Strong workover market not meeting analysts' expectations

A Baker Hughes tally indicates workover rig activity is lagging the 34% rise in drilling activity in the past year.

Sam Fletcher
OGJ Online

HOUSTON, July 30 -- Workovers of US oil wells to boost production are lagging behind earlier expectations for today's still relatively high-price crude market, industry analysts claimed.

However, the biggest contractors said business is better than those comparative numbers may show.

"The level of activity is strong and getting stronger," said Francis D. John, chairman and CEO of Key Energy Services Inc., East Brunswick, NJ, the largest US workover contractor.

Key Energy was working 1,050 of its well-servicing and workover rigs in June, an increase of 150 over the same period a year ago. "We're working an average 59,000 man-hr/week, up from 51,000 hr/week," John said.

Moreover, he said, "We're refurbishing 25-40 rigs each quarter. We're still putting additional rigs out as fast as we can."

"We don't see any retreat," said Dennis Smith at Nabors Industries Inc., Houston, which includes Pool Well Services. "Every quarter has been a record in terms of income. Getting people for crews has been a challenge. Wages are up 30%-40% in some areas."

Consolidation of the industry has left substantially all of the stacked rig capacity with the two largest contractors, Key Energy Services and Pool Well Services. The two, along with privately held Basic Energy Services Inc., Midland, Tex., control 61% of the US workover rig fleet.

"We've not seen a real drop in activity, but we're not having a lot of growth," said W.T. Clark, vice-president of operations at the Baker Oil Tools division of Baker Hughes Inc., Houston, which does a monthly count of active workover rigs in the US and Canada.

The July count of US workovers is expected to jump to 1,295 for a 28% increase year-to-year, Clark told OGJ Online.

The company's last full count of active US workover rigs was 1,197 in June, down 6% from the previous month but up 14% from the same period in 2000. Baker Oil Tools counted 311 Canadian workovers during June, up 7% from May but only 2% from the previous year. The July count should be out next week, said company officials.

High commodity prices generally provide a shot in the arm for workover activity as a relatively inexpensive way to bring more production quickly on line. However, members of the supply and demand committee of the Independent Petroleum Association of America said in a recent report, "Workover rigs have just broached 1,000 but should be closer to 1,400 or 1,500 in this price environment" (OGJ Online, June 8, 2001).

Simmons & Co. International, Houston, late last year predicted a 31% increase in workovers of US wells during 2001, based on expectations of continued strong commodity prices and a backlog of work deferred by earlier large mergers and property exchanges. The number of active workover rigs was expected to increase to 1,350 this year and grow another 10% to 1,491 rigs in 2002.

Simmons & Co.'s predictions were based on its original expectations of average prices of $26/bbl for oil and $3.75/Mcf for natural gas through 2001, which it later upgraded to $27/bbl and $4.30/Mcf. But last month, the company reduced its projected gas price to $3.50/Mcf.

Other market analysts have lowered their commodity price expectations to $25/bbl for oil and $3.25/Mcf for gas (OGJ Online, July 6, 2001).

With US supplies of gas increasing in the face of "lost demand," Salomon Smith Barney Inc. reduced its forecast of composite spot prices to $3.25/MMbtu through 2002 from a previous range of $3.75-$4.50/MMbtu. Salomon Smith Barney previously had expected gas prices to average $3.75/MMBtu during the third quarter of this year, rising to $4.50/MMbtu in the fourth quarter, and sustaining around $3.75/MMbtu through 2002.

Raymond James & Associates Inc. refigured its third quarter projections for oil prices to $25/bbl from $28/bbl; and its 2002 forecast to $26/bbl from $30/bbl.

Producers' concern over the falloff in commodity prices for natural gas in recent rates and the rising costs for rigs and other services "may have changed the economics" to dampen the expected rebound in workover activity, said Clark.

Higher natural gas prices earlier this year may have caused some producers to focus on drilling new gas prospects instead of working over existing oil wells to increase production, said Scott B. Gill, director and co-head of research for Simmons & Co., who compiled the company's workover study.

However, John said, "Just remember for every rig drilling a gas well, there's a well-service rig that does the completion." Moreover, he said, "We're doing a lot of reentries and completions on deep gas wells. About 60% of Key Energy's business is gas-related."

Although some operators may have curbed both drilling and workover activity, others are still pursuing aggressive programs. XTO Energy Inc., Fort Worth, Tex., said Thursday it has done 300 workovers so far this year and plans 229 more by the end of 2001.

Meanwhile, the business analysis committee of the Houston-based Association of Energy Service Companies, which represents the workover and well-servicing industry, is working to launch its own regular survey of working rigs.

Based on information supplied by 50 member contractors, the association last counted an average of 1,800 active rigs during April. "That's up 47% since June 1999," said Jim Yancy, the association's executive director.

The association's count included both smaller rigs that work "only daylight hours" and larger rigs "that operate around the clock," he said. "The increase is spread pretty evenly across almost all regions of the US."

John said, "There are some real flaws in workover rig statistics. There are some 3,200 well-servicing rigs in the country. Some are doing completions and workovers, and others are doing maintenance. It's hard to figure out who's doing what."

US workover activity peaked in November 1990 with 2,041 rigs working, Clark said. It hit a low in March 1999 with 692 workovers.

Baker Hughes began monthly surveys of workover rig activity in the US and Canada in April 1987. Before then, company officials said, such a measurement of "true" workover operations wasn't possible because of the industry's general inability to define a workover and because contractors often used workover rigs for other purposes.

By Baker Hughes' definition, a workover occurs "when the operator has pulled production tubing from a well that is 1,500 ft or more in depth." Its monthly workover survey includes only those jobs where tubing is out of the wellbore and does not include rigs doing rod jobs or wells less than 1,500 ft.

Each of Baker Oil Tools' district offices begins contacting all workover contractors in its territory 3 days prior to the end of each month to determine how many rigs meet those criteria.

Contact Sam Fletcher at samf@ogjonline.com

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