The outlook for a continued tight oil and natural gas supply/demand balance suggests a bright outlook for the worldwide drilling industry for the foreseeable future.
There is little danger of a broad and deep glut in global drilling rig markets emerging anytime in the near future, say industry experts interviewed for this report.
With expectations of continued strong demand in oil and gas set against persistent production declines in mature areas, industry forecasts have called for a requirement of about 100 million boe/d of oil and gas to be added to production capacity during the next 10 years, notes Claus Chur, 2006 chairman of the International Association of Drilling Contractors.
“In my view, this can be achieved only with intensified exploration activities, enforced application of advanced production technologies, and further increases in drilling activity,” he says. “So the risk of rig oversupply is considered small; however, the drilling industry has been through so many cycles in the past that the risk of oversupply cannot be completely excluded.”
Chur, director, Europe, Middle East, and Russia for KCA Deutag, Aberdeen, adds that he is “certainly confident that the onshore and offshore newbuilds that are in the pipeline right now will find work at attractive dayrates,”
Land rig outlook
Jim Nixon, president and CEO of Varel International, Dallas, contends that an oversupply already exists in the two main drilling markets of North America.
“Currently, the US and Canadian markets have an oversupply of land drilling rigs. Drilling contractors, both the established and the start-ups, reacted to the very positive market signals in 2005 and early 2006 by accelerating the building of new land rigs. The newbuilds entering the market exceeded demand at the end of 2006 as gas prices settled and industry economics softened.
“We now have an event in the US market without historical precedent-active drilling rig count is rising, but dayrates are declining due to oversupply. As a result, the economics of drilling a well in 2007 appear to be improving monthly for the E&P companies. We believe by midyear 2007 North America will have a surplus of 150-200 land rigs.”
The surge of new rigs into the US land drilling market could pressure day rates and profitability in 2007, says David Mannon, senior vice-president and chief operating officer for Parker Drilling Co., Houston: “However, much drilling is needed to keep US gas supplies level, so this surge may be absorbed relatively painlessly.”
Aging land fleet
Worldwide, a growing majority of the global land rig fleet consists of rigs that are 20-40 years old. That begs the question of whether that situation will translate into greater retooling or more newbuilds.
“As we saw in the past,” says Chur, “it is actually both. Drilling rigs do not have a specific age expectancy, if the equipment is properly maintained and replaced when necessary.”
In the end, it will come down to an economic decision of what is best for a specific project, Chur adds: “I would like to emphasize that the investment for a fully equipped 2,000 hp rig with BOP stacks, drill pipe, camp, crane, etc., is in the range of $35-40 million. So a day rate level above $30,000 is required in the first few years to justify such an investment.”
A land rig oversupply might emerge in North America, suggests David Barr, group president, drilling and evaluation, for Baker Hughes Inc., Houston: “If so, this would allow the industry to retire the oldest rigs. Most of the idle US land rig fleet has been cannibalized to the point where completely new rigs are necessary to increase drilling capacity.”
Nixon contends that some of the oldest US land rigs will be retired, reducing the average age of the fleet. He notes that in 1981 about half of the rigs working were less than 5 years old.
“That year, each rig drilled an average of 17 wells. Today, those same rigs are still working, but now they are 25 years older and are drilling almost 30 wells per year, yet these wells are deeper and more complex,” he said. “Did the rigs change? Yes, a little; but almost all were drilling improvements that helped make these older rigs more productive came about downhole-with technological improvements in drill bits, drilling fluids, and directional drilling systems. The tools and systems operating at the end of the drillstring are what has maximized the productivity of our mature rig fleet.”
Don McKenzie, president and CEO of M-I Swaco, Houston, sees the prospect of market equilibrium being tilted toward low-cost foreign newbuilds: “The US land rig market traditionally has been closed, but now we see land rigs coming from other regions, like China. Most of these rigs will be newbuilds. If they can be contracted for less than US refits, this is going to increase.”
To renew the US land fleet, more newbuilds will be required, according to Mannon: “There is still a considerable amount of mechanical rigs working in the US, and, over time, these will need to be retired and replaced with newbuilds. This and natural attrition will cause about 5% of the fleet to be renewed each year, in my estimate.”
Robert Bloom, senior vice-president and chief technology officer for National Oilwell Varco, Houston, concurs: “Much of the offshore and onshore fleet is old and decrepit and does not have the horsepower or capacity to be retooled or upgraded with new, more efficient technology. Therefore, much of what is being built today is replacement for current rigs. We estimate that for every two new land rigs delivered, one rig is retired.”
