DRILLING MARKET FOCUS: Drillers cautiously optimistic about climbing oil prices

Feb. 15, 2010
Drilling contractors expressed cautious optimism early this year upon strengthening oil prices while many exploration and drilling companies announced 2010 budgets calling for more exploration and development than in 2009.

Drilling contractors expressed cautious optimism early this year upon strengthening oil prices while many exploration and drilling companies announced 2010 budgets calling for more exploration and development than in 2009.

At least a few independent natural gas producers said they are leaning toward putting more rigs to work drilling for oil because of the gap between oil and gas prices in late 2009 and early 2010.

Transocean Ltd. has a 3-year contract for its deepwater semisubmersible rig GSF Celtic Sea. The contract, worth an estimated $350 million, is with an undisclosed customer for operations in Angola starting in second quarter 2011. Photo from Transocean.

In a Jan. 11 research note, RBC Capital Markets said service and drilling contractors likely will benefit from increasing oil activity. RBC analysts forecast crude oil prices of $80/bbl in 2010 and $90/bbl in 2011. Its natural gas forecast is for $6/Mcf in 2010 and $6.50/Mcf in 2011.

RBC believes increasing demand for oil drilling will be driven by unconventional drilling in North America, and the worldwide deepwater market is poised to show strong growth.

"We continue to favor more oil, international-weighted oil service names given stronger confidence in oil prices relative to natural gas," said RBC analysts who expect international drilling markets to be flat to slightly higher with Brazil and deepwater West Africa leading the way.

Contractors cautious

Drilling contractors and service companies are cautiously optimistic after being hard hit during 2009, a year when rig counts plummeted along with weakening oil prices. Despite crude oil prices of about $80/bbl on the New York Mercantile Exchange during January, contractors said it still will take a while before some oil companies become convinced of higher prices and commit to big projects again.

"I'm kind of glad to see 2009 end," Larry Pinkston, Unit Corp. chief executive officer, told analysts and reporters attending a January Pritchard Capital Partners LLC conference in San Francisco. Unit Corp is a Tulsa exploration and production company with its own service division.

Jay Swent, chief financial officer, of offshore rig contractor Ensco International PLC, told Pritchard Capital conference participants that he expects "the next year or 2 as being a little more challenging than the good old days."

Oil drilling plans

EOG Resources Inc. is among a few gas-weighted producers that say they are escalating their oil exploration programs while maintaining their already successful gas inventories and gas drilling programs.

Gas now accounts for two thirds of EOG Resources Inc.'s production, but EOG Chief Executive Mark Papa said he hopes that oil will account for half of the company's production by 2011, and the Houston company expects to allocate 60% of its capital expenditures for oil projects.

"The concept is that we are evolving EOG from a heavily weighted gas company into a more balanced company," the Jan. 1 Wall Street Journal quoted Papa. "We are bullish on oil short term and long term."

While maintaining a deep inventory of undeveloped gas reserves, EOG is using its horizontal expertise in gas plays to tap unconventional oil and liquids-rich reservoirs.

A presentation posted on its web site says EOG foresees attractive returns from horizontal drilling in the North Dakota Bakken shale, the Barnett shale in north Texas, and in Waskada field in Manitoba. EOG sees limited competition for shale oil requiring horizontal drilling because most companies remain focused on horizontal drilling in shale gas, which has a low-technical barrier to entry.

Mariner Energy Inc. Chief Executive Officer Scott Josey said the Houston company is leaning more toward oil projects in its asset acquisitions. Currently two thirds of Mariner Energy's production is gas.

"The areas that I think that we would like to focus on are going to be more oily in nature," he said during a conference call last year. Mariner Energy is acquiring Edge Petroleum Corp.

Mariner Energy announced a $600 million budget for 2010, saying it expects to increase drilling in the Permian basin, particularly in Deadwood oil field in Glasscock County. Assuming the closing of the Edge Petroleum acquisition, Mariner said it plans "to participate in 140-170 onshore wells and test several unconventional play concepts during 2010." The Edge Petroleum acquisition brings South Texas properties to Mariner Energy.

Questar Corp. of Salt Lake City had focused entirely on gas assets, but it's putting 20% of its development capital into oil projects. Executives said future oil revenue is expected to enhance the company's returns.

The company has an 80,000 acre (net) leasehold in the Bakken play. On Oct. 27, Questar E&P said it planned to operate one drilling rig throughout 2010 in the Bakken where it had working interests in 23 producing wells at that time.

Well counts down

The number of wells drilled was down across much of the world during 2009. US and Canada average rig counts each dipped 42% in 2009 compared with 2008, said rig count statistics from Baker Hughes Inc.

In many parts of the US, operators ran fewer than half the rigs on average than in 2008 (OGJ, Jan. 18, 2010, p. 30.)

Research firm Wood Mackenzie's report, "Review of 2009—UK Upstream Sector," outlined how depressed economic conditions led to lower activity in the UK's upstream operations during 2009.

UK exploration and appraisal (E&A) drilling plummeted by 37% from the previous year during the global financial crisis. Uncertainty in the 2009 oil price—which started the year at $30/bbl and ended at $80/bbl—caused oil and gas companies to delay projects and wells.

Geoff Gillies, lead UK and Southern Europe Upstream Research Analyst for WoodMac said, "The upside is that we expect exploration and development levels to stabilize in 2010, and then pick up from 2011 onwards."

WoodMac said 140 MMboe of new reserves were brought on stream last year, marking the lowest reserves additions in the history of the UK Continental Shelf. Only 8 fields started production there last year, marking a 9-year low. Development approvals were also down, with only 6 new fields granted approval compared with 12 in 2008.

The report also noted a significant decrease in the number of companies operating wells in the UK with only 24 companies in 2009 compared with 43 in 2008, reversing the trend of recent years.

The reduced number of operators also reflects fewer wells—with 76 E&A wells drilled in 2009 compared with 120 in 2008 (see chart on this page). Despite less activity, 315 MMboe was discovered, 70 MMboe higher than in 2008.

"There isn't a lack of drilling opportunities in the UK: some companies weren't able to drill even if they wanted to," Gillies said. He blamed the economic downturn and subsequent restricted access to capital funding and tightening capital budgets.

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