US drilling fell for the fifth consecutive week, down by 26 rotary rigs to 1,764 still working during the week ended Dec. 19, compared with a rig count of 1,809 in the same period last year, said Baker Hughes Inc.
This was the lowest US rig count since Feb. 1 when 1,763 rigs were drilling. It also was the second consecutive week since Jan. 18 that the count fell below year-ago levels.
As usual, the biggest decline was in the biggest category, land rigs, down 28 to 1,688 still working. Inland water activity was unchanged with 9 active rigs. Offshore drilling increased by 2 rigs to 64 in the Gulf of Mexico and 67 in US offshore waters.
Seasonal impact
The Christmas holidays have always been “a reasonable excuse to lay down more rigs and give the crews time off,” said analysts at Pritchard Capital Partners LLC, New Orleans. But this year, they said, “Given the economic crisis, the sharp decline in oil and gas prices, and sharply lower drilling activity forecasts, it may be timely to lay more rigs down and leave them down.”
The analysts noted, “It’s typical to see 10-15% seasonal rig count declines in December-January, but we are down 12% before normal seasonality kicks into high gear.” Evidence from producers “seems overwhelming that they will be cutting back activity materially until service costs come down 15-20% or oil and gas prices recover to at least $60/bbl and $6/Mcf,” they said.
Day rates falling
Analysts at Barclays Capital Resources, New York, said, “Day rates for jack up rigs in the Gulf of Mexico are falling quickly.” They cited two recent contracts signed by Hercules Offshore Inc. for commodity rigs working with Chevron Corp. at rates 26% lower than their previous contracts. “These are the first in a series of lower day rates that will likely be revealed as the shallow water Gulf of Mexico corrects,” the analysts said.
They reported, “The inland barge market is also getting more difficult. Utilization has declined, with several additional barges now stacked.” In a separate report, analysts said, “Last month, 13 of Hercules’ barges were working, with an average contract backlog of 21 days. Today, 8 barges are working, with an average contract backlog of 17 days.”
Moreover, they said, “Activity levels and pricing for well service rigs are deteriorating at a rapid pace, and we expect this deterioration to continue into the first half of 2009. Rig hours are falling on a weekly basis due to both seasonal factors and reduced demand, and pricing has recently turned down.”
In addition, they said, “There is a negative mix shift occurring in the well servicing market as higher-margin workover activity is being delayed while lower-margin maintenance activity continues. Well completions have been moving forward, however, providing well servicing operators with a backlog of completion work in the near term.”
Barclays Capital analysts forecast 2009 global spending for exploration and production will contract 12% to $400 billion—“a reversal after 6 years of global growth.” Based on a semiannual survey of 357 oil and gas companies, they said, “Budgets are being cut in response to the significant decline in commodity prices, constrained cash flow, and the tight credit markets.”
US projections
Barclays Capital analysts continued, “The sharpest decline in spending is expected to be in the US, where 2009 E&P expenditures are indicated to drop 26% to $79 billion,” ending a 4-year upturn. They expect Canadian budgets to drop 23% to $22 billion in 2009.
However, Barclays Capital expects North American E&P spending to pick up in 2010.
The surveyed companies based their 2009 budgets on average prices of $58/bbl for oil and $6.35/Mcf for gas. “However, given the recent fall in prices, these price assumptions may prove to be overstated,” analysts said.
