DRILLING CONTINUES UPWARD MOMENTUM

Sept. 24, 1990
Guntis Moritis Drilling/Production Editor The drilling recovery that began during the second half of 1989 is continuing into 1990. On top of this, the Iraqi invasion of Kuwait has caused disarray in oil markets, driving up oil prices, and disrupting access to oil supplies. Potentially, this upheaval could lead to an upward spike in worldwide drilling activity. How long the spike might last or when it might become substantive is still anyone's guess.
Guntis Moritis
Drilling/Production Editor

The drilling recovery that began during the second half of 1989 is continuing into 1990. On top of this, the Iraqi invasion of Kuwait has caused disarray in oil markets, driving up oil prices, and disrupting access to oil supplies.

Potentially, this upheaval could lead to an upward spike in worldwide drilling activity.

How long the spike might last or when it might become substantive is still anyone's guess.

Another positive event for the oil field service and supply industry is the reforms occurring in Eastern Europe, including the U.S.S.R. These changes are creating a potentially large market that has started to beckon to many companies that sell to exploration and production (E&P) operations.

U.S. ACTIVITY

In the U.S., drilling has recovered from the slump of mid-1989 (Fig. 1). The low point was March 1989 with a monthly average of only 753 active rigs. The turnaround started after June 1989. Since August 1989, the rig count has hovered around 1,000 rigs.

Texas District 1 is one place with a sizable increase in activity. Because of horizontal drilling in the Austin chalk, the rig count leaped from 2, in June 1989, to 66 by mid-August 1990. (See article, in this issue by Lang and Jett on the potential for horizontal drilling).

OGJ at mid-year (July 30, p. 72) forecast that the rig count will increase to 1,150 by yearend. The average activity for 1990 is expected to be 1,000 rigs, up substantially from last year's 869. This forecast was made prior to the Iraqi crisis.

LAND RIGS

Reorganizations, mergers, and consolidations have dramatically decreased the number of drilling contractors in the U.S. According to Smith Barney Research, "At the beginning of 1986 there were 26 publicly owned, land-based domestic contract drilling companies. Today, only 9 survive."

For those that are left, the outlook is improving; but many are still in the red. An upward trend in bid requests during August has been seen by Dick Zartler, president of Grace Drilling Co. Areas with shallow oil prospects are commanding the most interest. These prospects can be drilled and produced rapidly to take advantage of the recent elevated oil prices.

Grace Drilling is the largest owner of land rigs in the U.S. About 50% of its 183 rigs are working. Last October's Reed Tool Co. land rig census determined that 57% of the 2,542 available rigs were making hole.

According to Zartler, rig rates are up but not enough to pull Grace out of the red for 1990.

Grace's average rig rate during the first quarter of 1990 was $5,100/day. This is up from the $4,900/day in 1989, but down from the peak of $5,800/day in 1985. Because of special requirements and the large number of rigs that are active, Zartler says, the only area where rigs are commanding significantly higher rates is the Austin chalk.

A survey of four contractors, by Smith Barney Research, found that in 1989 the average rig rate in the U.S. was $4,250/day compared to $7,500 overseas.

About 60% of Grace's rigs are drilling on a day-rate basis. The others are on a footage basis except for six on turnkey contract. Zartler says that Grace would accept more turnkey contracts, but operators are not willing to pay enough to cover the geological risks.

Zartler sees no shortage of drill pipe if operators are willing to order 4 1/2-5 in. pipe from the manufacturers at $22-30/ft.

The surplus pipe that could be bought at $10-15/ft is no longer available. On new pipe orders, Grace is experiencing long delivery times of 12-14 weeks.

The price of land rigs has also started to climb. Smith Barney Research notes that 6-9 months ago a 15,000-ft rig was selling for about $500,000. Now the price is above $1 million. Likewise deep-rig prices have climbed from last year's $800,000 to today's $2 million.

OFFSHORE

The Gulf of Mexico remains almost the only active offshore area in the U.S. Rigs under contract in mid-August were 138 compared to 136 last year (Ocean Oil Weekly). The count had dropped to a low of 103 rigs in February 1989 and reached a high of 158 in December 1989.

The Gulf activity represents a fleet utilization of 60% of the available rigs in the area. This is considerably less than the average 75% utilization worldwide.

