Keith Rappold
Drilling Editor
The U.S. drilling industry has suffered another depression in 1992 to date, vet there are now signs of improving conditions. In June, the domestic drilling rig count dropped to its lowest level since the 1940s (OGJ, June 22, p. 36).
One sign of an upturn, however, is a significant increase in the issuance of drilling permits since the first quarter of this year. The number of U.S. drilling permits issued increased 21.8% to 2,259 in July for 29 states tracked by Solomon Bros.
This indicator of future drilling activity suggests drilling may have bottomed and should increase soon. After dipping to 596 in June, the rig count has steadily climbed to about 695 in August.
Meanwhile, drilling activity in some major arenas outside the U.S., particularly the North Sea, has dampened. The Baker Hughes Inc. international rig count last peaked with 710 rigs in November 1991, and the count has steadily dropped to around 630 in August.
Despite recent stability in natural gas and oil prices, most major oil companies will probably not change their spending programs for the remainder of the year. Numerous major and large independent oil companies have restructured again and offered severance packages. As a result, some majors have cut back on domestic exploration, laid off staff, and sold properties to fund international operations.
Common characteristics of the oil industry in the U.S. for the next few years will include the practice of purchasing reserves rather than drilling for reserves and the selling of properties by the large oil companies seeking to move more strongly overseas.
In the U.S., tough environmental regulations, the absence of a realistic national energy policy, outer continental shelf (OCS) moratoria on drilling, and poor rates of return continue to push companies into the numerous international markets.
The international sector continues to attract exploration and production (E&P) companies, but the level of growth is not as high as anticipated at the beginning of the year.
According to Salomon Bros.' 10th Annual Survey of Worldwide E&P Expenditures, 241 companies planned to spend only 1.3% more in 1992 than in 1991. Over half of the companies in the survey indicated that the economics of purchasing reserves is superior to drilling for them.
The companies used an average oil price of $20.40/bbl for West Texas Intermediate or Brent crude and an average gas price of $1.62/Mcf for their evaluations.
HORIZONTAL
The two technical innovations that will most affect operating companies are horizontal drilling and seismic technology.
Although the horizontal drilling boom has quieted, about half of the companies in Salomon Bros.' survey planned to increase their horizontal activity in 1992.
However, horizontal drilling activity remains flat (Fig. 1).
DOMESTIC ACTIVITY
Drilling in the U.S. has begun to turn around, albeit slowly.
According to the 1991 Reed Tool Co. Rig Census, the number of available rigs in the U.S. has decreased to 2,251 in 1991, a drop of 69 from 2,320 in 1990 and the ninth consecutive year with a drop in available rigs. In contrast, during the boom years the number of available rigs peaked at 5,644 in 1982.
(Note that Reed's annual rig count includes rigs actively making hole and not rigs that may have worked during the year but are idle during the 45-day census period. This count represents the number of rigs required to sustain a given level of drilling activity over a long term. Smith International Inc.'s weekly rig count includes rigs that are rigging up and those that have reached total depth and are still on location. Baker Hughes Inc.'s weekly rig count includes only those rigs that are drilling at the time of the survey.)
Of the 252 rigs deleted from the U.S. fleet in 1991, 69 were cannibalized, 38 left the U.S., 50 have been stacked for over 3 years, 74 would have required excessive capital expenditure, and 21 were destroyed. The fleet added 183 rigs, including 138 brought back into service, 43 assembled from components, 2 moved back into the U.S., and 0 newly manufactured.
The domestic drilling contractors' problems have not eased. Drillers continue to face poor day rates, high insurance costs, stringent environmental regulations, a scarcity of drill pipe, and difficulty attracting crews. In the near term, rig attrition will continue, U.S. drilling will remain essentially depressed, and contractors will face lean times.
From the beginning of 1991 through the middle of this year, Baker Hughes' domestic drilling rig count has steadily decreased (Fig. 2). The low point occurred in June when the rig count dropped to 596. The year-to-date average has hovered around 700 rigs.
June was the transition month-the U.S. rig count at the end of the month was higher than at the beginning, signaling the start of a slight turnaround. With the rig count near 700 at the end of July, the recovery of the domestic oil field service industry may have begun.
