Rig activity fails to bounce back despite $20/bbl oil

Sept. 20, 1999
Rig activity remains near historic lows, despite months of recovering oil prices and falling inventories.

Rig activity remains near historic lows, despite months of recovering oil prices and falling inventories.

Click here to enlarge image

Industry leaders blame financial weakness and structural reorganization for the apparent lag in drill rig recovery. (Fig. 1 at right)

Click here to enlarge image

From May to July, worldwide drilling activity edged upwards 213 units to 1,384 rigs, while over the same period, Brent oil prices rose $3.44 to $18.65/bbl (Figs. 1, above right and 2, right). Yet last year, while oil prices ranged from $12 to $14/bbl, operators and national oil companies kept more than 1,800 rigs busy.

Worldwide activity

Click here to enlarge image

According to Baker Hughes Inc., the international rig count, excluding the FSU, communist countries, Iraq, and North America, averaged 581 active rigs in July, down 150 rigs from last year and 21 rigs from the prior month (Fig. 3).

Additionally, the North American active rig count averaged 803 rigs in July, a 22% decline over the prior year. Over a 16-month period, beginning in December 1997, the North American rig count set a record high, for the 1990s, followed by a record low, resulting in a loss of 941 rigs.

In August, the U.S. rig count, including onshore and offshore units, averaged 639 rigs, down from 791 rigs last year. For the week of Aug. 20, however, the rig count rose to 668 rigs, up 28 rigs from the prior week.

In Western Canada, the August active rig count averaged 285 units, down 50 rigs from a year earlier. Yet for the week of Aug. 31, 296 rigs were drilling in Western Canada, up from 231 a year ago.

Click here to enlarge image

In the major international regions (Fig. 4), operators and national oil companies employed 80 rigs in Europe, 141 in the Middle East, 38 in Africa, 179 in Latin America, and 143 in the Far East during July.

Click here to enlarge image

Worldwide offshore activity maintained relatively flat with abnormally low utilization rates throughout the first half of 1999 (Fig. 5, right). According to Offshore Data Services Inc., the working fleet stood at 456 rigs on Aug. 13, with a utilization of 72.8% (Table 1, below right). In 1998 at the same time, 89% of the fleet was at work.

The U.S. picture

Click here to enlarge image

OGJ estimates operators will drill 18,600 wells in the U.S. this year, a level not reached in 65 years and off from an estimated 23,900 wells in 1998 (OGJ, July 26, p. 65). Well drilling and completion spending should also fall 25% to $11.3 billion and exploratory drilling may consequently fall to 1,998 wells, down from 4,000 in 1998.

Click here to enlarge image

Using the West Texas Intermediate (WTI) crude oil benchmark, oil prices began sliding from $17.64/bbl the week of Jan. 2, 1998, reaching a low of $10.64/bbl on Dec. 25, 1998 (Fig. 6). Soon to follow, the rig count began a steady decline, with the U.S. active rig count starting to drop irreversibly in late February.

By Mar. 12, 1999, however, oil prices began to recover as the weekly WTI benchmark jumped $2.04 to $14.19/bbl, eventually breaking $20/bbl at the end of July. Unfortunately, drilling activity continued to drop, even as oil prices rebounded, reaching an historic low of 488 rigs on Apr. 23, 1999, recovering slightly to 650 rigs 4 months later.

"We've recently seen a 30% increase in rig utilization (to 40 rigs)," said Tom Richards, chairman, CEO and president of Grey Wolf Inc., "yet with today's higher commodity prices, we should have 100 rigs working by now."

Richards told OGJ there are two reasons for lagging U.S. rig activity. "First, the independent oil companies' balance sheets are still impaired, making it difficult for them to increase their budgets. Second, consolidation among the majors has taken them out of the market for the time being."

Bob Rose, CEO and chairman of Global Marine Inc., foresees a challenging future for both operators and drilling contractors, once these issues are resolved. "Capital budgets will probably not be as great as before and a lot of spin-off properties will end up in the hands of the independents."

Under normal conditions, he said, "Independents work their properties very quickly, especially those that are too small for the majors. It will be some time before the majors can rationalize their portfolios and spin these properties off."

Rig utilization

Click here to enlarge image

Based on the 1998 Reed Rig Census and weekly information provided by Rig Location & Permit Report Service (Rlprs; OGJ, Oct. 5, 1998, p. 36), total U.S. rig fleet utilization from January to August ranged from 46 to 54% (Table 2).

