Gloom permeates the U.S. drilling sector, with little prospect of a significant turnaround soon.
However, there remain some bright spots for U.S. drilling contractors, notably in a suddenly resurgent U.S. natural gas outlook and in new opportunities for work in other nations.
Those themes dominated the annual meeting of the International Association of Drilling Contractors (IADC) in Houston last week.
GLOOMY STATUS REPORT
Reed Tool Co.'s gloomy status report, followed by other companies' bleak assessments of the U.S. drilling sector, marked the opening tone of the IADC meeting.
Based on results of its annual survey of U.S. drilling contractors, Reed concluded:
- The U.S. rotary rig fleet in 1992 has shrunk to less than 2,000 the first time since 1974.
- Rig utilization rates are averaging less than 60%.
- Next year is shaping up as another difficult period for drilling contractors.
REED SURVEY DETAILS
According to Reed's census, the number of rotary rigs available in the U.S. this year decreased by 255 units, roughly four times the rate of fleet attrition Reed tallied in 1991.
With 1,996 units available, the U.S. fleet stands only 229 units more than Reed's census low set in 1973.
Reed attributed the large net loss in rigs this year to a 48% increase in cannibalization and a need for capital to return rigs to work.
Reed Tool Pres. Roy Caldwell said, "The bottom line is contractors in 1992 are liquidating assets to survive, an ominous sign for the future of the industry and of the country.,,
Contractors responding to Reed's 1992 rig census reported 1,192 rigs active, down 19% from 1991 and the second lowest active rig count since Reed began its survey 40 years ago. Reed in its 1986 census counted 1,052 active rigs.
Reed's census of active rigs includes any unit drilling a well during the day survey period. A rig is counted as part of the U.S. fleet if it could go to work within 30 days without requiring a capital expenditure of $50,000 or more.
Offshore contractors surveyed this year by Reed reported a 24% rig attrition rate, more than twice the onshore rate, with the U.S. offshore fleet falling 58 units to 187. Reed said the U.S. offshore rig fleet since 1987 has declined by 50% to only 8 units more than the survey's low, set in 1974.
Caldwell traced low rig utilization to the continuing exodus of drilling capital from the U.S. by major oil companies and large independent producers. Low U.S. gas prices and unfavorable tax treatment have discouraged surviving independent operators from picking up the drilling slack left by majors, he contends.
"The 1992 census characterizes an industry that has faced a difficult decade and has the prospect of facing more difficult years ahead," Caldwell said.
ACTIVITY FORECASTS
Based on contractor responses to its survey, Reed predicts rig activity in 1993 will average 1,200 units.
Persistent low demand will cause contractors to continue stacking or cannibalizing units or selling spare rigs, trimming another 250 units from the U.S. rotary fleet and leaving a record low 1,746 rigs available for work.
Reed said U,S. rig utilization next year will increase to 69%, a rate higher than all but 2 years since 1982, "but still not high enough to halt deterioration of the U.S. contracting industry."
Sam Albright, of Howard, Weil, Labouisse, Friedrichs Inc., New Orleans, notes emerging operator trends that will include more turnkey operations, risk sharing, partnerships, seeking outside sources for certain services vs. developing them in-house, and cradle to grave responsibility for wells. He believes oil industry restructuring and consolidation will continue the next few years.
Merrill Lynch's Suzanne Cook contends U.S. drilling has entered an upturn that could last 3-5 years, citing some Gulf of Mexico day rates that have jumped about 25% the past month because of Hurricane Andrew. She notes that contractors that invested early in technology to improve drilling efficiency will be among the first to benefit.
Matthew Simmons, Simmons & Co. International Inc., Houston, cited improved natural gas prices and diminishing worldwide production capacity in his prediction for an upturn in drilling and service industries.
Simmons contends improvements in drilling efficiency have not had a tremendous effect on depressing the rig count and that exploratory success in the U.S. has remained fairly constant the past few years.
Continued worldwide recession is the only cloud on the horizon for recovery, said Simmons.
Gary junco, president of Enserch Exploration Inc., Dallas, predicts more U.S. offshore contractors will convert mobile offshore drilling units to floating production vessels.
"Many of you will be able to employ currently stacked rigs in this manner in the near future," he said.
He said contractors could improve chances of employing idle rigs by accepting shares of working interest or net profits in some projects.
Junco said U.S. independents in the past 3 years have applied new technology-especially 3-D seismic and horizontal drilling-to develop profitable onshore plays that will carry U.S. industry into the next century.
EFFECTS OF U.S. PRICES
With Section 29 tax credits due to expire at yearend, Reed estimates U.S. operators have about 175 wells drilling in qualified Section 29 formations.
"Even if those tax credits are extended, operators will have the option of spreading their Section 29 drilling activity over several years, and a drop of 80 or so rigs next year is probable," Caldwell said.
However, investment in drilling U.S. oil and gas wells could increase if Congress modifies the Alternative Minimum Tax (AMT) to achieve more rational treatment of intangible drilling costs.
Bryan Dudman, Smith International Inc., Houston, said without AMT changes or extension of Section 29 tax credits, drill bit suppliers and drilling contractors will face a rough year in 1993.
Dudman said major oil companies have about 16% of the U.S. rig count. However, fewer than 20% of those rigs are drilling for Section 29 gas. Most majors do not support Section 29 and are basing next year's drilling plans on expectations the credit won't be extended.