At mid-year, OGJ forecast that the U.S. rig count for the year would average 695, down 19% from the average of 858 in 1991 (OGJ, July 27, pp. 61-82).
According to the Oil & Gas Journal Energy Database Survey of Forecasters early this year, the U.S. rig count may average about 900 next year and 960 in 1994. The ranges, however, are quite broad. For 1993, the U.S. rig count forecast ranges from 700 (according to a financial analyst) to 1,125 (according to an independent operator). Most industry analysts expect the rig count to range between 700 and 900 per year for the next few years. The range forecast for 1994 is 8001,250; the broad range reflects the uncertainty and instability still pervasive in the drilling industry.
The major oil companies are expected to drill 2,318 wells, of which 219 are wildcats, in the U.S. by the end of 1992. The total is considerably less than the 3,390 wells (3,219 field wells and 171 wildcats) drilled by the majors in 1991.
Independents continue to drill a majority of the wells in the U.S. Overall, operators will drill 23,630 wells this year, an 18% drop from the 28,778 wells drilled in 1991. This year may have the dubious distinction of the low record of completions, below the 24,482 completions in 1945 (OGJ, Jan, 27, p. 66).
OIL PRICE
The prices of crude oil and natural gas are not the only factors influencing the rig count, The long term prospects for a high rate of return have a large impact on drilling and exploration.
Fig. 3 plots the price of an average barrel of U.S. crude against Baker Hughes' total domestic rig count and the total international rig count from 1981 through the present.
In 1990, the cost of a barrel of West Texas Intermediate was $24.39, natural gas was $1.59/Mcf, and the U.S. rig count was 1,008. In 1991, the numbers fell to $21.51/bbl, $1.38/Mcf, and 866 rigs, respectively. In 1992, the numbers fell to $20.25/bbl, $1.34/Mcf, and 662 rigs, respectively. The rig count is running disproportionately low with respect to the oil and gas prices.
According to Shearson Lehman Bros., current activity levels are one third below the levels previously associated with current oil and natural gas prices.
Up through the 1986 oil industry crash, the correlation between rig count and oil price has been high. Since then, the general upward trend in oil prices has not led to a similar increase in drilling activity. The high price spurt in late 1990 and early 1991 from the Persian Gulf war led to only a slight, temporary increase in activity.
The correlation between oil prices and rig utilization has broken down because of the potential for future price instability.
Additionally, natural gas has become more o(a factor. The natural gas price crash of 1991-1992 hurt the domestic oil industry, bringing the industry to a virtual standstill. With the lowest natural gas prices in a dozen years, many operators scaled back much of their Gulf of Mexico drilling, and others shut in gas wells.
However, the increase in natural gas prices during the year brought both some peace of mind to the operators and an improvement in the immediate cash flow (30-45 day lag).
U.S. drilling activity will improve with the continued strength in natural gas prices and with the drilling decisions influenced by the possible expiration of the tight gas sands tax credit at the end of this year.
OFFSHORE
Because of offshore moratoria along most of the U.S. coastline, the Gulf of Mexico remains practically the only active area offshore the U.S., except for limited activity around Alaska. The Baker Hughes rig utilization rate in the Gulf of Mexico in late August hit 37%, compared to the worldwide rig utilization rate of 64%.
According to Oceandril Data Services, the worldwide offshore mobile rig fleet comprises 656 rigs, with about 36% of those rigs idle or available for work as of August. The mobile offshore rig fleet includes 4 arctic rigs, 31 barge rigs, 37 drillships, 400 jack ups, 170 semisubmersibles, and 14 submersibles (Table 1).
The number of worldwide working competitive offshore rigs has dropped 9% from 477 to 432 (Table 2). A rig is classified as competitive if the rig managers or owners actively tender the rig for contracts in the open market.
Noncompetitive rigs include those that are mothballed, cold stacked, under repair, state owned, or nonmarketable for drilling.
Of the 61 noncompetitive rigs in the Gulf of Mexico, only 25 could respond quickly to a renewed demand. Sonat Drilling's Gulf of Mexico jack ups and one submersible are noncompetitive only because Sonat will not work the units at current day rates. Diamond M-Odeco has plans to scrap 6 of its noncompetitive units and will return 6 to the competitive fleet.
