DRILLING MARKET FOCUSRig demand hits 6-month high in Gulf of Mexico

By OGJ editors
HOUSTON, June 20 -- Demand for rigs in the Gulf of Mexico hit a 6-month high this week with 132 mobile drilling units under contract, 4 more than last week, officials at ODS-Petrodata, Houston, reported Friday.

That bumped up the utilization rate to 72.5% of the 182 rigs available for work in those waters.

However, officials at Baker Hughes Inc. said the number of rotary rigs actually in the process of drilling offshore remained unchanged this week at 105 in the gulf and 109 in the US as a whole.

The total US count of working rigs dipped to 1,067 this week, down 4 from last week, but still up significantly from the 838 units that were working at this time a year ago. The entire decline was in land operations, down 6 rigs with 942 still working. US inland water activity increased by 2 to 16 rigs working this week.

There were 337 rotary rigs working in Canada this week, 22 more than the previous week and up from 210 a year ago.

The number of US rigs drilling for natural gas increased by 5 to 915 this week, while the number drilling for oil was down 10 to 148. The remaining 4 rigs were unclassified. Directional drilling decreased by 2 rigs to 270; horizontal drilling was down 5 rigs to 87.

New Mexico and California led this week's decline, down 2 rigs each to 68 and 20, respectively. Louisiana and Oklahoma were down 1 rig each to a respective 154 and 129. Rig counts were unchanged in the other major producing states, including Texas 470, Wyoming 63, and Alaska 8.

ODS-Petrodata reported 4 fewer rigs under contract in European waters this week, down to 83 out of the 100 units available for a utilization rate of 83%. Worldwide, there was a net decline of 1 mobile offshore rig under contract this week, while 1 jack up rig was removed from the global fleet. That left the global utilization rate among mobile offshore rigs unchanged at 80.4% with 529 units contracted out of the 658 available for work.

North American outlook
Analysts at UBS Investment Research in New York, a division of UBS AG, this week raised their US rig forecasts to 1,057 from 955 in 2003 and to 1,150 from 1,055 in 2004. They increased their rig estimates for Canada to an average 383 from 345 this year and to 380 from 359 the following year.

However, all of the US gain "comes on the land rig side of the market," which "generates far less revenue per rig than in the offshore environment," said James Stone, managing director, oil field services equity research, for UBS Investment.

In fact, Stone said, "We have actually modestly lowered our 2003 and 2004 offshore rig count forecasts for the US for several factors. Firstly, the average offshore count for the first half of the year has been tracking below expectations. Secondly, the continuing decline in the rig availability in the Gulf of Mexico and the expected softness in semisubmersible demand is likely to result in lower activity levels for the remainder of the year and perhaps into 2004 than previously forecast."

Some of the loss of activity in the US sector of the gulf will be made up in other offshore markets "such as Mexico, Africa, and the Middle East," said Stone.

However, Stone said, "Outside of the US, our revised forecasts (for both land and marine activity) are a mixed bag, with Latin America being stronger than previously anticipated due to a strong ramp up in Mexican activity and the resumption of Venezuela, although Venezuela will be a slow recovery.

"European activity will show some nice improvement in the second half of the year, and since this is a strong revenue-rig market, it should be positive for second half earnings," he said. "Africa will be slightly lower than we had previously modeled, which will be offset somewhat by higher activity in the Middle East. We expect Iraq activity to start picking up later this year and to add materially to the overall Middle East rig count in 2004. Asia should be relatively flat," Stone said.

Despite a "nearly 30%" surge in the US rig count so far this year, Stone said, "There has been little meaningful change in (rig) rates over the past couple of months." He sees indications "that there is more supply in the land rig market than 2 years ago, and customers do not seem to be panicked about the availability of rigs."

As for offshore, Stone said, "We think clients are much more attune to the economics of well prospects and are being more careful with the day rates that they are willing to pay, relative to the economic returns of each prospect."

However, he said, despite these twin limitations, we have noticed some positive momentum in offshore and land day rates, which will continue, albeit at a slower rate than in previous cycles."

Permits issued for new land wells "continued to show strength with the 13-week moving average still at levels not seen since September 2001. The highest weekly change came in the Gulf Coast (region), which increased 79 permits to 116," said James K. Wicklund, an analyst in the Houston office of Banc of America Securities LLC.

Brazilian outlook
Meanwhile, Edinburgh-based consultant Wood Mackenzie Ltd. reported the lack of recent commercial discoveries has damped interest in deepwater drilling off Brazil, once considered one of the hottest new exploration plays when that country opened its upstream sector to foreign investment in the late 1990s.

Initial interest was high when Petroleo Brasileiro SA (Petrobras), Brazil's state-owned company, drilled several significant discoveries in the Campos basin, "including the 1.9 billion bbl Roncador field," discovered in 1996.

However, international oil companies have now drilled 32 deepwater wildcat wells off Brazil, with relatively little to show in return. "We consider that only 7 of the wells that have found oil offer any chance of development," said Matthew Shaw, senior consultant at WoodMac. "At present, they are all considered uncommercial for more or less the same reasons: reserves are small; the oil is heavy; and water depths are extreme."

Petrobras remains "the driving force in Brazilian deepwater exploration," having drilled 113 wildcats since the Roncador discovery. But commercial discoveries have been made only in the BC-60 block of the Campos basin, Shaw said.

"Six discoveries have been announced in (license area) BC-60, but they all suffer from having heavy oil, and only two are large enough to have any hope of being developed on a stand-alone basis," said Pauline Geddes, another senior consultant at WoodMac. She identified those two as Jubarte and ESS-121, "with about 600 million bbl each."

Moreover, Geddes said, "The state company has a long portfolio of other uncommercial discoveries in other blocks."

The lack of additional commercial discoveries in deepwater "will have a significant impact on medium to long term oil production" in Brazil, said WoodMac analysts. "Production is set to rise substantially in the near term, but this is masking the bad news that it will enter a steep decline post-2007," they said. "If a solution can be found to help make recent discoveries economically more viable, then this would ultimately result in hugely increased revenues to the government."

It may require an improvement in fiscal terms to render these fields commercial, said the WoodMac analysts. Both a "high case scenario" based on reserves of 600 million bbl and a "base case scenario" of 270 million bbl "are uneconomic under the present fiscal terms, assuming that a hurdle rate of return of 15% is required," they said.

"Relatively modest changes to the terms could render the larger field economic," WoodMac said, "but far more radical changes will be required to enable the exploitation of the base case field."