SPEARS TRIMS FORECAST OF U.S. DRILLING ACTIVITY

Forecasts of 1991 U.S. drilling activity continue to slide as oil markets shed their jitters in the wake of a very short Persian Gulf ground war.

In its quarterly review late last month, Spears & Associates Inc., Tulsa, cut its projected U.S. average rig count for this year to 960. In its previous quarterly forecast, Spears expected the 1991 rig count to average 1,050.

Baker Hughes Inc. earlier trimmed its predicted average of U.S. active rigs to 1,104, while Salomon Bros. forecast 1,060 (OGJ, Mar. 25, Newsletter).

Spears' Canadian rig count estimate remained at the 150 average predicted last December. Spears' cut its forecast for the rest of the world to an average 920 active rigs from an earlier projection of 998, but the revised estimate still represents a slight increase from 1990.

The U.S. forecast was trimmed for two reasons, Spears said.

In the first quarter, horizontal drilling, which had been forecast to rise by 50%, appears to have reached a plateau-at least in terms of rig count. And coalbed methane drilling during the first quarter dropped by 50% as a result of failing natural gas prices and an extension of the deadline for tax incentive qualification.

In addition, offshore drilling is 31% below the level of first quarter 1990, Spears said.

Using the most likely market scenario, U.S. activity will fall 5% this year, Canadian activity will gain 9%, and rig activity outside North America will be up 2%.

MARKET OUTLOOK

Spears cited these key effects on the oil market resulting from the Persian Gulf war:

Destruction of Kuwait's oil fields and Iraq's limited oil transportation capability.
Saudi Arabia's decision to step up its expansion plans.
Reduced demand caused by recession and higher oil prices.

A continued production decline in the U.S.S.R. that threatens export volumes may also affect oil markets. Soviet oil production fell about 6% in 1990 to 11.46 million b/d. Through February, production was down another 8-10% from last year's level, Spears' figures show,

Spears developed three market cases.

Under the "OPEC control" case, in which West Texas intermediate spot prices average $20/bbl in 1991, average U.S. rig count would be 960.

An "oil surplus" market would mean $18/bbl oil and a further drop in the U.S. average rig count to 934.

Under a "supply shortage" scenario, WTI would also average about $20/bbl, but average rig count could be expected to reach 1,001.

Spears assigns a 60% probability to the OPEC control case. Each of the other two cases is assigned a 20% probability.

U.S. natural gas price in all three cases is $1.60/Mcf. Little movement in gas prices is expected before at least next fall, and "...in the meantime, producers' gas drilling programs are in full retreat except for tight gas activity."

IRAQ, KUWAIT

It's unlikely Iraq and Kuwait will be able to reenter the oil market with significant volumes during 1991 and 1992, Spears said.

Spears' information shows about 500 Kuwaiti wells ablaze, with 60% classified as "hard to control." Another 100 wells are blowing out but not on fire. That leaves about 100 wells undamaged and capable of producing 70,000 b/d.

Spears said about 6 million b/d is being lost, and damage to reservoirs from water or gas coning is already being reported. Perhaps 10% of the country's reserves of 90 billion bbl will be destroyed before the situation is under control.

Firefighting efforts may take 18 months.