Rig activity strengthening, utilization high

Keith Rappold
Drilling Editor

Higher average gas prices have driven this increase. Natural gas prices tend to drive North American offshore drilling activity, including the shallow waters in the Gulf of Mexico. Oil prices, however, tend to drive international offshore drilling and deepwater and subsalt projects in the Gulf of Mexico.

Total worldwide offshore rig utilization was 91% this summer, compared to 86% last summer. By rig type, semisubmersibles have a 94% utilization; barges, 93%; jack ups, 91%; drillships, 83%; barges 75%; and arctic rigs, 50%. Effective offshore rig utilization has reached 100% in several regions throughout the year.

The international (all noncommunist countries excluding Canada, the former Soviet Union, and the U.S.) rig count averaged 815 in July, up from an average of 759 last year. The U.S. rig count averaged 784 in July, up from an average of 723 last year. The Canadian rig count averaged 291 in July, up from an average of 231 last year (Figs. 3 [28063 bytes]). The worldwide total number of rigs drilling was 1,890.

The Baker Hughes Inc. rig count projections for 1996 are 794 for international regions, 766 for the U.S., and 274 for Canada. The projections for 1997 are 815 for international regions, 850 for the U.S., and 281 for Canada.

In the major international regions, the Middle East had 138 rigs working-31 offshore and 107 onshore. Europe had 126 rigs drilling-59 offshore and 67 onshore. The Asia Pacific area had 192 rigs working-65 offshore and 127 onshore. Africa had 76 rigs drilling-31 offshore and 45 onshore. Latin America had 283 rigs drilling-61 offshore and 222 onshore.

Offshore drilling activity has been relatively strong in the Gulf of Mexico, primarily because of strong gas prices (Figs. 4 [21686 bytes]).

The U.S. offshore has averaged 107 drilling rigs this year, up from 98 last year. Drilling activity in U.S. inland waters has held steady at about 17 rigs, up two from last year. The Gulf of Mexico is a major natural gas province, which accounts for 16% of U.S. proved natural gas reserves and 26% of U.S. natural gas production. About 94% of the mobile drilling rigs in the Gulf of Mexico are drilling for gas, which is a tremendous increase compared to the average 65% in years past, according to Baker Hughes.

Jack ups

Worldwide jack up demand reached 350 rigs this summer, up 16 rigs from last year, according to Offshore Data Services. The worldwide jack up utilization rate has increased steadily since early 1995, reaching a current rate of 91%, compared to 87% last year, according to Offshore Data Services (Table 1 [35185 bytes] and Tables 2 [32123 bytes]).

This jack up demand is near the 10-year high of 352 reached in December 1990, but less than the all-time high of 402 in January 1985. Jack up demand has been steady worldwide

Of the 383 jack ups available, 17 are cold stacked, and 9 are in the shipyard. With an effective supply of 357 rigs, the effective utilization rate increases to 98%. Eight of the stacked jack ups are ready stacked; however, 6 of these have been idle for 1-4 years and would require refurbishment before returning to work. Seven of the jack ups in shipyards will be available later this year, and strong demand should absorb this supply rather quickly, according to financial analysts with Jefferies & Co. Inc.

This tightening supply and demand balance has resulted in day rate increases for jack ups and semisubmersibles. In the Gulf of Mexico, day rates for extended leg (350 ft) independent leg cantilever jack ups are currently $40-45,000, $34-36,000 for 300-ft independent leg cantilever jack ups, $28-30,000 for 250-ft independent leg cantilever jack ups, and $23-25,000 for mat-supported jack ups.

Day rates off West Africa have increased to the mid-$40,000 range for 250 ft independent leg cantilever jack ups because of strong demand.

In the North Sea, day rates for conventional jack ups typically range $40-43,000 for short term contracts. Day rates for heavy duty jack ups range $90-110,000.

Semis

Worldwide semisubmersible demand increased to 136 rigs this summer, up from 120 at this time last year, according to Offshore Data Services. The overall semisubmersible utilization rate is 94%, compared to last year's 85%. The effective utilization rate of third and fourth generation semisubmersibles remains at 100%.

Of the 145 semisubmersibles available, 6 are cold stacked, 1 is mothballed (out of service), and 2 are in the shipyard. With an effective supply of 136 semisubmersibles, the effective utilization rate is 100%.

Day rates for fourth generation semisubmersibles are currently in the $125-145,000 range. Day rates for third generation semisubmersibles are in the $85-100,000 range, but recent contracts indicate these rates should increase, according to Jefferies & Co.

