Paula Dittrick
Senior Staff Writer
Oil and natural gas companies are asking oil service contractors for sophisticated technology to drill longer horizontal wells in onshore shale plays and for new offshore rigs that can fulfill increasingly stringent deepwater drilling safety standards and regulations.
"The growing abundance of shale gas and liquids, the continued pursuit of oil in increasingly complex environments, and a rapid escalation of service intensity cannot be understood within the constraints of normal energy industry cyclicality," FBR Capital Markets analyst Robert MacKenzie said in a Feb. 7 research note.
Fourth-quarter 2010 earnings reports "proved stellar" for most large service providers, MacKenzie said, adding that he expects this trend will continue through 2012 based in part on robust land drilling activity in the US focused on liquids-rich shale plays.
An offshore rig construction cycle also appears to be gaining momentum, partially because oil companies demand new, high-specification equipment from drilling contractors given regulatory uncertainties following the 2010 deepwater well blowout and massive oil spill in the Gulf of Mexico.
An April 2010 blowout of the deepwater Macondo well, operated by BP PLC, resulted in an explosion and fire on Transocean Ltd.'s Deepwater Horizon semisubmersible, killing 11 crew members and prompting numerous inquiries into deepwater drilling practices.
Ongoing delays in US offshore drilling permits mean deepwater drilling activity in the gulf is unlikely to pick up significantly until this year's second half, executives for both contractors and operators repeatedly stated in recent earnings conference calls.
Barclays Capital analyst James C. West said, "Drilling contractors begin to realize that older assets have become somewhat obsolete or are nearing obsolescence in a post-Macondo world" because older equipment is "becoming much less desirable" to oil and gas companies.
For instance, ODS Petrodata reported last year that 18% of the floater fleet worldwide second-generation semisubmersibles vs. 20% of the fleet being sixth-generation semisubmersible. The 20% includes newbuilds under construction (Table 1).
West foresees continuing growth in the deepwater worldwide, noting "major oil companies are starting to express concerns about rig capacity in 2012-13 and beyond." He expects more than 100 new offshore rigs will be ordered during an ongoing rig build cycle that started in late 2010.
Subsea demand
West said, "New rig construction is a powerful driver of backlog and earnings for the equipment suppliers, primarily National Oilwell Varco and also for Cameron." Cameron has reported accelerating demand for subsea equipment.
During January, Brazil's Petroleo Brasileiro SA (Petrobras) ordered $74 million in subsea trees and related equipment from Cameron with deliveries scheduled to start this year and continue over a 4-year period. The trees will feature enhanced drill-through capability to save time and money during drilling and completion, said Jack B. Moore, Cameron president and chief executive officer.
Separately, China National Offshore Oil Corp. ordered $85 million in subsea production equipment from FMC Technologies Inc. to be used for CNOOC's Liuhua 4-1 development that will involve eight subsea trees and tieback to the existing Liuhua 11-1 field.
Liuhua 4-1 is in 850-1,000 ft of water in the South China Sea about 130 miles off Hong Kong. Delivery of the FMC equipment is scheduled to begin in the fourth quarter.
Shale drilling
The US land drilling market has experienced a move toward horizontal drilling and subsequently longer lateral lengths.
"Horizontally directed rigs currently account for 56% of the total US land rig count, up from 17% in 2005 and 6% in 2000-and 34% of those are in shale plays (Barnett, Fayetteville, Woodford, Haynesville, Marcellus, Eagle Ford, and Williston Bakken)," MacKenzie said.
Operators in the Bakken are pressing for more than 40 stages per well while lateral lengths in the Eagle Ford are in some cases approaching 10,000 ft, MacKenzie said (Table 2). Meanwhile, revenue per rig in the US and Canadian markets continues to rise, the major service providers report.
"In 2011, we expect North American land services to continue surprising investors, many of whom are currently anticipating a peak in the market," MacKenzie said. "Our supply-demand analysis suggests, however, that the market will remain healthy into 2012."
He said the question is how much increases in oil and liquids activity can offset potential declines in gas drilling activity given low gas prices.
"Simply put, our analysis shows a rig count held stable by an exodus to the liquids-rich shale basins from the dry gas basins, a substantial (and growing) backlog, a tight supply of in-demand equipment, little chance of a near-term oversupply due to new capacity additions," among other factors that indicate a long-term trend toward increased service intensity, MacKenzie said.
Noting a correlation between the demand for drilling rigs and the demand for oil service providers, FBR forecasts a growing average US rig count with 1,689 rigs in 2011 and 1,789 rigs in 2012.
"Based upon our numbers, development of the Bakken, Eagle Ford, Granite Wash, and Permian basins should be enough demand to offset any near-term decline in other basins such as the Haynesville and the Barnett," MacKenzie said.
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