Additionally, U.S. rig use, based on marketable rigs, also grew slightly throughout the year, ranging from 53% in January to 54% in August.

Click here to enlarge image

Altogether, the top 50 U.S. operators drilled 2,908 wells in 1999 for a total of 29.2 million ft (Table 3). Through mid-August, Chevron U.S.A. Inc., EOG Resources (Enron Oil & Gas), Burlington Resources Oil & Gas Co., Texaco E&P Inc., and Vastar Resources Inc. drilled the most wells, with 768 wells and 7.16 million ft of hole.

U.S. land rigs

Click here to enlarge image

Based on a 4-week mid-August average for U.S. onshore drilling activity, 776 rigs were actively drilling (Table 4), down 189 rigs from the year before (OGJ, Sept. 21, 1998, p. 51). Thus, with 1,449 U.S. available land rigs, operators utilized 54% of the land fleet, down from 67% a year earlier.

Coinciding with the downturn, day rates fell accordingly. "In January 1998, we received $9,500/day for a 2,000-hp rig," Richards said. "In June of this year, however, we received only $6,000/day for the same rig." Unfortunately, Richards says, these rates are breakeven at best.

Click here to enlarge image

On a state-by-state basis, Texas, Oklahoma, Louisiana, Wyoming, and New Mexico were the most active in July with Texas, holding about 48% of the total market share in terms of footage (Table 5).

Angry workforce

If rig activity returns to 1997 levels, a shortage of experienced individuals may again become a serious concern for the drilling sector. Richard Mason of the Land Rig Newsletter says that during the last upturn (1996-1997), most of the employees who returned "basically received a slap in the face as they were let go again."

Many of these individuals "who are now working in competitive industries, receive better pay and even overtime," he said. Thus, "The next time around, workers may not be as inclined to return."

Fortunately, because rig activity is ramping up slowly, there has not been an acute labor shortage-yet. "If we encounter a step level change, however," Mason said, "say 10 to 15% in the near term, we may be in trouble."

Using a conservative estimate of 21 employees/rig, about 12,000 roughnecks and drillers have been laid off since January 1998, assuming total U.S. rigs dropped from 1,500 working units to 927 (Table 4; OGJ, Sept. 21, 1998, p. 52).

Some drilling contractors, however, have taken steps to maintain a core of experienced personnel. "In January 1998, we had 2,700 employees, which bottomed out at 1,200 during this down turn," Richards said.

"Based on two strategies, however, we believe we'll have an advantage as drilling activity revives. First, where most of our competitors cut wages, we didn't. Second, we kept our most experienced personnel including an additional 100 drillers and 50 toolpushers, working them at lower positions as needed."

Richards believes this strategy will allow the company to respond quickly if there is a sudden turn for the better.

Onshore consolidation

The consolidation frenzy that affected 44 companies and 30% of the onshore rig fleet in 1997-1998 subsided this year (OGJ, Sept. 21, 1998, p. 56). Nevertheless, in July, UTI acquired Norton with an exchange of 15 rigs, and in April, Nabors acquired Bayard Drilling Co. with an exchange of about 70 rigs.

Currently, Parker Drilling Co. plans to sell its U.S. rig fleet, consisting of 15 land rigs, to Unit Energy Corp. The company intends to get out of the U.S. market and concentrate on overseas markets.

Directional and gas drilling

The percentage of vertical, horizontal, and directional wells relative to one another has remained within normal percentage levels, despite low oil prices. Similar to 1998, vertical wells in 1999 encompassed 68% of U.S. drilling activity followed by directional (25%) and horizontal (7%) activities.

Click here to enlarge image

According to Smith Tool Co., for the week of July 30, operators drilled 457 vertical wells, 149 directional, and 57 horizontal (Fig. 7).

Click here to enlarge image

On the other hand, the spread between oil and gas drilling in the U.S., both onshore and offshore, continues to favor gas. According to Baker Hughes, 478 rigs drilled for gas in July, while only 108 drilled for oil (Fig. 8). From January 1997 to July 1999, the portion of gas wells increased from 58% to 82%.