The Gulf of Mexico semisubmersible utilization is at 100%, excluding three nonmarketed rigs. Day rates for shallow water (less than 1,000 ft) rigs, which were in the $65-70,000 range, appear to be increasing, with a recent contract for a second generation semi in the mid-$80,000 range, according to Jefferies & Co.

In the North Sea, day rates for second and third generation semisubmersibles are $90-120,000.

U.S. rigs

The U.S. rig fleet reached an historical low of 1,729 rigs in 1995, said Roy Caldwell, president of Reed Tool Co., at last year's Reed Rig Census report at the International Association of Drilling Contractors (IADC) Annual Meeting in Houston. According to Reed's 1995 Annual Rig Census, the U.S. rig fleet declined by 112, a drop of 6% compared to the 1994 count (Table 3 [40174 bytes]).

The previous low was in 1973, when 1,767 available rigs were counted. This low was followed by a surge in the late 1970s and early 1980s, and in 1982 the available rig count peaked at 5,644.

Reed has conducted this census for the past 43 years, and the 1996 census will be presented at the IADC Annual Meeting next week. The forecast for the 1996 rig fleet is an available count of 1,679 and an active count of 1,232.

The primary mission of the census is to count the number of rigs available for work and to identify units that are active during the census period.

The census reported 1,232 active rigs, up just 11 from the previous year. The Reed Rig Census active count is higher than published weekly rig counts because it is a cumulative count of all rigs active during a 45-day period, from June 3 to July 17, 1995.

Rig utilization increased to 71% in 1995, up 5% from the previous year. The utilization rate, the ratio of active to available rigs, is considered a key barometer of industry health. Rig utilization peaked at 98% in 1981 and reached a low of 26% in 1986. The average utilization rate has been 73%.

"We believe a sustained utilization rate above 80% is necessary for business conditions to improve significantly for drilling contractors. The offshore fleet, the one real bright spot, has experienced a considerable increase in utilization since the last census, driven mostly by gas drilling," said Caldwell.

There were 229 rigs available in the U.S. marine fleet, and the utilization rate was 83.0%. Platform rigs had a 60.5% utilization rate; jack ups were 87.6%, inland barges 88.9%, and floating rigs 94.7%.

The decrease in the rig fleet resulted from 195 deletions and 83 additions. The primary reason for rigs leaving the fleet was cannibalization or auctioning the rigs for parts; 71 rigs were cannibalized. Sixty-two rigs were dropped because they needed more than $50,000 in upgrades; 30 rigs were moved out of the U.S.; 29 rigs were stacked; and three rigs were destroyed.

Additions to the fleet included 38 rigs which were reactivated, 35 rigs assembled from components, and 10 rigs moved back into the U.S. There were no newly manufactured U.S. rigs reported in 1995.

During the past 9 years, the number of rig owners has continued to decline. In 1995, there were 316 rig owners in the U.S., less than half the number in business in 1987.

The largest number of owners leaving the industry had small operations, with most owning a single rig.

In Reed's survey of contractors, respondents ranked low rig rates as being their most serious problem. Large contractors were more concerned about experienced crew availability, drill pipe replacement, and aging rig equipment. Small contractors were more concerned with insurance costs, crew availability, and financing.

The percentage of rigs drilling for gas in the U.S. averaged 53% in 1995 and 55% in 1994. Currently, about 61% of all U.S. rigs are drilling for gas, according to Baker Hughes Inc. (Figs. 5 [18181 bytes]).

Oil and gas prices have been slightly better than expected by many industry analysts this year. Oil prices have been running $19-21/bbl this summer, and gas prices have ranged around $2.25/MMBTU (Figs. 6 [25420 bytes]).

Workover rig activity has increased slightly this year, with 1,379 rigs working (Figs. 7 [23974 bytes]). With 3,951 service rigs working, the utilization rate has averaged 69% for the year.

According to the Quality rotary rig count, 433 rigs were drilling deep (greater than 10,000 ft) wells in August, up from 351 last year. Additionally, 124 rigs were drilling exploration wells, up from 113 last year.

Directional

Directional and horizontal drilling activity improved this year. About one-third of all active U.S. rigs are drilling either directional or horizontal wells, according to Smith International Inc.

In August, 190 rigs were drilling directional wells (excluding horizontal), compared to 172 last year, according to Smith International Inc. (Figs. 8 [27565 bytes]). The majority of directional work was occurring in south Louisiana with 118 rigs, followed by Texas with 33 rigs running.

