Drilling contractors mobilize badly needed rigs and crews.

The drilling industry must be commended for finding crews, mobilizing an aging rig fleet, and generating newly built rigs, exceeding the 1997 peak drilling activity both in terms of rig count and total footage drilled.

The driller had a definite impact, along with other factors during the year, on increasing badly needed gas storage levels, reducing commodity prices, and saving the North American economy further damage from extreme energy costs.

Even though rig counts have come off of their recent peaks and the industry looks to the future with a wary eye on lower commodity prices and softening rig demand, we must celebrate the gains of the past year.

Richard Mason of the Land Rig Newsletter said, "We should raise a glass to the drilling contractor, who in the past year, has done a phenomenal job of mobilizing more rigs and crews than during the peak of 1997, something many thought was impossible a few months ago."

Worldwide activity

According to Baker Hughes Inc., Houston, worldwide rig activity increased 23% from last year to 2,345 active rigs in July 2001, following a peak in February 2001 of 2,430 active rigs (Fig. 1). Coinciding with Canada's annual winter activity spike, the peak in February exceeded the previous peak of December 1997 by 112 rigs, when 2,318 rigs were active.

The international rig count, excluding the FSU, communist countries, Iraq, and North America, averaged 748 rigs in July, up 86 rigs from last year, but dropping 12 rigs from the previous month's recent high of 760 rigs (Fig. 3).

Responsible for most of the increase, the North American rig count averaged 1,597 rigs in July, a 28% increase over the previous year on top of a 55% gain the year before. In July, the US rig count, including onshore and offshore units, averaged 1,278 rigs, up from 941 rigs last year.

In Western Canada, the July active rig count averaged 360 units, up 16 rigs from a year earlier.

In the major international regions (Fig. 4), operators and national oil companies employed 98 rigs in Europe, 181 in the Middle East, 55 in Africa, 262 in Latin America, and 181 in the Far East, up 15%, 13%, 22%, 12%, and 9%, respectively, on top of solid gains the previous July.

Worldwide offshore activity bad a net gain during the year, with a utilization of 73.6% in August 2001 (Fig. 5). This is up from 71% last year, with a peak at 77% in June 2001. According to ODS-Petrodata Group, Houston, the working fleet stood at 475 rigs on Aug. 10, 2001 (Table 1), up 13 rigs from a year ago.

The US picture

By yearend 2001, OGJ estimates that the surge in drilling in the US could result in the largest number of completions in any year since 1987, with operators increasing spending for wells and completions to $32 billion, a 36% increase over last year. As a result, operators should drill and complete 33,600 wells this year, far exceeding the 25,945 wells OGJ estimates were drilled in 2000 (OGJ, July 30, 2001, p. 101).

Using West Texas Intermediate (WTI) 40[degrees] API, oil prices rose to a peak beginning-of-the-month posted price of $34/bbl in December 2000, but then declined, stabilizing in a range near the July 2001 $24.50/bbl (Fig. 6).

More importantly, with the winter 2000 Henry Hub prices spiking to $10/MMbtu, strength in natural-gas prices were the driver for US rig mobilizations (Fig. 2).

Even though gas prices declined going into summer 2001 to the more modest $3/MMbtu range, the US total active rig count continued its climb to the July 2001 peak of 1,278 active rigs, up from 942 rigs in July 2000. Drilling contractors mobilized an average of 28 rigs/month during this 12-month period or almost 1 rig/day (Fig. 6).

Based on information provided by RigData for wells deeper than 2,500 ft, by August 2001 the top 50 operators in the US had drilled 6,344 wells (average well depth of 8,340 ft) for a cumulative 52.9 million ft drilled (Table 2).

Additionally, the five most active operators in terms of wells drilled included BP Exploration Inc. (451), Occidental Petroleum Corp. (404), Anadarko Petroleum Corp. (400), FOG Resources Inc. (316), arid Louis Dreyfus Natural Gas Corp. (256). Anadarko was the most active operator in terms of total footage drilled, with almost 4.3 million ft, averaging 10,678 ft/well (Table 2).

US land rigs

Based on a 4-week, mid-August 2001 average for US onshore activity RigData says 1,385 land rigs were drilling, up 363 units or almost 36% from last year (Table 4).

Drilling utilization for the top 25 US drilling contractors began the year at 73%, climbing to 79% in August 2001, with highs in June and July of 81% (Table 3). The data in this table include both onshore and offshore rigs and are not completely accurate as an indicator strictly of land rig utilization.

However, US land rigs make up most of the statistics in Table 3, making it a good off-the-cuff reference. It's safe to conclude that mid-year 2001 land rig utilization had increased 3-10% over last year.

Land rig utilization during the 4-week, mid-August 2000 average was 74.6%, based on RigData's 1,022 rigs running and 1,370 available land rigs in 2000 from the 48th Annual Reed-Hycalog Rig Census.

Wages, dayrates

Although rig demand and day rates have flattened on lower commodity prices in July, rig day rate increases from 2000 through the second quarter 2001 have been dramatic.

A simple average of reported US day rates for all land rig classes increased from just under $5,000 in first quarter 1999 to $10,000 in the second quarter 2001 (the Land Rig Newsletter, July 2001, p.2).

Drilling companies have reported record earnings, making as much money during the first half of 2001 as they did all of last year.

During the second quarter 2001, operating margins were higher than actual day rates 2 years ago. Grey Wolf reports that it will enter 2002 with 22 rigs under term contacts, with average daily margins in excess of $7,000.

David Wehlmann, senior vice-president, Grey Wolf Inc. said, "The current spot market price for 1,000-3,000 hp rigs currently range $ 12,000-17,000. Grey Wolf expects to have an average 94 rigs running in the third quarter 2001, which is the extent of our forecast."

When asked about wages, Wehlmann said, "We had a pay increase last September and again in June 2001, which combined, totaled 20%. We see no additional wage increases, now that the rig market is softening."

Richard Mason of the Land Rig Newsletter commented recently that people in the industry always complain about manpower and having a hard time finding skilled workers. We've heard this in 1978, in the 1980s and we're hearing it now.

However, when commodity prices and rig day rates go up as dramatically as they have during the past year, the drilling contractors come through, delivering rigs and crews. "Roughly speaking we've seen the land rig fleet go from 1,000 to 1,500 rigs, or 50% increase in 18 months, which is truly phenomenal," said Mason.

Consolidation and valuation

Patterson Energy Inc. and UTI Energy Corp. completed their merger in May 2001, creating Patterson-UTI Energy Inc., North America's second largest drilling contractor with $2.2 billion combined market value and 302 land-based rigs, 286 located in the US …