Continuing high oil, gas prices drive world drilling

Oct. 27, 2008
Crude oil prices hovered below $100/bbl in fourth-quarter 2007, keeping drilling crews busy and motivating operators to invest in capital-intensive projects.

Crude oil prices hovered below $100/bbl in fourth-quarter 2007, keeping drilling crews busy and motivating operators to invest in capital-intensive projects. As the prices rose through 2008, more new rigs were ordered and day rates continued to increase. New yards are under construction in India and China, with nearly 200 newbuilds filling order books.

Oil averaged $123.80/bbl in second-quarter 2008, then fluctuated wildly in third-quarter 2008, from a high of $147.27 on July 11 to $90.51 on Sept. 16, averaging $118.22/bbl.1 Turmoil in the US financial system has some analysts speculating about a looming recession and slowed demand for energy. On Sept. 29, Deutsche Bank lowered its 2009 New York oil price forecast by 23% to $92.50/bbl because of the economic crisis.1

High natural gas prices drive a lot of drilling in North America, where there’s a pipeline infrastructure and established markets. Prices have been sufficient to justify the cost of hydraulic fracturing gas-bearing shales, and demand for frac services has increased sharply as operators pursue new shale plays around the US and Canada.

Operators of new pipeline projects in Australia and elsewhere will increase drilling in order to maintain a steady supply of natural gas to feed LNG trains (OGJ, Oct. 13, 2008, p. 45).

Improved technologies affect natural gas drilling by reducing costs and expanding the economically recoverable resource base.

Worldwide activity

Worldwide drilling set a record in August 2008, with 3,523 rigs operating, based on the Baker Hughes Inc. international rig count (Fig. 1).2

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The North American rig count reached a historic high of 2,436 rigs in August 2008, up 13% from a year earlier and diverging from a pattern set over the last 5 years (Fig. 2, Baker Hughes). The seasonally cyclic trend, in which drilling spikes in February, is driven by Canadian operations.

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Normally, drilling falls off in March and April, increases over the summer, levels off in August and September, and then rebuilds to a new peak in February. In 2008, however, North American drilling has steadily increased since April, and August drilling surpassed February (Fig. 2).

Baker Hughes Inc.’s international rotary rig count (excluding North America, Iran, and Sudan) reached a record high of 1,102 rigs in June 2008, up 8.6% from 1,015 rigs a year earlier (Fig. 2). For BHI to count an international rig as active, it must have been drilling at least 15 days during the month. A rig is considered drilling if it is “turning to the right” and has not yet reached TD.2

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The increase in international rig use is mainly driven by gains in Latin America, the Middle East, and Asia Pacific. Drilling activity in Europe rose only slightly; activity has decreased about 10% in Africa (Fig. 3).

Drilling in Latin America increased about 9% year-over-year, with a new peak of 398 rigs active in June 2008. Most of this (80%) is land drilling.

Mexico hosted the largest number of active rigs—104 (77 land, 27 offshore) in August 2008, representing 27% of all rigs working in Latin America.

The largest land fleet in South America continues to work in Argentina, where 82 rigs were drilling in August, up from 73 rigs a year earlier. After Argentina and Mexico, land fleets are particularly active in Venezuela (56), Colombia (41), and Brazil (26), and Ecuador (12).

There was only minor land activity in Peru (6 rigs), Bolivia (4), and Trinidad and Chile (1 each).

Offshore Latin America, Brazil dominates with 29 rigs drilling in August, followed closely by Mexico and more distantly by Venezuela (14) and Trinidad (3).

Two rigs were drilling off Peru, which is uncommon. Peru’s six offshore basins (from north to south: Tumbes, Talara, Sechura, Trujillo, Salaverry, and Pisco) have been very lightly explored.3 In the 1970s and 1980s, operators drilled 18 wells on five structures in the Tumbes basin, discovering oil and gas in five fields: Albacora, Barracuda, Corvina, Delfin, and Piedra Redonda.

BPZ Resources Inc. drilled five wells in Corvina field, the most recent in August 2008, and produces oil to an FPSO, according to company reports. Other operators have drilled four wells (dry holes) in the Trujillo basin, none in the Salaverry.3

State-run Petroleo Brasileiro SA (Petrobras) has been signing long-term contracts for many new MODUs, to ensure that it has sufficient capability to drill its increasing offshore portfolio. Brazil will also be the first country in Latin America to start building offshore rigs.