Horizontal drilling activity is holding strong in 1996, with 91 rigs reported drilling horizontal wells. Texas had 52 rigs drilling horizontal wells, North Dakota had 11, and the other states combined for 28.

Drillers in Canada had 37 rigs working on directional wells, up from an average of 31 last year. Canada's horizontal activity is also up. The horizontal rig count was 43 in August, up from an average 31 last year.

Rig replacement costs

Worldwide offshore drilling markets continue to show signs of strengthening, according to Global Marine Inc. Global Marine's summary of offshore rig economics (Score) rose to 56.6%, its highest point since December 1982.

At 64.9%, the North Sea has the highest Score of all regions measured, but in recent months the Gulf of Mexico, West Africa, and Southeast Asia have been improving. West Africa was the second strongest drilling market with a Score of 57.4% (Table 4 [32524 bytes]).

Global Marine's Score reflects current offshore mobile drilling day rates as a percent of the estimated day rates contractors would need to justify new construction. Global Marine calculates new construction day rates as the sum of daily cash operating costs plus a capital recovery factor of $700 per day per million dollars invested. A separate Score is calculated for jack up and semisubmersible rigs for different regions to indicate the relative conditions of rig markets.

The Score tracks the industry's progress towards peak performance. If the pattern of the previous offshore drilling cycle is repeated, then the industry will have reached maximum market rates when Score reaches 100%, and contractors will be ordering rigs on speculation that they can secure a drilling contract during construction. At a Score between 70 and 80%, most contractors would order a new rig only if they could secure a drilling contract beforehand.

At current Score levels of 50-60%, new rig construction is unusual, but reinvestments and upgrades of existing equipment are common. At a Score less than 40%, most contractors report losses, and there is little investment in the industry other than that required to maintain existing rigs in good operating condition.

The offshore drilling industry has been improving steadily for the past year. Three trends are driving the market:

• Technology is steadily lowering the cost of finding and producing oil and gas.

• Energy prices are high enough to stimulate drilling yet low enough to stimulate consumption.

• Some governments have lowered taxes on energy producers to attract investment. In combination, these trends have expanded the market for deepwater drilling services beyond the available supply of rigs and daily rig rates and are rising toward levels required to justify building new rigs, according to C. Russell Luigs, chief executive officer of Global Marine.

New construction

Eight mobile rigs are currently under construction.

Gazprom will own and operate two 300-ft independent leg cantilever jack ups which will be delivered in mid-1997 and mid-1998, respectively. The Kvaerner & Zvezdochka-designed rigs will cost $100 million each. Rowan Cos. Inc. will take delivery of a LeTourneau 150-88-C 400-ft jack up in May 1998. Rowan is constructing the $170 million heavy duty jack up, the Rowan-Gorilla 5, on speculation.

Three semisubmersibles are under construction. Caspmor (Russia) will own and operate the Shelf 7, an F&G Enhanced Pacesetter design for 1,000 ft of water, and the Shelf 9, a CD&BE Coral design for 820 ft of water. Each rig has an estimated cost of $80 million, and no delivery date has been announced. Deepsea ASA will take delivery of the Deepsea Stavanger, a Bingo 8000 design for 6,500 ft of water, in February 1998. The rig has an estimated cost of $210 million and is available.

Falcon Drilling is building a dynamically positioned drillship, the Peregrine 4. Falcon plans to complete the drillship, which would be capable of drilling in 9,200 ft of water, by December 1997. In June 1998, Sonat Offshore will take delivery of a dynamically positioned drillship for drilling in 7,000 ft of water. The Discoverer Enterprise, an Aframax Tanker design, has an estimated cost of $245 million and should receive a day rate of $180,000. The rig construction is supported by a 3-year contract with Amoco Production Co.

About this report...

Strong, stable gas prices have increased demand for offshore rigs worldwide. Several regions have seen 100% utilization rates for both jack ups and semisubmersibles. Onshore markets have also improved because of increased gas drilling, but in the U.S. the number of contractors continues to dwindle.

Drilling alliances continue to increase in popularity, but not all alliances succeed. A comprehensive analysis of alliances, from both the operator and service company perspectives, found seven factors critical for success.

Rounding out this report is the first known published article on underbalanced drilling activity in the U.S. Interest in underbalanced drilling continues to grow steadily, primarily to reduce formation damage, increase penetration rates, and reduce lost circulation problems in depleted reservoirs.

Copyright 1996 Oil & Gas Journal. All Rights Reserved.