Reed-Hycalog: US rig activity at 47-year low

Oct. 18, 1999
US rig activity fell to a 47-year low this summer, according to the latest census by Reed-Hycalog.
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US rig activity fell to a 47-year low this summer, according to the latest census by Reed-Hycalog. Rig utilization dropped to 52.3% from 76.5% a year ago (Fig. 1a), while total available rigs declined 61 units, ending a 2-year streak of gains (OGJ, Oct. 5, 1998, p. 36).

"The increase between 1995 and 1997 has been negated, and unfortunately we are back to where we were in 1988 before the upward trend began," John Deane, president of Reed-Hycalog, told attendees at the annual meeting of the International Association of Drilling Contractors in Houston last month.

Reed-Hycalog's active rig count for the 47th annual census, which began May 8 and ended June 21, reveals higher weekly rig counts compared with other benchmarks because it encompasses a total count of all rigs active at any time over the 45-day period (OGJ, Sept. 22, 1997, p. 48).

Of the 1,644 available rigs, only 860 were engaged in drilling, down 445 units from 1998 (Fig. 1b). "Percentage-wise, active rigs declined 34.1%-greater than the decline between 1981 and 1982 (-31.4%) and second only to 1985 and 1986 (-60%)," Deane said.

Rig deletions, additions

In 1999, 100 rigs were deleted from the list, while 39 were added (see table, p. 30). Excessive capital expenditures needed to keep a rig operating comprised the largest category of losses, with 46 deletions-17 more than last year. The remaining deletions included: 41 cannibalized rigs, 7 moved outside the US, 2 stacked, and 4 destroyed.

Rig additions included: 18 brought back into service, 9 assembled from components, 6 new-builds, and 6 imports. Of the new-builds, 3 land rigs are in California, 2 land rigs are in Alaska, and 1 rig is off Louisiana.

In the 1999 census, there were 497 diesel-electric rigs available for work, an increase of 2 from a year ago. On the other hand, the number of mechanical rigs dropped 63 units to 1,145.

Comparing the 1998 and 1999 censuses, deletions or additions to the fleet by rig type included: 65 fewer land rigs, for a total of 1,145; 1 less inland barge, for a total of 46; 2 more floating rigs, for a total of 37; no change for the 45 offshore platforms; 3 more bottom-supported rigs, for a total of 132; and 3 more offshore stationary rigs, for a total of 177.

The US industry has now lost 4,000 rigs since 1982, when available rigs numbered 5,644.

The number of available rigs fell in every depth range over the past year. The rig depth distribution for the 1999 census (Fig. 1c) is:

  • 375 rigs capable of drilling deeper than 20,000 ft, a loss of 1 rig.
  • 134 rigs rated to 16,000-19,999 ft, a loss of 8 rigs.
  • 232 rigs rated to 13,000-15,999 ft, a loss of 6 rigs.
  • 368 rigs rated to 10,000-12,999 ft, a loss of 23 rigs.
  • 395 rigs rated to 6,000-9,999 ft, a loss of 17 rigs.
  • 140 rigs rated to 3,000-5,999 ft, a loss of 6 rigs.

Consolidation

The number of US contract drillers also declined in 1999, continuing a trend that has lasted for more than a decade (Fig. 1d).

"Simply put, consolidation is necessary," said Jean Cahuzac, president of Sedco Forex. "There are just too many suppliers to support both the existing and anticipated future rig market."

Over the past year, 137 available rigs changed ownership as the number of contractors fell to 219, down 21. And as industry consolidation continues, the large contractor group (companies with a large rig-market share) continues to gain more control over the rig fleet.

"Fifteen of our 219 contractors now own 20 or more rigs, a decline of 1 since last year," Deane said. "Those 15, however, now own a higher percentage of available rigs than ever reported."

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The large contractor group of 15 companies now owns 54% of all US-based rigs (Fig. 2). By comparison, 388 contractors owned 20% of the fleet in 1993.

"Consolidation implies self-regulation, eliminating fragmentation and redundancy, resulting in a more streamlined infrastructure...," Cahuzac said. "We shouldn't, however, discount the short-term impact of integrating the cultures and resources of the two former competitors-often a formidable task."

Earlier this year, Schlumberger agreed to spin off its offshore contract drilling unit, Sedco Forex Offshore, to unite it with Transocean Offshore Inc. (OGJ, July 19, 1999, p. 26). This merger will create the world's largest offshore drilling company and will involve integrating operating units from around the world.

A volatile market

Reed-Hycalog predicts that next year's utilization will return to historical levels of 73%, resulting in an active rig count of 1,200 units. "We predict available rigs will remain at 1999 levels, as future demand will be satisfied by rigs currently stacked," Deane added.

Mike Harris, regional drilling manager of BP Amoco PLC, told the IADC attendees, "Predicting oil prices and rig counts is a lot like predicting the weather; We know it's going to change, and we know we can't control it."

However, Harris feels there are ways to mitigate the effects of volatile commodity prices, which in turn affect rig rates. Giving the operator's perspective, he said, "We (BP Amoco) try to make sure our portfolio is robust at $11/bbl." In addition, he said, it's important to have "a structure that allows us to see when assets are not performing and be able to react very quickly...We want to be on the low side to protect the balance sheet but be on the up side to capitalize on any gains that can be had through exploiting any opportunities that present themselves."

Controversially, Harris feels contractors must work more closely with operators to iron out issues concerning rig rates, especially during periods of fluctuating oil prices.

Issues

This year, rig rates continued to be the top concern for US-based drilling contractors, as disclosed by survey questions accompanying the census.

"It is imperative that we break the cycle of high day rates and undercapacity followed by low day rates and overcapacity," Cahuzac noted. He feels this can be overcome only by effective long-range planning and continued implementation of new technologies.

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"The first will require oil and gas companies and drilling contractors working more closely than ever before...The second will require a commitment by both sectors to the development and deployment of leading-edge equipment that will substantially-at least by 25%-reduce well-construction cost."

Yet crew availability and aging rig equipment ranked second and third among operator concerns, "illustrating an optimistic outlook for the future, as companies begin to look for trained people and solid equipment to help put their rigs back to work," Deane added.

Reed-Hycalog asked respondents at what level they thought oil and gas prices would have a positive effect on business. Answers, on average, were $19.30/bbl for oil and $2.58/Mcf for gas.