After Brazil’s 1997 hydrocarbon law opened the oil sector to competition, independent oil companies enjoyed years of relatively open access to bid rounds and leases. Nevertheless, they were shut out from presalt bidding in the ninth round, November 2007. Brazil’s Agencia Nacional de Petroleo (ANP) removed 41 blocks after the Tupi discovery was announced.

New presalt discoveries, such as Anadarko’s Wahoo field and Petrobras’s Jubarte field in the Campos basin and Tupi and Carioca in the Santos basin, are likely to usher in a long period of ultradeep drilling (OGJ, Oct. 6, 2008, p. 30). Petrobras has already spent more than $1 billion drilling 15 wells in the ultradeep presalt, announcing 10 discoveries.4

Petrobras indicated it would order 28 new rigs to develop the presalt plays, beginning in 2013. If all 28 rigs are delivered on schedule and fully utilized, and each well takes 100 days to drill, Simmons analysts say Petrobras could theoretically drill 700 wells by 2024.4

In the Middle East, 289 rigs were drilling in August, up 7% from a year earlier. Most of this (89%) is land drilling. Offshore activity decreased 11% to 32 rigs, but land drilling was up 10%, to 257 rigs. Three countries have particularly active drilling programs: Saudi Arabia, Egypt, and Oman. Saudi Arabia had the largest share (26%) of rigs in the Middle East, split 65 land frigs and 10 offshore. The second largest concentration (21%) was in Egypt (60 rigs, split 49 land, 11 offshore). Oman was running 55 rigs, all but one on land.2

Another cluster of countries includes Pakistan, with 25 rigs drilling in August, Syria (20), Yemen (15), Kuwait (13), Abu Dhabi (11), and Qatar (10). There was minor activity in Dubai and Jordan (2 land rigs each). Baker Hughes discontinued counting rigs in Iran and Sudan in January 2006.2

Europe had 97 rigs operating in August, split nearly evenly between land (49) and offshore (48). Activity was up 18% from 82 rigs working a year earlier. Four countries accounted for 61% of the European activity: UK (24 rigs), Romania (18), Norway (17) and Germany (10). Smaller fleets were running in Turkey (6 rigs), Hungary (5), Italy (4), Netherlands (3), Denmark (2), France and Poland (1 each), and 6 elsewhere.

Drilling in Asia-Pacific increased about 7% over the year, with 257 rigs working in August 2008, up from 241 in 2007. Land drilling (53%) slightly leads offshore work.2

The most drilling activity in August 2008 was in India (80 rigs) and Indonesia (63), accounting for 56% of drilling in the region, according to Baker Hughes.

Cairn drillers work the drill floor in Ravva field, Rajasthan state, India (Fig. 4; photo from Cairn India).
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Cairn India ordered two new super-single AC-powered drilling rigs from Weatherford International; the first arrived in late September. Both will be used in development drilling in Rajasthan, where Cairn has delineated several oil fields (Fig. 4).

Significant fleets are also working in Australia (29 rigs), China offshore (24), Thailand (13), Malaysia (11), and Vietnam offshore (9). Smaller numbers are drilling in New Zealand (6 rigs), Myanmar (5), Brunei and Papua New Guinea (4 each), Japan (3), Phillipines (2), and other places (4).

Drilling activity in Africa has dropped about 9% from a year ago. In August 2008, 62 rigs were drilling in more than eight African countries and about 74% of those were on land.

About 37% were at work in Algeria (23 rigs) and another 24% in Libya (15 rigs). Tunisia and Angola each had 5 rigs, Nigeria 4, Congo 3, Gabon 1, and 6 were working elsewhere.2

SCORE ends

After acquiring Global Santa Fe Corp. last year, Transocean Inc. has discontinued the monthly summary of current offshore rig economics (SCORE). This measure was initiated by Houston-based offshore drilling contractor Global Marine and was a useful measure of profitability. The calculations compared the profitability of current mobile offshore drilling rig rates to the profitability of rates at the 1980-81 peak of the offshore drilling cycle, when speculative new rig construction was common. In 1980-81, SCORE averaged 100% and new-contract day rates equaled the sum of daily cash operating costs plus about $700/day profit/$1 million invested.

