S., down from an estimated 28,636 wells in 1997 (OGJ, July 27, p. 70). Spending to drill and complete wells in the U.S. is forecast to total $12.9 billion, down 12.5% from 1997 outlays.

However, OGJ estimates that average U.S. footage per well will grow to 5,596 ft this year from 5,282 ft in 1997, partly because of expanding directional and multilateral drilling activities. For Canada, OGJ estimates operators will drill 10,804 wells in 1998.

The drop in U.S. drilling activity lagged the drop in oil prices by about 2 months (Fig. 5 [44,618 bytes]). From June 1997 to March 1998, the number of U.S. rigs operating onshore and offshore remained above 950. However, once Brent and WTI spot prices remained below $15/bbl, U.S. rig activity began to slide below 900 rigs without any signs of recovery.

Bob Rose, president and CEO of Global Marine Inc. says that "as long as prices stay within a $2 band on either side of $19/bbl, [we'll] continue to see improved day rates and increasing capital expenditures by the oil and gas companies."

However, with low oil prices cutting into the operators' drilling budgets, there are now strong concerns that reduced capital spending and declining day rates will erode profits for U.S. contractors.

Tom Richards, president and CEO of Grey Wolf Inc., said "1997 was the first year in 15 years that domestic U.S. onshore drilling contractors were able to make a profit." However, despite the current slump, both Rose and Richards believe the long-term fundamentals of the drilling business are strong.

Rose said that the current downturn is an "aberration," the result of the four events that happened almost simultaneously:

  1. The Asian crisis which reduced demand.
  2. An unusually warm winter which further reduced demand.
  3. Iraq selling high volumes of oil in exchange for humanitarian aid.
  4. OPEC increasing its production quotas.
Rose said it is clearly in the interests of OPEC to get prices back up and sees further production cuts. He expects commodity prices to be near normal by the latter part of 1999.

U.S. onshore

By mid-August, the monthly average for U.S. onshore drilling activity was 795 rigs (Rig Location & Permit Report Services), compared to 1,150 rigs a year ago (Table 2 [170,173 bytes] ). According to Richard Mason of the Land Rig Newsletter, there are 1,478 available land rigs.

Thus, the utilization rate for Aug. 14, 1998, was about 54% compared to 78% a year ago. Mason said there are an additional 113 moth-balled land rigs that can be reactivated if the need arises.

Nabors Drilling Inc., Grey Wolf Drilling Inc., Patterson Drilling Co., UTI Energy, Bayard Drilling Technologies Inc., and Helmerich & Payne Inc. were the most active onshore companies with 448 rigs working in the U.S. during July as compared to 543 rigs in January 1998 (Table 3 [215,053 bytes]).

As of July 31, 1998, these six companies held 43% of the active rig market dedicated to 53% of the total onshore footage (Table 4 [142,881 bytes]).

Decline of horizontal and oil drilling

U.S. drilling has shifted away from horizontal and oil well drilling. According to Smith Tool Co., from January 1995 to April 1998, the number of U.S. rigs drilling horizontal wells remained stable between 9 and 11% (Fig. 6 [43,653 bytes] and Fig. 7 [44,889 bytes]). However, as of Aug. 14, 1998, only 37 U.S. rigs were used in this endeavor, or 4.4% of the total rig fleet.

Texas remains the leader in terms of horizontal drilling rigs and footage. As of July 31, 20 rigs were committed to 530,450 ft of horizontal footage (Table 5 [103,378 bytes]). This is followed by Louisiana with 5 rigs committed to 77,142 ft of horizontal footage.

Mason said that horizontal drilling activities have fallen because Union Pacific Resources Inc., Chesapeake Energy Corp., and Sonat Inc. are cutting back on their Austin Chalk drilling activities.