Natural gas price gains, a result of increased use, low inventory build up, and the possibility of a cold La Ni?a winter, account for the high ratio of gas drilling. September deliveries at the Henry Hub broke $3/Mcf Aug. 23, rising 60% from a year ago.

Canada

Click here to enlarge image

Tim Paul, coordinator of economic analysis for the Canadian Association of Oilwell Drillers (Caodc), told OGJ there has been a recent jump in Western Canadian drilling activity. "We've had an average utilization rate of 20% through the 2nd quarter (Fig. 9), the lowest we've seen since 1992. However, the rig count has been growing and is now over 50%."

During the week of Aug. 18, 314 rigs were drilling in Alberta, 18 in British Columbia, 98 in Saskatchewan, and 1 in the Northwest Territories. This left 347 rigs without work.

Paul said the up-tick is the result of stable oil and gas prices and cash-flow earnings. "We expect it to become much busier in the first quarter 2000." Caodc projects that 365 Western Canadian rigs will be working in the fourth quarter, utilizing 63% of its fleet. "We expect to drill 9,023 wells this year, which will probably be adjusted upward in September."

Unfortunately, Paul said, Canadian companies are also concerned with an upcoming shortage of skilled workers. "We face a lot of competition from the construction industry that offers comparative and steady pay." Nevertheless, he says, "This should not become a concern unless the rig count jumps 150 rigs or so."

Click here to enlarge image

Similar to the U.S., gas drilling continues to outweigh oil, by about four wells to one (Fig. 10). "In fact, we've had more dry wells than oil completions," he noted. Additionally, 80% of the successful wells have been gas with a 20% success rate for oil. "This has been quite a switch from prior trends," Paul said. Canada will probably finish out the year with 70-75% of its wells as successful completions.

Offshore markets

According to Offshore Data Service Inc., 463 offshore rigs held contracts on Aug. 27, 1 more than the prior week but 84 less than a year ago. Even West Africa, which remained the only market last year with all rigs running, has shown marked signs of decline, with only 24 out of 42 rigs under contract.

And as of Aug. 13, out of a worldwide fleet of 626 rigs, 243 jack ups, 102 semisubmersibles, 12 drillships, 0 submersibles, 19 barges, and 0 arctic rigs were actively drilling. On a regional basis, 65% of the offshore industry's rigs were at work in the Gulf of Mexico, 78% in Europe and the Mediterranean, 63% in West Africa, and 67% in Asia and Australia (Table 1).

Jim Day, CEO of Noble Drilling Co., feels the Gulf of Mexico, offshore Brazil, and Mexico hold the greatest promise for picking up in the fourth quarter, but says, "we probably won't see any improvement in the North Sea and West Africa until 2000."

Rose agrees with Day. "If you look at the world, there are two camps-oil and gas. The latter is primarily the Gulf of Mexico, where activity levels have bottomed out. However, in the North Sea, which is an oil province, we haven't seen the worst yet." Rose feels Africa is in-between and should recover in the mid-term.

Yet both industry leaders feel optimistic. "I like the fundamentals today with the Far East economy looking up and supply constraint (being upheld) by OPEC," Day said. "Nevertheless, we (Noble) were hoping the market would stay weak awhile longer to promote consolidation. The offshore market is still too fragmented and we need fewer competitors."

For example, too many competitors may have adversely affected day rates, more so than previously thought. "For a third-generation semisubmersible, we are lucky to get $30,000 to $40,000/day, whereas 18 months ago we would have received $100,000 to $140,000/day," Rose said. "These rates are slightly better than cash breakeven."

In contrast, low day rates, a result of too many bids and not enough work, may have provided an opportune time for some operators to drill prospects formerly placed on hold.

According to Arthur Andersen's 1999 Global E&P Trends report, upstream companies actually increased capital spending by 5% in 1998, despite a decline in return on capital that began in 1996 (OGJ, Aug. 2, Newsletter; OGJ, June 21, p. 27). According to the analyst, a 2% decline in U.S. capital spending was offset by increased spending in Europe (9%) and Africa-Middle East (25%).

Like the onshore decline in drilling contractor consolidation, offshore acquisitions slowed in 1999. Pending deals include negotiations between Nabors Industries Inc. and Pool Drilling Co., in addition to Transocean Inc. and Sedco Forex. Over the past year, R&B Falcon acquired Cliffs Drilling Co., while Parker Drilling Co. exercised full control over Hercules Offshore.