Almost all of the major markets for mobile offshore drilling units have had a drop during the past year, although the Gulf of Mexico had the largest drop in the number of units.
Of the 656 offshore drilling rigs in the global fleet, 374 are drilling, 5 are en route to a location, 30 are performing workovers, 56 are cold stacked, 132 are ready stacked, and 16 are mothballed. the remaining rigs are used as accommodation units, are undergoing inspection or modification, or are used as production units.
Day rates for jack ups in the Gulf of Mexico range around $9 000 to $13,000, and operating expenses run in the same range.
Some contractors drill at a loss because the operating expenses exceed the day rates.
The U.S. OCS lease sale in August reached another low with high bids totaling $30.6 million.
Only 38 companies submitted 81 bids at the sale.
Matagorda Island 636 (333,600 acres located 20 miles south of Texas) received the highest bid of $5.9 million from a group comprised of Amoco Production Co., Union Pacific Resources Co., and Anadarko Petroleum Corp.
INTERNATIONAL ACTIVITY
Despite the trend by many oil companies to increase international spending and decrease spending in the U.S. and Canada, the worldwide drilling activity has slowly declined this year. International drilling activity has declined since the end of 1991.
Most analysts originally expected continued increases in the international markets this year. The Baker Hughes international rig count, excluding Canada and the U.S., hit 864 in mid-August. The decline resulted in part from the restrictions in cash flow of the global oil industry. According to Smith Barney Research, many oil companies have slowed the transfer of capital to foreign projects because of limits in internally generated funds. Had the companies transferred capital as quickly as suggested by initial reports this year, the international rig activity would have been stronger.
The rig count averaged 915 during 1991 for the international regions which include Latin America, the Far East, Africa, Europe, and the Middle East. Figs. 4 and 5 plot the onshore and offshore international rig count, respectively, by region from 1981 through the present.
Many international areas have larger undrilled prospects, and many underdeveloped countries offer attractive contract terms to bolster their oil and gas production, and hence, economies.
According to the Oil & Gas Journal Energy Database Survey of Forecasters, the international rig count, excluding the U.S. and Canada, will average about 1,020 next year and 1,100 in 1994. The forecast for 1993 ranges from 950 to 1,100 and for 1994 the range extends from 1,000 to 1,160.
Shearson Lehman Bros. has predicted slightly lower day rates for both the North Sea and West Africa. The uncertainty in the U.S. and the increased cost of meeting new U.K. safety standards continue to hamper North Sea activity. According to a report by Shearson Lehman Bros., day rates for 250-ft jack ups in the North Sea run from $20,000 to $30,000, and for 300-ft cantilever jack ups the day rates range around $40,000. For 1993, the day rates may drop slightly. Semisubmersibles in the U.K. North Sea currently receive day rates in the range of $28,000-45,000. Some rigs command higher (or lower) rates depending on the age of the equipment, the water depth capability of the rig, the drilling depth, etc.
Also, competition from Gulf of Mexico rigs has negatively affected the West African market, where day rates for a typical jack up range from $25,000 to $30,000. Sedco Forex has a number of tender rigs working in Nigeria, the Congo, and Indonesia at $22,000 to $35,000 per day.
The Canadian Association of Oilwell Drilling Contractors (Caodc) recently cut its drilling forecast from 125 to 9 active rigs and from 4,900 to 4,100 wells drilled in 1992 (OGJ, July 6, p. 32). Low oil prices and high taxes contributed to the decline.
In August, 89 rigs were active in Canada; this number is up from the 60-70 rigs earlier this year. Caodc predicts little improvement in 1993, with 4,500 wells projected.
The breakup of the former Soviet Union has led to a number of exploration opportunities in its republics. The former Soviet republics have tremendous reserves and a high level of production (OGJ, pp. 56). The large exploration potential attracts many operators, but regulatory uncertainties, bureaucracy, and politics cause time delays with new contracts.
Drilling opportunities are not as plentiful as production and workover opportunities. The Russian drilling rigs perform adequately and frequently cost much less than Western units.
Russia offers many new frontier areas and well-knownbasins for exploration and development drilling. A number of companies have found work in the C.I.S. through joint ventures or in association with majors who have joint ventures set up.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
