Increased drilling spurs industry towards recovery

Sept. 22, 2003
Despite a brief dip in drilling activity this spring, the drilling industry remains healthy, with nearly twice the level of activity as recorded during the historic low in spring 1999 (Fig. 1).

Despite a brief dip in drilling activity this spring, the drilling industry remains healthy, with nearly twice the level of activity as recorded during the historic low in spring 1999 (Fig. 1).

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Commodity prices remain high and drive drilling to an extent. The spot price of UK Brent has been on a bumpy rise since $16.98/bbl in mid-November 2001, peaking at $34.18/bbl in mid-March 2003, falling, and rising again to $29.29/bbl as of Aug. 15 (Fig. 2). This rise in price coincides with the reduced crude oil production in Venezuela following the general strikes in December.

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Transocean Searcher, a Trosvik Bingo 3000 self-propelled semisubmersible, began drilling the first of three or four gas-condensate wells on the Statoil ASA-operated Alpha North satellite, in the Sleipner West field, off south Norway on Aug. 13, 2003. Photo from Dag-Tore Anfinsen, Statoil.

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Natural gas prices rose from fall 2001 to winter 2002 and reached a peak of $12.36/MMbtu on Feb. 28, 2003, due to low inventory levels (Fig. 2). The price has since slid to $5.04/MMbtu as of Aug. 15.

Worldwide activity

As of July, 2,254 rigs were operating worldwide, and worldwide drilling activity has increased 24% from 1 year ago, according to Baker Hughes Inc., Houston (Fig. 1). Rig activity has been generally rising since January 2002, with a sudden but momentary downturn in spring 2003. Current activity is only 7% less than the industry peak of 2,430 rigs operating worldwide in February 2001.

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North American rig count for July was 1,479 rotary rigs, the highest since September 2001. International rotary rig count (excluding North America) was 775 in July, the highest since June 1998 (Fig. 3).

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Worldwide demand for mobile offshore rigs is also increasing, according to the ODS-Petrodata weekly mobile offshore rig count (Aug. 15): "worldwide offshore rig demand has risen by 9 rigs over the last 4 weeks." The offshore drilling fleet totals 654 rigs, with 464 working and a utilization rate of 81% as of Aug. 22 (Table 1). Most of the fleet (121) is working in the Gulf of Mexico, followed by 78 units working in Europe and the Mediterranean, 48 units in Asia and Australia, and 33 units in West Africa.

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From a regional perspective, all drilling has been on an upswing through 2003, although rig counts are currently heading down in the Far East (Fig. 4). Latin American drilling is rising most dramatically, whereas drilling in Africa is increasing at the slowest rate of any region. Fig. 5 counts only competitive offshore rigs, excluding rigs owned by national oil companies or with geographical exclusions. Hence the difference between the 415 rigs it counts as contracted in August 2003, compared with the 464 working rigs attributed to the world fleet (Table 1).

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Two Houston-based companies, GlobalSantaFe Corp. and Parker Drilling Co., suspended drilling operations in Kuwait this spring due to the political turmoil in neighboring Iraq. Kuwait Petroleum is the largest shareholder of GlobalSantaFe, due to the large stake it held in Santa Fe International, which merged with Global Marine at the end of 2001. Other companies that have continued their drilling operations in the area include Pride International Inc., Transocean Inc. (largest offshore contract driller), and Nabors Industries Ltd. (largest onshore driller).

The US picture

The top 50 US operators drilled a total of 6,384 wells deeper than 2,500 ft through July 22 of this year (Table 2). Later this year, three oil companies are planning to drill exploratory wells 6 miles deep in the Gulf of Mexico. The new deep-shelf play targets the subsalt, looking for gas 2 miles deeper than existing production.

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BP PLC and Newfield Exploration Co. will drill in Eugene Island, off Louisiana, and BHP Billiton PLC and Newfield will drill in Texas waters. Bill Provine, vice-president for investor relations at Rowan Cos. said "It's exciting. They could add another 30 years of life to the gulf."

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Rig mobilizations tend to broadly follow, but lag, oil price fluctuations. Fig. 6 illustrates the rising price of West Texas Intermediate (WTI) 40° API since spring 2002.

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Drilling utilization for the top 25 US drilling contractors hovered once again between 50% and 60% for the first 8 months of the year, with a high of 59% utilization in July, representing 968 active rigs on and offshore (Table 3).

In general, utilization improved from January to August, although 3 of the 25 contractors maintained a steady utilization rate: Pool Well Services Co. (48%), Cheyenne Drilling Inc. (100%), and Scandrill Inc. (93%). Additionally, 8 of the 25 contractors experienced a drop in utilization from January to August: ENSCO Offshore Co. Inc. (67% to 61%); Parker USA Drilling Co. (34% to 31%); Diamond Offshore Drilling Inc. (59% to 53%); Nabors Offshore Corp. (31% to 19%); Rowan Cos. Inc. (91% to 86%); SW Jack Drilling Co. (53% to 16%); and Noble Drilling US Inc. (38% to 31%).