The aging of the US land rig fleet already has resulted in a considerable number of newbuilds and refits, according to Charles Jones, executive vice-president and chief operating officer for Hydril Co. LP, Houston.
“We know this because, during the BOP oversupply situation that existed for many years, we had a portion of our business that dealt in refurbishment of used equipment through the purchase of BOP ‘cores’ available in the market,” he says. “That business, for all practical purposes, does not exist today, as there are no longer meaningful amounts of core stock available. Today, we have more orders for new equipment destined for land rigs than we have had in 20 years.”
Despite the North American rig surplus, demand remains strong for certain new rigs. M. Alan Orr, executive vice-president, engineering and development, Helmerich & Payne International Drilling Co., Tulsa, sees a continuing market for “value-adding” rigs and personnel.
“Customers have demonstrated a commitment to technology as a means of improving shareholder returns or value to stakeholders,” Orr says. “Technologically advanced rigs enable operators to leverage other service company technology, such as rotary steerable systems and improved bits.
“We believe it will be a while before there is an adequate number of technologically advanced rigs to satisfy the requirements for more sophisticated drilling.”
Offshore rig outlook
Driving a strong outlook for offshore drilling is an ongoing boom in deepwater activity.
Due to the latest deepwater boom in areas such as Brazil, the Gulf of Mexico, West Africa, and Australia, utilization rates for semisubmersibles and drillships capable of drilling deeper than 5,000 ft of water are now approaching 100%, notes Bloom.
“As a result, the pressure on operators to get rigs on contract is so high that we are now seeing long-term (4-5 years) contracts in excess of $500,000 per day being achieved for some of the more modern vessels,” he says.
“The forecast is for deepwater exploration to continue to expand over the next decade. With the prospect of long-term contracts and high dayrates, international drilling contractors, speculators, investors, and government oil and gas companies are investing heavily into new deepwater rig build programs.
“There are currently more than 40 deepwater vessels being built in shipyards, primarily in South Korea and Singapore. There are also some major upgrades of older semisubmersibles going on, to bring them up to new deepwater standards.”
Unconventional gas
A major contributor to the surge in US drilling has been the explosion of activity directed toward developing unconventional gas resources in tight formations, shales, and coalbed methane. It has been forecast that more than 76% of new gas reserves found on land in the US will come from unconventional gas plays during the next decade.
Beyond the increased drilling, tackling the unconventional gas resource has changed the face of the US oil and gas industry, contends Nixon: “Unconventional gas ushered in the era of large independents, who, because of these opportunities, displaced the majors and are leading the way in unconventional gas plays.
“Unlocking the secrets of the Barnett, Fayetteville, and other shales was like finding elephant reserves in our own backyard, and the race to win the acreage and produce the gas carried the drilling industry through the drilling economics of 2006 and today.
“Unconventional gas accelerated the adoption of directional drilling, PDC bits, multiple zone completion tools, and massive frac jobs. It enabled operators to develop fields using the ‘batch approach’-multiple wells utilizing standard-sized products-versus drilling many different wells with different types of rigs, different-sized bits, and utilizing different sized casing.”
Bloom notes that unconventional gas plays are big resources for independent operators that contract hundreds of rigs with drilling capabilities of 8,000-15,000 ft.
“These rigs must also be capable of drilling horizontal laterals of up to 5,000 ft and must have the ability to rig up and move quickly and easily, because most wells are drilled in approximately 4 weeks or less between each rig move.
“This is causing the greatest increase in land rig building since the early 1980s, At this time the industry is building over 100 new land rigs, and this trend will continue for the foreseeable future.”
Mannon points out that while unconventional gas plays traditionally have been highly sensitive to price, the level of E&P interest in recent finds suggests a possibility for long-term stability.
“…Five years ago, the US natural gas industry shied away from drilling into dense shale,” he says. “Today, it’s becoming an increasingly important source of domestic energy, due to recent advancements in technology that made drilling in these areas more cost-effective.
“Two of the top three domestic independents are focused on exploring shale formations, and another independent recently announced the discovery of a major expansion to the Barnett shale gas field and identified four new or emerging shale fields in Texas, North Dakota, and Western Canada.”
Mannon notes that his company is capitalizing on the increased interest in these shale formations through its drilling and production rental tools subsidiary Quail Tools. In January, Quail Tools will open a new location in Texarkana, serving the East Texas, Oklahoma, and Arkansas markets.