Transocean is the world’s largest offshore drilling contractor, controlling 146 mobile offshore drilling units (MODUs), about 24% of the global fleet.

US drilling

US drilling continues to increase as operators continue to develop conventional plays and target new shale-gas plays throughout the country.

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RigData’s list of the top 50 operators, based on footage drilled, shows that they drilled 15,279 wells (including 6,911 directional wells) in the first 9 months this year, all deeper than 2,500 ft (Table 1). This is an 18% increase over the 12,991 wells that the 50 top operators drilled in 2007 (OGJ, Oct. 22, 2007, p. 41). And yet, those 15,279 wells represented only 44.2% of all the wells drilled in the US through September 2008, while the 12,991 well starts in the first 3 quarters of 2007 represented 50.7%.

The number of directional wells, 6,911, represented 45% of all wells drilled. Three operators each drilled more than 500 directional wells: Chesapeake Operating Co. (922), Devon Energy Production Co. LP (622), and EOG Resources Inc. (549).

Five operators drilled 250-499 directional wells: Williams Production RMT Co. (418), EnCana Oil & Gas (USA) Inc. (406), XTO Energy Inc. (388), SEECO Inc. (318), and BP America Production Co. (298).

Fifteen of the top 50 operators drilled wells with an average footage of 10,000 ft or greater. Seven operators drilled wells with an average footage of 12,000 ft or greater: Ultra Resources Inc., Shell Rocky Mountain Production LLC, Penn Virginia Oil & Gas LP, ExxonMobil Development Co., Samson Lone Star LLC, Questar E&P Co., and Goodrich Petroleum Co.

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RigData ranks Patterson-UTI Drilling Co. first in rig utilization among US drilling contractors, but three Nabors companies are listed separately (Table 2). Taking Nabors Drilling USA LP (ranked second), Nabors Well Services Co. (ranked 22), and Nabors Offshore Corp. (ranked 24) as a single entity, and the overall utilization would be higher, 273 rigs used, on average, each month, compared with Patterson-UTI’s average of 251 rigs.

Other top drillers, with an average 50 rigs or more in use each month, are: Helmerich & Payne IDC ,171 rigs in use; Grey Wolf Drilling Co. LP, 104; Unit Drilling Co., 71; Pioneer Drilling Co., 60; and Ensign US Drilling Inc., 51.

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US rig counts are considerably higher than a year ago. Table 3 shows the 4-week average for all US rigs in September 2008 was 2,018, up 13% from 1,787 rigs a year earlier.

For the week ending Sept. 26, 2008, the Baker Hughes rig count listed 1,912 rigs drilling in the US, while RigData listed 2,315 working rigs (Table 3). There were also 69 rigs (BHI; 114 RigZone) drilling off Alabama, Alaska, California, Florida, Louisiana, and Texas. Baker Hughes listed 14 rigs working in Louisiana’s inland waters; Rigzone reported 35 in Louisiana and 4 in Texas inland waters. Baker Hughes rig counts are more conservative, and only include rigs “turning to the right.”

M&A, IPO

According to Forbes, 2008 is “on pace to be the year with the least number of mergers and acquisitions in a decade.” Initial public offerings are also scarce, it noted, with only seven venture-backed offerings.5

On Sept. 30, Dow Jones VentureSource reported that in third-quarter 2008, returns from venture-backed companies reached a new low, down 66% from a year earlier.

The quivering credit market and instability in the US financial system may leave investors particular risk-adverse, unwilling to bankroll innovative companies in the energy sector. This may delay the introduction of cutting-edge technologies, so badly needed as drilling reaches record levels of activity and presses further into deep water, arctic, and hostile temperature-pressure environments worldwide.

Larger IOCs, NOCs, and service companies may be more insulated from the financial fallout than start-ups, but few companies will be immune to the global credit crunch in their sponsorship of basic R&D activities.

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In the not-too-distant past, drilling services were available through short-term contracts, but surging demand for rigs and experienced professionals has led operators to lengthened contracts and advance commitment of capital.