According to Baker Hughes, drilling for oil has also declined in the U.S. accompanied by a rise in natural gas drilling (Fig. 8 [37,507 bytes]). As of Aug. 14, 1998, 299 rigs were drilling for oil and 568 rigs for natural gas. A year ago, 417 rigs were drilling for oil and 580 rigs for natural gas.

Oil drilling has been steadily declining since July 1992 when it encompassed 50% of all drilling activity. During July 1998, oil drilling only accounted for 32% of all drilling activity. From August 1992 to July 1998, gas drilling increased from 50% to 67%.

Texas remains the most active region with 255 rigs drilling for natural gas and 66 for oil (Table 5). Oklahoma is second with 90 rigs drilling for natural gas and 15 for oil. Louisiana is third with 53 rigs drilling for natural gas and 7 for oil.

U.S. land consolidation

Since January 1997, consolidation has accounted for about 44 drilling companies being merged or acquired into 16 successor companies (Table 6 [199,567 bytes]). About 375 rigs were involved in the exchange encompassing 25% of the U.S. land rig fleet.

Nabors was the most active, acquiring some 111 rigs. Grey Wolf was second with 54 rig additions followed by Patterson and Key Energy Drilling Inc. each with 46 and 42 rig purchases, respectively.

Richards sees a definite pattern to the ongoing consolidation of onshore U.S. contractors broken down into three distinct phases. The first phase was "dominated by small entrepreneurs that operated anywhere from 4 to 10 drilling rigs."

In the second phase that began in the mid-1980s, "we began to see significant consolidation within the industry by the advent of strong publicly traded companies that were able to gain economies of scale over the smaller contractors," Richards said.

"We've gone from a situation where there might be 10 viable bidders on any particular job, to where there's only 4 or 5 today." Richards foresees the third phase consisting of further consolidation, but "involving the publicly traded companies [consolidating] between themselves."

Rig replacement

Richards believes the industry will have to build rigs in the future to satisfy increased demand once oil prices resume to a more normal level. "It's going to require at least a 100 additional rigs working in the U.S. in order to maintain the current deliverability of natural gas as well as to meet the increased demand for natural gas."

In addition, attrition continues to take 25 to 50 rigs a year. Some are moved overseas, some are retired as a result of obsolescence, and some are lost to fire.

Richards said a 2,000 hp diesel-electric rig will cost about $12.5 million to build. "In order to begin a phase of new construction, day rates will need to exceed $16,000/day based on 95% utilization."

Day rates for these high-capacity rigs peaked at about $10,000/day in the fourth quarter 1997, and since then have declined to $7,000/day. "Even at $16,000/day, you'll never pay for one on the kind of utilization we've had over the past 15 years," Richards said.

The other rig categories have also been affected by low oil prices. Denny Smith, director of corporate development for Nabors, said that "as the market slowed, the shallower mechanical rigs were the first to experience lower utilization and pricing. Conversely, the deeper rigs were affected later and to a lesser extent. Average rates for these more sophisticated rigs reached slightly over $9,000/day. The average rate has since declined to the mid-$8,000 range."

Canada

In July 1998, 232 rigs were actively drilling compared to 429 rigs the same time last year (Fig. 9 [35,614 bytes]). According to Tim Paul, coordinator of economic analysis for Caodc, "1997 was an anomaly. We usually have very cyclic periods of drilling activity."

Paul said last year there was lots of capital so operators were either willing to pay fines for drilling off-season or instead chose to increase their horizontal drilling activity. During second-quarter 1997, utilization was 60% instead of the more typical 20-30%. For 1997, utilization in Western Canada averaged 82%.

"This year has been more typical with dampened rig activity affected by a wet and early summer, compounded by the effects of low oil prices," Paul said. In addition, this year has seen a reversal in oil vs. gas drilling. Paul said the split is normally 60% oil and 40% gas.

However, in 1998, the split has been 55-50% gas and 40-45% oil. Paul said that this is a result of banks holding back funding for oil drilling due to low oil prices.

