US drilling dips to 5-week low

By OGJ editors

HOUSTON, July 11 -- US drilling activity declined to the lowest level in 5 weeks, down 12 rotary rigs with 1,065 still working, officials at Baker Hughes Inc. reported Friday.

It was the second largest 1-week loss for this year, topped by a drop of 16 units to 912 during the week ended Feb. 28. However, Baker Hughes has registered increases in 21 of the 28 weekly US rig surveys so far this year, with the current count up sharply from the 848 rigs that were working in the US and its waters during the same period in 2002.

Land operations absorbed most of this week's loss, down 11 units with 942 rigs still drilling this week. Activity in inland waters was down 1 rig to 16 units. Offshore drilling was unchanged at 103 rigs working in the Gulf of Mexico and 107 in US waters as a whole.

In Canada, the rig count increased by 7 to 382 this week, up from 270 during the same time last year.

Among US rigs, 908 were drilling for natural gas this week, 17 fewer than the previous week. Oil drilling increased by 5 rigs to 153. Four units were unclassified. Directional drilling decreased by 9 units to 267. Horizontal drilling was up 7 to 96 rigs.

Despite this week's declines, the number of US rigs drilling for natural gas is up 27.7% from the same 2002 period, while oil drilling has increased by 13.3%. The US land rig count currently is 30.8% higher than a year ago, but offshore drilling is down 0.9%, said analysts Friday at Lehman Bros. Inc., New York.

Except for Louisiana, which was unchanged with 157 rigs still working, all major producing states registered declines in their rig counts this week. Texas led the loss, down 5 rigs with 460 units drilling. Oklahoma lost 3 units to 123. The other four states lost 1 rig each, leaving New Mexico at 63, Wyoming 61, California 23, and Alaska 8.

The number of mobile offshore rigs under contract in the US Gulf of Mexico decreased by 1 to 128, while the available rig fleet increased by 1 unit to 180 this week. That dipped the fleet utilization rate to 71.1% in those waters, said officials at ODS-Petrodata, Houston.

In European waters, the number of contracted rigs increased by 1 to 84 out of an available fleet of 100, boosting utilization to 84%. Worldwide, ODS-Petrodata reported a net gain of 5 contracted rigs to 135, with the total available fleet edging up 1 unit to 659 mobile offshore rigs. Total utilization among mobile offshore rigs declined to 79.5%.

Uncertain outlook
Filings for drilling permits increased by 2.5% during June among the 30 states monitored by Lehman Bros. analysts. Leaders for the month were California, up an adjusted 45% from May, and Wyoming, which rose 34%. "The modest rise in permitting activity in recent months suggests a flattening of the domestic rig count in the third quarter," analysts said.

However, analysts at Jefferies & Co. Inc. in New York said Friday, "Notwithstanding the sluggish improvement in the Gulf of Mexico, we anticipate rising drilling activity over the next several quarters." They claimed, "The underlying fundamentals in the oil service business appear solid."

Other Jefferies analysts in Houston last week reduced day rate projections for deepwater and ultradeepwater drilling rigs, with units working the ultradeep waters of the Gulf of Mexico targeted for the biggest cuts.

Except for the West Africa market, world demand and day rates for deepwater rigs "have been relatively soft as state and major oil companies have been slow to evaluate and develop their deepwater reserves," said S. Magnus Fyhr, a Houston-based Jefferies analyst.

As a result, he said, "We are reducing our (US) ultradeepwater (5,000 ft or greater) day rate assumptions to $70,000 from $87,500 during the second half of 2003 and to $75,000 from $100,000 in 2004." For ultradeepwater rigs in international markets, Fyhr reduced day rate projections to $85,000 through 2004 from earlier expectations of $90,000 in the second half of this year and $100,000-110,000 in 2004.

"Ultradeepwater bid activity in the US Gulf of Mexico, which is the largest ultradeepwater market in the world, appears to be declining in part due to major operators like BP (PLC) and Shell (Offshore Inc., part of the Royal Dutch/Shell Group) reducing their level of exploration work," said Fyhr. "With the average size of (gulf) deepwater fields smaller relative to those (off) West Africa, we believe that prospects in the gulf may be losing investment dollars to other regions as major oil companies shift their focus to potentially larger finds in other markets."

Although utilization among US ultradeepwater rigs has been 92%, he said, "Several rigs are working on wells below their rated water depths just to maintain utilization." As a result, Fyhr said, "Two or three ultradeepwater rigs could leave the gulf during the second half of 2003 for work in West Africa, where a significant amount of development activity is materializing for 2004."

Jack up market improves
Meanwhile, demand for jack up rigs in the Gulf of Mexico "is now creeping up" from a collapse of that market 2 years ago, said ODS-Petrodata officials.

"But production of natural gas from shallow waters is in steep decline, and many companies purport to have fewer offshore prospects to drill. So although the price of natural gas has been high enough to generate decent levels of cash flow—which historically would have translated into more activity—the latest upswing in demand could come to an abrupt halt," they warned in the Offshore Rig Monthly report for June.

The recent focus on deep natural gas reserves in the shallow waters of the Gulf of Mexico "offers the promise of additional drilling and could dampen the effects of the decline of traditional drilling on the shelf," they said. "But it could become a niche play for a small number of companies that have the financial wherewithal to accommodate a run of dry holes.

"Even if the activity does ramp up significantly over the next few years, the bulk of wells are likely to target deep reservoirs first, rather than ultradeep ones, which means the current supply of US jack ups should be able to meet demand," they said.

"Over 200 deep wells have been drilled in the shallow waters of the US gulf (in) 2000-2002, and standard US jack ups, (equipped) with two mud pumps (each), drilled the majority," ODS-Petrodata reported. "However, the deeper and more complex wells were drilled by ultrapremium jack ups."

Those more complex deep gas wells have a higher mechanical risk index based on factors such as depth, casing joints, and increased mud weight. A set of three mud pumps is "one of the basic minimum requirements" for rigs drilling such wells, said ODS-Petrodata.

"Currently, there are only 29 jack ups in the US gulf that are fitted with three pumps," it said. "But some of these rigs do not have the engine capacity to drive three mud pumps and a top drive simultaneously, and some have not yet brought the third pump into operation."

Nevertheless, it concluded, "Not all wells in the deep gas play will be complex, and the current fleet of US jack ups has already shown its ability to drill deep wells."