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Table 4 encompasses onshore and offshore drilling activity for a 4-week period ending in mid-August, providing a breakdown for land activity by state and district, and for inland and offshore waters. RigData indicates a minor fall-off in offshore rig activity over the 4-week period in 2002 to 179 rigs in 2003 from 185 rigs operating, a 3% drop.

States with the highest level of offshore activity for the 4-week period in 2003 are Louisiana (82 rigs), Texas (19), and Alaska (3). Drilling activity in the deepwater Gulf of Mexico remains unchanged from 2002, at 42 rigs.

Alaska

Drilling activity in Alaska is on an upswing. Unocal spud two wells in the Deep Creek Unit on the Kenai Peninsula in June and August. On Aug. 4, Mark Meyers, director of the Alaska division of oil and gas, told Petroleum News that Unocal was applying for a permit to drill a third well later this year.

Pelican Hill Oil and Gas Inc., California, will be drilling eight wells on the west side of Cook Inlet later this year, with a truck-mounted rig shipped in from Hawaii, a top drive, and plans for casing drilling.

According to Kay Cashman, publisher and managing editor of Petroleum News, seven wells were drilled on the North Slope last winter season, of which five were wildcats and two were outpost, or in Unocal-lingo,"develop-cat" wells (close to development, large upside potential).

Based on prepermitting discussions with operators and government agencies, Cashman predicts that seven wildcats and six outpost wells will be drilled this coming winter on the North Slope. The tally includes Armstrong Oil & Gas LLC Alaska (one to three wildcats), ConocoPhillips Alaska Inc. (two or three wildcats and six outpost wells), Total Oil Co. (one wildcat).

Anadarko Petroleum Corp. will finish the gas hydrate well it drilled last winter and fulfill partnership commitments with ConocoPhillips on two wells. Arctic Slope Regional Corp. (ASRC) and BP may drill a joint outpost well. Although EnCana Corp. has an established acreage position and was sole bidder in the recent North Slope Foothills lease sale, it says it will not be drilling this season.

Cashman attributes increased drilling to higher oil prices, the 2002 gubernatorial election, an array of pro-oil and gas bills passed by the Alaska legislature in the spring, and the geologic success of recent North Slope drilling.

US land rigs

"While the offshore industry is a standardized and uncomplicated subsector, the land drilling industry tends towards idiosyncrasies with regional nuances that still play a significant role," according to Richard J. Mason, publisher of Land Rig Newsletter (July 31).

Onshore activity showed a hefty increase this year, comparing the 4-week average rig count ending mid-August for 2002 and 2003. According to RigData, there was a 26% increase in onshore rig activity, to 1,242 rigs working in 2003 from 984 rigs working during this period in 2002. As of Aug. 15, 2003, an additional 51 rigs were waiting to spud (Table 4).

The five states with the highest level of onshore drilling activity over the period this year are Texas, all districts (539 rigs), Oklahoma (164), Wyoming (88), New Mexico (78), and Louisiana (69).

Western Gas Resources Inc. plans an intensive drilling campaign for coalbed methane on US Bureau of Land Management (BLM) lands in Wyoming through the end of the year. Western Gas has already participated in 273 wells through July and wishes to reach a 2003 total of 600-650 wells. Peter Dea, Western Gas CEO, said on Aug. 12, "We're very optimistic of getting these permits."

Staffing issues

Hiring has perked up for land drillers.

Nabors Industries Ltd. added 2,700 workers this year, increasing total payroll to about 17,000 today from 14,300 at the end of 2002. Dennis Smith, director of corporate development at Nabors, told the Houston Chronicle, "We hire as rigs go up and down. As the rig count increases, we have to add a proportionate amount of people in such areas as processing and purchasing. Our thought process going forward is that we are going to see a steady increase in the rig count."

Other drilling companies adding staff include Patterson-UTI Energy Inc., the second largest land driller (1,500 new employees in 2003, a 40% increase), and Grey Wolf Drilling Inc. (300 new employees, a 21% increase).

Continued staff reductions are more the norm at other companies. Anadarko Petroleum Corp., Reliant Energy Resources, Shell Exploration & Production Co. Inc., BP, and Halliburton Co. have been trimming staff in recent months.