As of Aug. 5, 1998, 233 rigs were drilling in Western Canada with 181 rigs operating in Alberta, 29 in Saskatchewan, 22 in British Columbia, and 1 in the Northwest Territory. According to the Daily Oil Bulletin, 8,553 oil wells, 4,856 gas wells, 2,775 dry holes, and 292 service wells were drilled in 1997 for a total of 16,476 wells. In 1996, 12,689 wells were drilled (Fig. 10 [34,428 bytes]).

As of Aug. 13, Precision Drilling Co., the largest Canadian drilling contractor, reported that 86 rigs out of a fleet of 214 were drilling in Canada. However, this low utilization rate cannot be compared against U.S. or international markets since most drilling activity occurs during the winter, fall, and spring.

Offshore markets

The once active Gulf of Mexico market is showing marked signs of decline with utilization at 83% (Aug. 15) as compared to 96% a year ago. At this time, 144 rigs held contracts consisting of 108 jack ups, 26 semisubmersibles, 4 drill ships, and 6 submersibles (Table 1). This is the lowest level since November 1995.

Only the drill ships are 100% employed, with the remaining categories ranging from 75% to 83% utilization. Tom Marsh of Offshore Data Services said jack ups have been particularly hard hit. In addition to the 26 jack ups that are already idle, another 65 are on contracts that end Nov. 1. He said contractors are bidding jack ups at $20,000/day and less. At the beginning of the first quarter, day rates were in the $50,000-60,000/day range.

Semisubmersibles have not been immune with second-generation rigs experiencing idle time. In addition to the 3 semisubmersibles that are stacked in the gulf without contracts, another 4 may be released by the end of the year. Marsh said second-generation semisubmersibles are currently earning about $70,000/day and sometimes as low as $50,000/day.

The West Africa market, however, has shown no signs of decline. All 44 available rigs, including 28 jack ups, 14 semisubmersibles, and 2 drill ships, were drilling on Aug. 15. Marsh feels that West Africa is "going to heat up despite oil prices." Two additional drill ships are expected to begin drilling there later this year, both departing the Gulf of Mexico.

In the Europe/Mediterranean Sea, depressed oil prices still have not adversely affected drilling activity. Fleet utilization was 96.5% with 109 rigs under contract as of Aug. 15. Out of a fleet of 113 rigs, 55 jack ups, 51 semisubmersibles, and 3 drill ships held contracts. One rig was reported to have recently departed the area.

The Asia/Australia market has also been hit by low oil prices. As of Aug. 15, total utilization was 81.7%. Of the 71 available rigs, 39 jack ups, 17 semisubmersibles, and 2 drill ships were holding contracts. Three jack ups are ready stacked and 5 are in the shipyard for repairs.

Marsh said that between now and the end of the year, some 167 offshore drilling rig contracts will expire worldwide.

Offshore consolidation

Whereas the onshore contractors have been acquiring smaller, privately held drilling companies for purposes of expanding and dominating market share, offshore contractors have been undergoing a period of consolidation where large publicly held companies are merging with other large and medium-sized publicly held companies.

Last December, Falcon Drilling Co. and Reading & Bates Corp. joined forces, forming R&B Falcon Corp. This merger provided R&B Falcon with the world's largest offshore fleet, including 12 drill ships, 11 semisubmersibles, 26 jack ups, 3 submersibles, 2 tender rigs, 50 barge drilling, 10 barge workover rigs, and 3 platform rigs for a total of 115 mobile drilling rigs. R&B Falcon also plans to build seven drill ships and two semisubmersibles.

This merger is being followed by yet another. On Aug. 21, R&B Falcon announced its intention to merge with Cliffs Drilling Co. The merger will result in an expanded shallow-water presence for R&B Falcon with the addition of 16 jack ups, 10 of which will operate in the Gulf of Mexico.

R&B Falcon already operates the industry's largest fleet of transition zone rigs and the merger will make R&B Falcon the world's largest operator of jack up drilling rigs with 42 units.