Dudman predicted the U.S. rig count, as tallied by Smith under different criteria, will average 730 units in first quarter 1993 and 850 for the full year, up 12% from 1992, if drillers receive some AMT relief and Section 29 extension. Without those changes, the Smith rig count will drop to 625 in the first quarter and 733 for the year, 5% less than in 1992, he said.
An IADC committee on government affairs continued its neutral stance on Section 29. Some contractors said the Section 29 tax credits were critical to keeping their rigs running. Others said the Section 29 extension squeezes gas prices and causes operators to delay plans to drill conventional gas wells.
U.S. MARKETS ABANDONED
Thomas H. Bowersox, chairman of IADC and Zapata Offshore Co., Houston, said poor U.S. tax and environmental policies are driving investment away and causing offshore drilling contractors to abandon U.S. markets.
"While other areas of the world are as protective of the environment as the U.S., regulators outside the U.S. work with oil companies in a much more cooperative fashion to allow responsible development to take place," he said. "Misguided (U.S.) policies inevitably cost thousands of jobs, needlessly increase our already lopsided trade deficit, and irresponsibly risk polluting our seas with spills from tankers importing foreign crude oil and products to replace rapidly diminishing U.S. production."
Bowersox said nearly 100 MODUs have left U.S. markets since 1986, some lost to retirement and others to foreign areas. Since 1982, U.S. companies have sold more than 100 MODUs to non-U.S. investors.
George Dotson, president of Helmerich & Payne International Drilling Co., Tulsa, said contractors that have survived the past decade of depressed U.S. drilling markets foresee no real promise of relief next year without a change of U.S. energy policy or in official oil prices by the Organization of Petroleum Exporting Countries.
Dotson said expiration of Section 29 unconventional gas tax credits at yearend 1992 would further curtail U.S. drilling in 1993. Moreover, U.S. land contractors' efforts to pursue international opportunities have been blunted by the large investments needed to adapt rigs to international operators' specifications.
"All things considered, competition will continue to be fierce in the U.S., with low utilization, low cash flows under increasing pressure, and reinvestment growing more costly," he said.
BRIGHT SPOTS SEEN
Other IADC speakers found reasons for optimism about the future.
Enserch's junco said despite negative tax treatment, stringent environmental policies, and drilling moratoriums, the U.S. still offers plenty of opportunities to operators willing to accept change and continue developing more efficient ways to find and produce oil and gas.
"Investments in domestic exploration still are more secure from government takeover than anywhere else in the world," junco said.
While puny U.S. drilling activity is harmful to U.S. contractors, a low rig count might not be bad for producers if success rates improve on exploratory wells.
"And we think there are reasons to believe the industry can achieve higher success rates," he said.
C.A. Hinton, president of W.B. Hinton Drilling Co. Inc., Mt. Pleasant, Tex., said gas well drilling can buoy demand and profits in U.S. drilling markets, even in a year in which rig activity has fallen to a post-1940 low. Hinton said results of Reed's survey compare closely with those of 1973, when rig availability bottomed out and demand began to increase.
"Nineteen seventy-three was the beginning of the last golden era lasting until 1981, and 1993 will be regarded as the first year of the next golden era," Hinton predicted.
LATIN AMERICAN OPPORTUNITIES
In addition, Hinton said, success of U.S. contractors working under turnkey drilling contracts with Petroleos Mexicanos will create more drilling opportunities in Mexico.
"Turnkey drilling has been a screaming success in Mexico," Hinton said. "The Mexicans are happy enough that they hope to contract by the end of the year for 35 more turnkey wells in the Bay of Campeche.
"Next year, they want to do 105."
One rig can drill about three Campeche wells/year, he said.
He predicted U.S. land rigs also will be working in Mexico, within 1-2 years.
Hinton also cited Argentina's plan to sell state owned drilling rigs under a privatization campaign as another foreign opportunity for U.S. contractors.
C.I.S. PROSPECTS, PITFALLS
George Helland, deputy secretary for export assistance at the Department of Energy, said U.S. drilling contractors might play important roles helping develop oil and gas reserves in the C.I.S.
Helland said U.S. contractors can offer better drilling rigs and equipment and better trained crews than those in former Soviet republics. But he warned of the pitfalls of trying to do business in Russia and other parts of the C.I.S.
"There are no legal systems in the C.I.S.," Helland said. "People there have a devil of a time making decisions."
Because officials of the former Soviet republics have no experience in and don't understand free enterprise, they don't know how to conduct business and see little basis for rewarding risk takers, he said.
C.I.S. NEEDS
Helland said Russian wells need 25,000 pumping units and 40,000 wellheads. But the country's economy is too weak to import needed equipment, and Russian manufacturing plants are too old and poorly staffed to turn out the quality and quantity of goods required.
"Western manufacturers could move in there and begin operations with low capital investments," he said.
Helland said opportunities for drilling and servicing contractors potentially are greatest in Russia, which has the bulk of C.I.S. reserves. However, turmoil and uncertainty also are greatest in Russia.
Kazakhstan represents an attractive combination of good potential reserves and the fact that "a large portion of the country has never been explored for oil and gas," Helland said. In addition, the Kazakhstan government holds authority to make most important decisions without interference from local production associations.
Helland said the political situation in Azerbaijan is more stable than in Russia, but that country has limited upside oil and gas potential. In addition, the government is not particularly stable but could stabilize quickly.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