Wages, day rates

The publication National Driller summarized US land drilling contractor salary and benefits trends in early August. Editor Greg Ettling said, "Overall, changes in average wages and salaries increased for 40% of respondents and decreased for 6% of respondents, with 54% reporting no change."1

British Columbia's Ministry of Skills Development and Labour has developed special employment standards rules for the oil and gas well drilling and servicing industry, in effect as of Nov. 30, 2002. Workers in certain job titles must be paid as hourly employees with guidelines for overtime. Another set of job titles has the option of taking compensation under an hourly wageplan or a base-salary-plus-bonus-compensation structure.2

Gas, directional wells

Natural gas continues to be the primary target for domestic drilling. According to Baker Hughes Inc., 86% of all active US rigs in July were drilling for gas (Fig. 7). The average number of gas wells drilling in July was 924, and the average number of rigs drilling for oil was 153.

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According to the ODS-Petrodata rig count (Aug. 23), there were 883 rigs drilling for gas in the US. This is an 18% increase over the 747 rigs drilling for gas a year ago. There were 87 rigs drilling horizontal holes, an increase of 23% from the 71 rigs engaged in horizontal drilling a year ago.

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Land Rig Newsletter offers a biweekly recap of US land-based drilling, for wells deeper than 5,000 ft (Table 5). Data from oil, gas, and horizontal drilling activity are provided as a US total and also differentiated among the top eight states. For the two-week period ending Aug. 8, deep horizontal wells were being drilled in Texas (52), Oklahoma (11), Wyoming, and North Dakota (2 each).

Offshore markets, day rates

Offshore rig day rates have not changed much in the past few months. The ODS-Petrodata Gulf of Mexico Jack up Day Rate Index is at 110 for August, similar to the past 21 months. Day rate indices are based on the average market day rate in January 1994 equal to 100.

Fleet utilization in the Gulf of Mexico had improved to nearly 80% (July 2003) from 50% (November 2001), but dropped to 75% in August, giving up the gains made since the beginning of 2003. ODS-Petrodata analysts said, "A continued decline in utilization will bring downward pressure to bear on day rates."

Lehman Bros. analyst Angeline Sedita sees rates rising to 23% for 250 to 350-ft jack ups but cautions "We had expected a modest flattening of day rates during the summer months and thus we are somewhat surprised that some of the rigs are rolling over to these higher rate levels. Certainly the GOM jack up market is not robust with dramatically rising rates, but these rate moves show that some pricing power does exist."

The ODS-Petrodata North Sea Jackup Day Rate Index is at 233 for August, having increased steadily from June, and stands at nearly the same level as a year ago. Fleet utilization remains at 100% for the third consecutive month, suggesting that day rates may strengthen further. Fleet utilization in the North Sea stood at 90% a year ago (ODS-Petrodata).

Deepwater drilling rig rates have been declining since the beginning of the year, to about 37% in August from nearly 50% utilization. The ODS-Petrodata Deepwater Rig Day Rate Index is 180 in August, only a very slight improvement over July.

Offshore construction

This year, 9 jack ups, 9 semisubmersibles, and 2 tenders are being built or have been proposed, with 6 to be finished by the end of 2003, 2 in 2004, 3 in 2005, and 4 later (Table 6). Of the 20 offshore rigs under construction, 16 have no contract. Of the contracted 4, 1 has already been delivered.

Keppel FELS Ltd. completed construction of the Atwood Beacon in 21 months, and the ultra premium deepwater jack up was delivered in May to Atwood Oceanics Inc. Houston.

Offshore consolidation

Transocean Inc. announced in July that they were removing from service five commodity jack ups (all more than 20 years old), a "midwater" semisubmersible (Sedco 708), and a self-erecting tender rig (Searex 15). They own the largest fleets of jack ups (56) and drillships (12).

Transocean sold two semisubmersibles, Transocean 96 and Transocean 97, to Noble Drilling Services Inc.

Noble acquired two semisubmersible hulls from Ocean Rig (Bingo 9003 and Bingo 4).

On June 24, Noble announced an option agreement giving it the right to acquire two jack up drilling units, the Maersk Viking and Maersk Valiant. They are both MODEC 300C, independent leg, cantilever jackups, currently operating offshore Iran. Noble will exercise the options in 2004 after the rigs have completed their contracts and mobilized to UAE waters.

In late 2002, Noble acquired two jack up units from Schlumberger, the Trident III and Dhabi II, and options to acquire two additional jack up units, the Trident XVIII and Trident XIX.

The GlobalSantaFe merger consolidated fleets from Santa Fe International and Global Marine, including 47 jack ups and 11 semisubmersibles.

References

1. Ettling, Greg, "Who's Making What In the Drilling Industry," National Driller, Aug. 2, 2003; www.drilleronline.com.

2. British Columbia Employment Standards Act Factsheet: Oil and Gas Well Drilling and Servicing Employees, www.labour.gov.bc.ca/esb

This special analysis of worldwide drilling activity and market trends, by Drilling Editor Nina M. Rach, takes the place of the usual bimonthly Drilling Market Focus feature.