Cliffs Drilling's international jack up rigs are working in Trinidad, Venezuela, Mexico, and Qatar. In addition, Cliffs operates 11 land rigs in Venezuela where the company has gained extensive turnkey experience, providing the company with additional diversification.

In addition to its continuing expansion in shallow water, R&B Falcon has focused on the ultra-deep water market. R&B Falcon has a fleet of 15 semisubmersibles and drillships capable of operating in water deeper than 3,000 ft.

Rose foresees continued consolidation in the industry, but many of the benefits that operators enjoy do not happen when two contractors, be it onshore or offshore, join forces. "The G&A costs as a percentage of the total costs is so low that if you put two drilling companies together, it's negligible, you just don't see it. The reason why drilling companies merge is because of increased market share and a better mix of rigs," Rose said.

Rig construction

As of late August, a total of 66 mobile rigs were under construction around the world (Table 7 [149,082 bytes]). Eleven rigs are expected to be delivered in 1998, 34 in 1999, 20 in 2000, and 1 in 2001. Semisubmersibles account for 46% of the new builds, 29% are drill ships, 15% are jackups, 9% are barges, and 1% is a tender. Marsh said total new construction estimates are now valued at $12.89 billion.

Twenty-six rigs will be built in the Gulf of Mexico, 16 in the Far East, 7 in Southeast Asia, 6 in Europe, 4 in the Mediterranean, 3 each in Canada and the North Sea, and 1 in the Caspian Sea.

So far, only 13 rigs are without a contract. Rose believes drilling contractors are much more cautious today than they were in the late 1970s and early 1980s. "No one is expecting tremendously high product prices and we don't have the tax regime that was available to the industry back then."

In addition, rig costs are an order of magnitude higher today. "We were looking at $20 to $25 million jack ups back then that would cost $80 million today." In addition, "Most of the rigs that are being constructed today are deep water rigs for a niche market. These are $200-250 million expenditures, so you don't have a lot of speculators jumping in as we had in the last cycle."

International markets

As a sign of state-owned drilling companies cutting back on drilling activities, Pdvsa said in August it will cut drilling operations from 125 rigs to 51. However, this will be partially offset by allowing third-party oil multinationals to increase drilling operations by an additional 5 rigs to 36 by the end of 1998.

Despite current shortcomings in many overseas markets, particularly Venezuela, several drilling contractors feel the international markets are less risky than operating in the U.S. Sted Garber, CEO of Santa Fe International Inc., said his company is enjoying 94% utilization because it has no exposure in the U.S.

Of the company's 26 marine rigs operating in the North Sea, Venezuela, West Africa, Southeast Asia, Egypt, Middle East, and Indonesia, only 1 rig is idle. Of the 22 land rigs that are running in the Middle East, none are idle. The company may even add one additional rig to its Kuwaiti fleet of 6 rigs. Venezuela is the only "soft market" with 3 rigs out of work.

Nevertheless, Garber said day rates are moving down everywhere except where the company has long-term contracts. Santa Fe has further reduced its risk by focusing on niche markets.

For example, the company has booked its 4 heavy-duty, harsh-environment North Sea rigs for 86% of the time next year. As of today, there are only 14 such rigs in the world. Overall, its fleet has commitments for 57% of next year.

Helmerich & Payne (H&P) is yet another company that has a high degree of international exposure. Worldwide, the company's fleet is 82% utilized. Of its 87 available rigs, 53 are located in overseas' markets. In Bolivia and Argentina, the company has 5 available rigs. Two are stacked and 2 more are being built.

In Colombia, 8 rigs out of 10 rigs are working. In Equador, all 4 rigs are drilling. In Peru, 1 rig is under contract. In addition, All 10 of H&P's South American platform rigs are committed. Even in the U.S., 32 of its 34 rigs were working mid-August.

However, of the company's 21 Venezuelan land rigs, 10 are out of work.

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