The first two offshore horizontal wells in the Gulf of Mexico were drilled this year. The two shallow gas wells were drilled by Texaco from a platform in 180 ft of water in East Cameron Block 265. The producing sandstone is at 1,700 ft, and both wells flowed at rates above 10 MMcfd. These may be the first of many such wells.

The deepwater Gulf of Mexico potentially contains the best prospects, although in the latest lease sale, 125, the interest was primarily on nearshore prospects (OGJ, Aug. 27 p. 17).

INTERNATIONAL

The trend toward greater international activity is apparent in such statistics as those from Arthur Anderson & Co. For 236 companies with major U.S. interests, Arthur Anderson's 11th annual survey of oil and gas disclosures showed that 1989 was the first year in which E&P expenditures outside exceeded those within the U.S.

International is the prime area where sizable reserves still have a high probability for being discovered. In the U.S., many of the areas with the most potential are under a drilling moratorium because of environmental fears.

The upward momentum in international activity can be seen in the rig activity statistics (Fig. 2). Since mid-1989, the number of active rigs steadily moved up until July 1990. But then a drop of 10 rigs in Yugoslavia, 7 in Syria, and 8 in Argentina contributed to the decrease of 45 rigs from the previous month of June.

Because of the Iraqi invasion, more decreases might be expected in the number of rigs working in the Middle East. In July, 38 rigs were drilling in Iraq and 5 were active in Kuwait.

In Canada, for 1990, drilling should be up from last year according to Hans Maciej, vice-president of the Canadian Petroleum Association.

Due to weather problems, the Canadian activity at midyear is down from 1989. But Maciej sees a recovery during the last part of 1990 that should result in a 10-15% increase over 1989.

Drilling in the Canadian Beaufort Sea is still mired in studies on impacts of major oil spills.

But for 1991, the Middle East crisis and the price of crude will determine the level of activity in Canada. Companies that are not heavily burdened with debt have the best possibility for earlier acceleration of drilling programs, says Maciej.

The prospects for oil field service and supply companies working the U.S.S.R are explored in an article, p. 80, by Deffarges, Moeller, and Treat.

Internationally offshore rig utilization is strong. Total rigs worldwide under contract in mid-August were 503 out a fleet of 671, 75% utilization (Ocean Oil Weekly).

Rig demand is particularly strong in the North Sea. Out of an available 130 rigs, six are stacked (OGJ, Aug. 10, p. 49).

Activity in the area is likely to increase as new blocks become available. A number of operators are contemplating moving their rigs to the North Sea from the Gulf of Mexico.

TRAINING

The increase in drilling activity is creating a shortage of competent people to operate the rigs. Training schools such as Texas Engineering Extension Service (TEEX), a part of the Texas A&M University system, have started courses for rig hands. Its first class in Abilene, Tex., recently graduated seven entry level roughnecks.

Will McNair, head of the TEEX energy training division, expects about 15-25 students for September's class. Since Iraq's invasion of Kuwait, McNair has received a large increase in inquires; more than 100 to date.

Zartler says that Grace Drilling has been doing its own training. Many times Grace includes, at cost, a trainee at a rig site. He sees no problem is getting hands, but compensation will have to increase to draw people away from other work. Grace, to make drilling jobs more attractive, is providing trailer-type living accommodations at about 40% of its rig sites.

In-house training is also on the upswing with some major operators. BP Exploration has one of the more unique programs for its rig hands. According to Ron Auflick of BP, its awareness short course on stuck pipe is the first time that this level of instruction has been attempted with people from the drill floor, primarily contract employees. The short course is part of a 2 year program aimed at decreasing the occurrence of stuck pipe.

The main emphasis of BP's program is to teach people on and around the drill floor to be aware of signs that may indicate oncoming problems. According to Auflick, stuck pipe is a billion dollar a year problem for the oil and gas industry. His analysis showed that in BP's case, 68% of the stuck pipe problems occurred 2 hr before or after crew change (Fig. 3). These numbers are similar for both BP's Gulf of Mexico and North Sea operations. Auflick believes that up to 50% of all stuck pipe occurrences can be prevented through more awareness and communication. Since starting the program, BP has dramatically reduced its stuck pipe occurrences, according to Auflick.

BP is also employing "human engineering" scientists from the nuclear industry to help define and provide solutions to more effectively use people in the drilling operations.

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