Newbuilds, offshore

Drilling contractors continue to make significant capital investments in their fleets, committing billions to new rigs. According to ODS-Petrodata, about 189 new MODUs are under construction worldwide, including 84 jack ups, 56 semisubs, 43 drillships, and 6 drilling tenders, to be delivered 2008-11 (Table 4).

Keppel FELS delivered the Discovery I, an enhanced B-class jack up rig, 49 days ahead of schedule to Discovery Drilling, a joint venture of Jindal Drilling & Industries. The rig will go to work off India under a 3-year contract for ONGC (Fig. 5; photo from Keppel FELS Offshore & Marine Ltd.).
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This backlog is up 36% from the 140 MODUs under construction a year ago (OGJ, Oct. 22, 2007, p. 41). So far, only half (18) of the 35 jack ups scheduled for 2008 completion have been delivered this year, and orders continue to accumulate (Fig. 5).

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Adding 189 new rigs to the fleet of 620 MODUs will increase the fleet by 30%, to 809 offshore rigs (Table 5).

On May 30, Petrobras announced board approval for contracts on 12 newbuild, ultradeep drilling rigs. Ten of these will be owned by Brazilian companies, but built overseas.4

The 12-rig order strengthened the ultradeep newbuild market and Simmons analysts said drilling contractors will expect 5-7-yr term contracts at or above $550,000/day to justify building new semisubs and drillships.4

Petrobras has yet to order an additional 28 deepwater rigs, but will need them delivered 2013-17 to support announced project plans. Will this lead to further cost inflation?

Noble Drilling Corp. ordered a drillship based on the Huisdrill 10,000 design in late September (Fig. 6; image from Huisman Equipment BV).
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Among recent announcements:
Sept. 22: Noble Corp. announced that subsidiary Noble Drilling Holding LLC is building a new harsh environment Globetrotter-class drillship for $585 million. The hull and propulsion systems will be built by South Korea’s STX Heavy Industries Co. Ltd. in a new yard in Dalian, China, and the topsides by Huisman Equipment BV in the Netherlands (Fig. 6). Noble has options for three more drillships expiring end of first-quarter 2009.

Sept. 25: Norwegian rig contractor MPF Corp. Ltd. announced that it filed for insolvency protection under the provisions of both US Chapter 11 and Provisional Liquidation in Bermuda. The company said there were “substantial cost overruns” in the construction of its MPF01 drillship. The hull is under construction at COSCO’s shipyard in Dalian. The “Multi-Purpose Floater” was designed to handle early production and will be the world’s largest drillship.6

Looking ahead

There are no signs that the demand for oil and natural gas will abate, and continuing high prices should promote continued drilling. Most analysts are bullish on the broader energy cycle.

Most of the newbuilds for land fleets and more than half of the MODUs under construction (Table 4) are already committed to contracts, so we may see additional building as new plays require rigs.

One of the most interesting areas to watch will be offshore Brazil, which has 55 MODUs under contract and more on the way. The rapidly expanding fleet of ultradeepwater and harsh environment rigs will require thousand of experienced personnel—how will we get them?

Land drilling will continue to increase as long as natural gas prices remain high and newbuilds enter the market and renew the fleets. Operators will need them to pursue unconventional resource plays and explore relatively untapped basins, particularly in North and South America, Australia, and India.

References

  1. Habiby, Margot, “Oil Drops Most in 17 Years in Quarter on Economy Woes,” Bloomberg.com, Sept. 30, 2008.
  2. Baker Hughes Inc. rig counts, http://investor.shareholder.com/bhi/rig_counts/rc_index.cfm.
  3. Ghazi, Tarek, “GIS-aided play assessment of several basins in offshore Peru,” Apr. 4, 2006, http://gis.esri.com/library/userconf/pug06/papers/peru_basins.pdf.
  4. Kessler, Robert A., Mei, Brandon, and Khoja, Kazim, “Petrobras Initiation Report,” Simmons & Co. International, Energy Industry Research, Sept. 9, 2008.
  5. Corcoran, Elizabeth, “Sucker punch for innovation,” Forbes.com, Oct. 1, 2008.
  6. MPF Corp., www.mpf-corp.com.