U.S. rig utilization drops, fleet size expands

Dean E. Gaddy
Drilling Editor

• Status of U.S. Rig Fleet [248,360 bytes]

The U.S. drilling rig utilization rate has dropped sharply.

According to the latest annual rig census by Reed Tool Co., Houston, U.S. rig utilization has dropped to 76.5% from 86.9% a year ago. Of the 1,705 available rigs, only 1,305 rigs were engaged in drilling activity (see charts, this page).

"This is a significant decline, and most assuredly, oil prices are to blame," said Reed Pres. Roy Caldwell. Nevertheless, utilization is still higher than the average 70.1% seen during 1989-98.

Details were released at the International Association of Drilling Contractors (IADC) annual meeting in New Orleans late last month. The active rig count for the census, which began May 9 and ended June 22, is higher than other published weekly rig counts because it encompasses a total count of all rigs active at any time over a 45-day period (OGJ, Sept. 22, 1997, p. 48). Caldwell said, "The census period corresponded with the transition of our industry from the strong 1997 and first half of 1998 to the somewhat depressed levels we are currently experiencing."

Reed forecasts next year's census will show a further decline in rig utilization to 72%, fairly close to the historical average of 73.5% (1955-98). "This is not too bad, when we look at the history of our industry, but lower than most of us would be happy with for the long term," Caldwell said.

Rig deletions, additions

Total available U.S. rigs climbed by 40 rigs in the 1998 census, the second year in a row there has been a net gain after 14 years of decline. During 1983-96, 3,995 rigs were eliminated from the fleet since its record high of 5,644 in 1982.

However, since the 1997 census, the fleet has grown by 56 rigs. In 1998, deletions accounted for 72 rigs, while additions accounted for 112 rigs (see Table 1 [75,715 bytes], p. 37). The category of excessive capital expenditures needed to keep a rig operating accounted for the largest loss of rigs, with 29 deletions. The remaining deletions included: 22 cannibalized rigs, 10 rigs exported out of the U.S., 8 stacked, and 3 destroyed.

Rig additions included: 62 assembled from components, 37 brought back into service, 7 newbuilds, and 6 imported into the U.S. In the 1998 census, there were 497 diesel-electric rigs available for work, an increase of 41 from the census a year ago. The number of mechanical rigs dropped by one to 1,208.

Comparing the 1997 and 1998 censuses, additions to the fleet by rig type were:

• Land rigs, 21, for a total of 1,449.
• Inland barges, 3, for a total of 47.
• Floating rigs (semisubmersibles and drillships), 7, for a total of 35.
• Offshore platform rigs, 3, for a total of 45.
• Bottom supported rigs (jack ups), 6, for a total of 129.

Reed forecasts available rigs will rise by a modest 20 units by the next census.

Depth capabilities

The available rig-depth distribution for the 1998 census breaks out as:

• 376 rigs capable of drilling deeper than 20,000 ft.
• 142 rigs rated to 16,000-19,999 ft.
• 238 rigs rated to 13,000-15,999 ft.
• 391 rigs rated to 10,000-12,999 ft.
• 412 rigs rated to 6,000 to 9,999 ft.
• 146 rigs rated to 3,000 to 5,999 ft.

The 16,000 ft category (combining the two biggest groups) is the largest, with 518 available rigs, gaining 42 rigs since 1997.

The 6,000-9,999 ft category is the second largest, with 412 available rigs, losing 9 rigs since the 1997 census. The 10,000-12,999 ft category is the third largest, with 391 available rigs, gaining 4 rigs since the last census.

The 13,000-15,999 ft category is the fourth largest, with 238 available rigs, gaining 8 rigs since the 1997 census. And the 3,000-5,999 ft category is the smallest category, with 146 available rigs, losing 5 rigs since the last census.

Consolidation, concerns

The number of U.S. contract drillers continues to decline. The 1998 Reed rig census counted 240 rig owners, a loss of 30 from last year and 450 since 1987.

There are now 16 companies that own at least 20 rigs. In relation to the U.S. rig fleet, contractors own 1,640 rigs, with operating companies accounting for the remaining 65.

"The drilling industry has not been immune to the merger mania," Caldwell said. "Our numbers show that 194 rigs changed hands during the past year," he said.

The 1998 Reed census rated rig rates as the number one concern for contractors, followed by crew availability, drillpipe replacement, rig-parts availability, and aging of rig equipment. In the 1997 census, the number one concern was crew availability, followed by drillpipe replacement, rig rates, rig-parts availability, and aging rig equipment (OGJ, Oct. 20, 1997, p. 37).

"We have to adapt to the volatility of the business-it's a fact of life," said Eugene Isenberg, chairman and CEO of Nabors Industries Inc.

Nabors has the largest onshore rig fleet in the world, with 400 available land rigs, 317 of which are in the U.S. Isenberg feels that land-rig replacement costs are still relevant (see Table 3 [87,010 bytes], this page), especially since the inventory of rig components has disappeared. This has created a situation where most component prices are now at replacement costs.

Isenberg noted that the concerns facing drilling contractors, such as crew availability, drillpipe replacement, rig-parts availability, and aging rig equipment, will diminish as rig rates rise.

Price sensitivity

For the past few years, Reed has asked contractors to predict oil and gas prices for the coming year. This year, the Reed rig census changed this inquiry, instead asking, "At what oil and gas price level does your business begin to suffer?"

Respondents answered with averages of $14.32/bbl for oil and $1.78/ Mcf for natural gas. Currently, gas prices have so far stayed above this mark, while oil prices recently pushed ahead of $15/bbl, indicating there may be some relief in sight.

Caldwell said the prevailing mood among contractors is one of: "Wait and see." He added that most contractors "believe oil prices will eventually rise and stabilize again in the $16-17/bbl range and that more steady growth will occur after a couple of tough years."

Last year's census forecast an average oil price of $20.39/bbl and average gas price of $2.26/Mcf.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.