Analyst: US needs 850 rigs in 5 years to meet demand

July 15, 2005
The US will need 850 more drilling rigs in the next 5 years, said J. Marshall Adkins, Raymond James & Associates Inc.

By OGJ editors
HOUSTON, July 15 -- The US will need 850 more drilling rigs in the next 5 years, said J. Marshall Adkins, Raymond James & Associates Inc.

"That represents a 50% increase over today's rig fleet and equates to a 7% compounded annual growth rate," he said in a July 11 report. "Rig crews and labor will likely be the biggest limiting factor to activity levels."

With Canadian and international rig markets showing similar trends, Adkins added, "We expect that, all in, the total number of rigs globally will increase by over 1,600 (40%) by the end of the decade."

Investment needed
Adkins said high oil and gas prices, rapidly rising investment returns for service companies, and "20 years of underinvestment" have set the stage for increased capital investment in energy infrastructure.

"Over the past 20 years, instead of building new equipment and new rigs, operators and drillers alike have consumed that excess supply built in the 1970s," he said. "Fast-forward to 2005, we are at a point where that excess supply has been cannibalized, and the existing rig fleet is 25 years old."

Over the past 5 years, the available US rig fleet has grown about 4%/year as improved profitably encouraged drilling contractors to refurbish rigs and build a few new ones, with construction increasing during the past year. "We have counted at least 154 rigs that are on the books to be refurbished or newly built over the next 12 months," said Adkins.

While about 60% of the estimate involves refurbishment, he added, "We expect that mix to change as the last of the stacked rigs come to market over the next year. Future rig growth will come primarily from completely new rigs, which will likely stress manufacturing capacity and limit the total additions to the rig fleet."

New rigs were added much faster during the last building cycle of the 1970s drilling boom. From 1973 to 1980, the rig fleet grew by 11%/year. "If we were to include the massive additions in 1981 and 1982, the growth rate of the rig fleet in the last 5 years of the cycle was a whopping 18%," said Adkins.

Historically, putting more rigs to work has done little to increase oil and gas production, primarily because of accelerating depletion rates and dwindling reserves. Even during the drilling boom of the 1970s, Lower 48 oil production trended down. "If we plot annual US oil and gas production per active domestic rig, the trend of diminishing returns is astounding," Adkins noted.

Meanwhile, the capital reinvestment trend in the oil field service industry also has taken root in the Middle East, Southeast Asia, and Latin America, "where we have counted over 35 new jack up rigs, 4 deepwater rigs, and a number of land rigs that are scheduled for construction and deployment over the next few years," said Adkins.

"We believe that the rate of additions to the international rig fleet (excluding China and the Former Soviet Union) will be similar to the US, growing at approximately 7%/year. That equates to about 60-80 rigs/year, which is still far less than the 100-135 rigs added per year during the late 1970s," he said.

Raymond James based its projections on the number of existing rigs reported by Baker Hughes Inc. as available to work in international markets. "As it stands today, however, we believe the international rig fleet is essentially fully utilized and that any additions will come primarily from new rigs entering the market," Adkins said.
Raymond James expects drilling activity to shift outside North America.

Canadian growth
Unlike the US and international markets, the less mature Canadian oil and gas sector has been growing for the past decade, posting 5%/year increases in its rig fleet.

"Only in the last few years have rig activity, depletion rates, and drilling economics started to equilibrate between the US and Canada. Given Canada's 10-year-long growth cycle, we do not see much acceleration in the trend of its rig fleet," Adkins said. "We would, however, point to continued spending on rig infrastructure with our latest count of 54 new rigs on the agenda to be added to the market this year. Going forward, we are conservatively modeling that Canadian rig growth slows modestly to 4.5%/year."

He added, "Recently there has been a greater emphasis on building deeper [drilling capacity], more-capable rigs, which happen to be more capital-intensive and take longer to enter the fleet. This change in mix could moderate the rate of rig builds in Canada."