Construction update

Five new drillships (or major upgrades) and seven semisubmersibles joined the deepwater drilling fleet over the past year. These include the: Transocean Marianas, Deepwater Pathfinder, Noble Paul Romano, Noble Paul Wolff, Deepwater Frontier, Stena Tay, Pride Africa, Noble Jim Thompson, R&B Falcon Peregrine 4, Marine 700, Noble Amos Runner, and the Discover Enterprise (see related article, p. 54). According to Offshore Data Service, the addition of these vessels accounts for about $2.85 billion in capital expenditures.

Click here to enlarge image

As of mid-August, 8 jack ups, 23 semisubmersibles, and 11 drillships were under construction or on order (Table 6). For the remainder of 1999, 3 jack ups, 8 semisubmersibles, and 5 drillships should be delivered, to be followed by 4 jack ups, 11 semisubmersibles, and 6 drillships in 2000.

Finally, the current construction cycle, which began in 1996, should come to a close in 2001 when the remaining four semisubmersibles are delivered. Of these new builds, four jack ups, four semisubmersibles, and one drillship do not hold drilling contracts.

International markets

Compared to last year, when many international onshore drillers enjoyed higher utilization rates than their U.S. counterparts, depressed oil prices and a lack of exploration success have leveled the playing field in 1999.

"In the U.S., I think gas prices will help us to bounce back. In South America, however, many of the projects moving into the latter stages of development were caught in the downturn," said George Dotson, president of Helmerich & Payne Inc. (H&P). "What we're seeing is that 18 months ago we had 43 of 43 rigs running, but now we have only 19 of 43 running internationally."

Conversely, in the U.S., 27 of 36 of the company's onshore rigs are at work. Dotson told OGJ that Venezuela has been particularly hard on contractors where only 6 of H&P's 21 rigs are working. Furthermore, BP Amoco has downsized operations in Colombia, while Peru's lack of exploration success, coupled with low oil prices, has brought exploratory drilling to a halt.

Located near Santa Cruz, Bolivia, Helmerich & Payne Inc.'s Rig 175, rated at 30,000 ft, uses a National 1625 drawworks, three Gardner Denver PZ11 pumps, a Varco TDS-4 top drive, and five 3512B Caterpillar engines. Innovative features include a 2,000-bbl cylindrical mud system. Photo by Preston Hale (Fig. 11).
Click here to enlarge image

"In Bolivia and north Argentina, there have been some exploratory success for deep gas, but economical turmoil in Brazil has created demand problems," Dotson said (Fig. 11). "One bright spot is Ecuador, where improving oil prices are renewing activity."

Yet in other parts of the world, particularly onshore operations in the Middle East dominated by national oil companies, drilling activity appears to be unaffected by low commodity prices.

According to Richard Hoffman, vice-president for Santa Fe International Corp., all eight Kuwaiti rigs are working, along with two in the Partitioned Neutral Zone, two in Saudi Arabia, four in Oman, and one in Qatar. Only three rigs are idle, one in Qatar and two in Oman.

Probably the largest land rig in the Middle East, Santa Fe International Inc.'s Rig 180, delivered to Kuwait Oil Co. in February 1999, has a casing capacity of 1.5 million lb. Mounted on a 37 ft box-on-box Pyramid subbase, the unit contains a National Oilwell 750-ton top drive unit and a Martin Decker Totco block control system (Fig. 12).
Click here to enlarge image

To support Kuwait Oil Co.'s need for a heavy-duty rig, capable of drilling deep, high-angle Jurassic wells, Santa Fe added a brand-new 3,000-hp unit to its Kuwaiti fleet (Fig. 12). "Without a doubt, Rig 180 is the largest land rig in the Middle East," Hoffman said.

Another new unit added to the international rig fleet was Rig 66, which headed for Syria last Spring under a 2-year contract. Built for Rotary Drilling Co., a Hungarian subsidiary of MOL, by IDM Equipment in Houston, this rig, rated at 20,000 ft, contains a mixture of new and refurbished parts. According to David Huntington, president of IDM, "The rig was put together in 70 days."

Click here to enlarge image

Spears & Associates (PennPoint) says there are now at least 148 available land rigs in the Middle East, 134 in Africa, 95 in Europe, 269 in South America, and 159 in Southeast Asia (Table 7).