Sam Fletcher
Senior Writer
HOUSTON, May 16 -- With US drilling activity still on the rise, independent producers have enough good prospects to grow natural gas production over the next 3 years, if wellhead prices remain above $4/Mcf, said James Stone, an oilfield services analyst at UBS Warburg LLC, New York, in a Friday conference call.
Based on a UBS Warburg poll of "1,400 E&P field personnel in the last 8 weeks," Stone said, "The current environment is ripe for higher drilling levels in the US, producers are flush with cash, gas production is declining, and the more elastic portions of gas demand, such as residential and utility demand for gas, are growing." Therefore, he said, "We believe US gas drilling should continue to rise as producers drill their inventory of prospects in an attempt to grow gas production from current levels."
In a report on that poll, Stone said, "We have been uncomfortable with the view that as a result of a 6-month period in 2001, in which (the industry) ran 1,000-1,300 rigs, the US exploration and production industry all of a sudden ran out of drilling prospects. We heard many E&P companies discussing a lack of prospects, and we saw this issue materialize in many presentations, but when we . . . asked a company if it lacked prospects, the answer was invariably no."
Available prospects
The poll verified Stone's suspicions. Of the respondents, 74.2% said there are enough good drilling prospects to exploit for another 5 years at a commodity price of $4/Mcf, while 97% said they have the quality prospects to grow production over 3 years at that price. Even at a price of $3.50/Mcf, 88.3% still said they could grow production.
When UBS Warburg analysts further defined that question, a whopping 69.5% said they could still grow production even with a 25% across-the-board price increase in oil field services, if gas were priced at $4/Mcf. The analysts concluded, "The real sensitivity among operators is to cost inflation; price levels similar to 2001 cause a sharp falloff in the viability of prospects and drilling."
Other conclusions from that survey were as follow:
--The high level of drilling activity in 2001 merely reduced the number of prospects that are economic at a gas price of $3.50/Mcf. Most of the respondents indicated that the quality of prospects available today is as good or better than those available 2 years ago.
--E&P field personnel are confident that US gas prices will remain above $4 for the foreseeable future.
--The recent upward trend in finding and development costs is a key driver of the secular rise in gas prices. "We estimate that independent E&P companies need over $4(/Mcf) gas to earn the same return on capital today as they could in 1997 at $2.50(/Mcf) gas," analysts said.
--Cash flow generated by prices of $4/Mcf for gas and $25/bbl for oil, or better, is sufficient to maintain or grow activity over the next 3 years.
--Outside capital is available to the industry and is no impediment to increased drilling.
In the most negative response in the poll, 62.6% of the respondents said restrictions to drilling on federal land in the Lower 48 are significantly impeding the industry's ability to increase US gas production, said Stone.
Although the amount of gas reserves added per well drilled has declined in the past several years, Stone said, it remains virtually the same as in the early 1990s. "Therefore, it is difficult to argue that a material deterioration in the productivity of US gas prospects has occurred.
Gulf of Mexico failing
An examination of drilling, reserve replacement, production, and drilling costs over the last 5-10 years shows "a sharp rise in drilling reserve replacement costs in the Gulf of Mexico coupled with a sharp decline in the reserves added per well completed," said Stone. "The data for the more conventional drilling market in the Gulf of Mexico (shallow waters) are most likely even more troubling." Only the growth of deepwater gas reserves has allowed the overall amount of gulf reserves to remain flat while both reserves and production in the gulf's shallow waters have been falling for the past 5 years, he said.
However, in US land operations, Stone said, "Over the past 10 years, there has been virtually no decrease in reserves added (through the drill bit) per well and only a small increase in the reserve replacement costs based on the costs per well in the onshore market."
As a result, he said, "Producers should be far more bullish on the prospects for land drilling in the US than in the offshore market."
US rig counts
US drilling activity increased with 1,040 rotary rigs working this week, 19 more than the previous week and up sharply from 829 during the same period in 2002, officials at Baker Hughes Inc. reported Friday.
Land operations accounted for the bulk of that increase, up 21 rigs to 915 working. Offshore drilling increased by 2 rigs to 109 in the Gulf of Mexico this week, but with a net gain of only 1 rig to 113 for the US as a whole. Drilling in inland waters decreased by 3 units to 12.
Canada had 99 rotary rigs working this week, a gain of 8 from the previous week and up from 98 a year ago.
In the US, the number of rigs drilling for natural gas increased by 20 to 868, while those drilling for oil were down 2 to 168. There were 4 rigs unclassified. Directional drilling increased by 1 unit to 269 rigs. Horizontal drilling was up 9 to 75.
Texas led the surge, adding 10 active rigs for a total of 467. Oklahoma was up 8 to 132. Wyoming had 48 rigs making hole, 3 more than last week, and New Mexico's rig count was up 1 to 70.
California and Alaska were unchanged at 19 and 9 respectively. Louisiana recorded the only loss among the primary producing states, down 3 rigs with 156 still working.
The utilization rate among mobile offshore rigs in the Gulf of Mexico was unchanged at 70.9% this week with 129 units contracted out of the 182 available for work, said officials at ODS-Petrodata, Houston. In European waters, 2 more units were contracted, boosting utilization to 88% with 88 rigs under contract out of a fleet of 100 in that market.
Worldwide utilization among mobile offshore rigs was unchanged at 81.6% with 537 units under contracts out of a total fleet of 658.
Contact Sam Fletcher at [email protected]