U.S. rig utilization rate best since boom days

Keith Rappold
Drilling Editor

• How U.S. rig utilization is increasing [25753 bytes]

The U.S. fleet has fallen to a modern low of 1,649 total rigs available, a drop of 80 rigs from last year. The previous modern low was last year's 1,729 rigs.

The number of rigs available for work has declined each year since the record high of 5,644 rigs in 1982.

Comparing surveys

The 1996 census counted 1,263 active rigs, up about 3% from last year.

The active rig count for the Reed census is higher than published weekly counts because Reed's census is a cumulative count of all rigs active at any time during a 45-day period-this year, May 25-July 8.

For its survey, Reed considers a rig available if it has worked during the past 3 years and can be returned to service with a capital outlay of $50,000 or less.

In contrast, Baker Hughes Inc.'s weekly rig count considers a rig active only if it is drilling when surveyed. During the survey period, the Hughes count reached 782 active rigs.

Smith International Inc. considers a rig active if it is in any phase of rigging up, drilling, or rigging down.

Improving outlook

Because of the declining rig fleet and the higher active rig count, utilization improved significantly this year, up from last year's 71%.

This utilization rate is the highest since the U.S. drilling boom that peaked in the early 1980s and higher than the 44-year average utilization of 73%, said Reed Tool Pres. Alex Newton. Newton presented the census at the annual meeting of the International Association of Drilling Contractors in Houston this month.

"We see reasons to be encouraged about the outlook for improving prospects for U.S. drilling contractors in 1997 as rig supply and demand continue to move closer together," said Newton.

Reed's forecast for next year's census is a further drop of 40 rigs, resulting in a projected available rig count of 1,609.

At the same time, Reed projects rig activity will continue to rise another 2%. Based on this forecast, rig utilization next year would improve to 80%.

"If oil and gas prices remain stable, we expect rig attrition to continue and drilling activity to increase. As rig supply and demand curves converge, they will ultimately reach a utilization rate that will allow recapitalization of the rig fleet. We believe this will occur sooner for the offshore sector, but it is still several years away for the land contractors," said Newton.

Utilization

During the history of the Reed rig census, rig utilization has fluctuated widely, reaching a high of 98% in 1981 and a low of 26% in 1986.

Utilization reflects industry health, as it measures rig supply and demand balance. According to Newton, a sustained utilization rate that exceeds 80% is necessary for business conditions to be healthy for drilling contractors.

However, according to the Reed definition of an active rig, a utilization rate of 77% does not mean rigs on average were drilling about 77% of the time. A rig drilling just 1 day during the 45-day census period would be counted as fully utilized.

Rig owners were asked the number of days a rig was on a job during the census. On average, the response was 64%, or 29 out of 45 days.

Applying this factor to 77% yields a more realistic "on the job" utilization rate of 49%. Thus, there is still excess capacity in the industry, Newton said.

The census found that just 6% of the available rigs were not being marketed this year.

Utilization for both the U.S. marine and land fleets increased this year.

Marine, land fleets

Marine fleet utilization climbed to almost 86% from 83%, driven by Gulf of Mexico activity.

Floating rigs had the highest utilization rate, almost 96%, followed closely by jack ups at 95%. Inland barge and platform rigs had utilization rates of 78% and 66%, respectively. The barge utilization rate was low because a number of barge rigs were solely performing workover operations and were therefore not included in the drilling count.

"If this dwindling gap between supply and demand of the marine fleet continues to narrow, offshore rig rates should continue to climb," said Newton.

Land rig utilization made even more progress, as utilization rose to 75% this year, up from 70% last year. Four of 10 census regions had land utilization rates greater than 80%: the Permian basin, the Gulf Coast, ArkLaTex, and Midcontinent areas.

Gains in land rig utilization are significant but still short of allowing recapitalization of the rig fleet, according to Newton. Of the land contractors, 69% said drilling activity was up, and 60% said day rates were up.

The split between rigs targeting oil versus gas was similar to last year, with gas drilling stronger overall. In 1996, 24% of the rigs drilled for oil, 35% for gas, and 41% for a combination of oil and gas.

Fleet decline

The net change in the rig fleet reflects removal of rigs from service as well as addition of new, rebuilt, or previously stacked rigs.

The net reduction in the rig fleet again exceeded the additions to the fleet.

In the 1996 census, 141 rigs were removed from the fleet: 42 required a capital outlay exceeding $50,000, 36 were stacked more than 3 years, 36 were cannibalized or auctioned for parts, 24 were moved out of the U.S., and three were destroyed.

When rig rates are low, many contractors control capital costs by cannibalizing marginal rigs or those that have fallen into disrepair. Last year, 195 rigs were removed from the rig fleet, 71 of which were cannibalized.

The U.S. rig fleet also added 61 units this year, down from 83 last year. Of these additions, 33 were brought back into service, 24 were assembled from components, three were newly built, and one was moved into the U.S.

Good used equipment is now increasing in cost, but it can still be purchased at a fraction of what new equipment costs, Newton said.

Low day rates and market uncertainty during the past few years have been significant barriers to the construction of new land rigs. This year, however, two contractors built a total of three new rigs-the first land rigs built for the U.S. market since 1992.

The number of rig owners has continuously declined the past decade. The number of rig owners dropped by 27 to 289. More than 400 rig owners have left the business since 1987.

Rig owners with more than 20 rigs now control a greater portion of the available fleet. Large contractors now control almost 30% of the available rigs, even though they represent just 4% of all rig owners.

"This consolidation can contribute to a healthier industry over the longer term," said Newton.

Census results also indicated significant increases in day work drilling this year. Day work contracts were 54% of all active rigs drilling during the census period, up by four percentage points, providing further evidence of improving conditions in the drilling industry.

Footage contracts accounted for 37% of the drilling, and turnkey contracts accounted for 9%, down from 14% last year.

Contractor survey

In a survey conducted in conjunction with the rig census, drilling contractors reported crew availability as their number one concern.

In the 7-year history of this survey, respondents previously had listed rig rates as their top concern.

The other major concerns for contractors included rig rates, drill pipe replacement, insurance costs, and environmental concerns, in that order.

"Low rig rates and crew availability are interrelated in that low rig rates mean low wages. Over the past few years, low rates have caused the experienced labor pool to shrink to such a point that, as rig activity now climbs, the limited availability of qualified labor is a serious impediment to industry growth," said Newton.

Offshore rig rates have climbed considerably more than land rig rates, up 16% and 3%, respectively. Day rates for land rigs vary greatly by region, but they have averaged $5,025 in the continental U.S., according to those surveyed.

The contractors reported they could increase drilling days by 20% before additional rigs are needed. Rig rates are still below the level needed to justify purchasing newly manufactured rigs for almost every contractor.

Contractors said business activity was up 15% last year, more than they expected. On average, they expect business to increase 10% next year.

Forty-five percent of contractors plan to expand their fleets the next 5 years. An increasing number of companies are beginning to focus on growth instead of just cost reduction.

Industry consolidation is likely to continue, as even more companies are seeking merger opportunities-30%, up from 16% last year. In addition, only 3% of the contractors plan to trim their fleets, compared with 13% last year.

Copyright 1996 Oil & Gas Journal. All Rights Reserved.