ALAN LAWS, ANALYST, MERRILL LYNCH: Let me get started in here for the afternoon sessions. We're going to start off with one of the larger drillers in North America, Patterson-UTI Energy. Mark Siegel, the Chairman, is going to do the presentation. Mark, come and tell us about what's going on with Patterson.
MARK SIEGEL, CHAIRMAN, PATTERSON-UTI ENERGY, INC.: Alan, thank you, and thank you to Merrill Lynch. We're delighted to be here today. First, a quick look, please, at our forward-looking statements disclaimer. Having satisfied our counsel, we can move along.
Our presentation today is in five parts, as you see. We'll first take a look at the commodity environment, the land drilling industries then our drilling business, in particular; our other businesses and then, most importantly, Patterson as an investment.
First, we're going to start out with the commodity environment, and I (inaudible) that this cartoon is dated 2004, when we first started to have public comment about oil prices. That's probably very understandable because, if you look at this chart which is covering 18 years, 18.5 years, you can see that for the first 10 years we were pretty flat at $20 for oil. Then we went to $30 in 2000, $40 in 2004, $50 in '05, $60 in '06 and $70 in '07. I really like the fact that those numbers work out that way. And as you can see, the average of the last 2.5 years is at $83.
We think that those significantly different oil prices over that relatively short period, that $100 kind of oil price, reflects basically four key factors -- strong worldwide demand with increasing consumption by the industrializing nations -- we'll take a little deeper look at that next; at the ever-increasing challenge of overcoming depletion; the weak dollar versus the euro since '02; and, obviously, a small premium, we think, for possible supply disruption.
As you look at that, you see that basically in the United States we consume approximately 25 barrels per person per year. In South Korea and Japan, it's about 12.5 to 13 barrels per year, or 15 barrels per year, pardon me. Then you see China and India just starting to get on the chart, and then you start to think about, that is per person, these numbers. So you start to realize where that increasing demand is coming from and how, fundamentally, increases in the demand from China and India far eclipse whatever conservation efforts are going on here.
Natural gas -- pretty much the same kind of story that we've seen in terms of oil prices, a very steady period for -- as you can see, for pretty much 10 years, from 1990 to 1999. We finally kind of crossed in 2001 the -- we got to the $4 point. And then, you can see that over the last 2.5 years, about a $7.03 price. We think that those prices reflect (technical difficulty) [expectations] of -- and the futures market. As you can see here, those expectations remain for gas to go -- to be at about $8 at the end of the year and about $9 at the end of next year.
So what we're saying is fundamentally the market is expecting natural gas prices to continue that steady rise that we've seen kind of over the last 20 years, that we were showing on that slide before.
In terms of natural gas prices, there's a ratio that I would like you to take a look at here between oil prices and natural gas prices. And, as you can see, over the last 10 years it's been about an 8.2 kind of ratio between those two. On that basis, gas is cheap on a relative basis. You can see that gas on that same basis would be about $12, a little over $12. Obviously, people can talk about the BTU equivalent of 6 or 7 to 1. But you can see here that natural gas is really selling at a significant discount to oil prices.
Okay. Having looked at the commodities for awhile, I'd like to move onto the land drilling industry. The first thing I'd like to observe about our land drilling industry is that we're the primary source for US natural gas demand, for US natural gas supply. You can see here that 13% comes from offshore, 15% largely is Canadian, some LNG. But basically, if you're kind of operating on the 80/20 rule, it's 80%-plus from land.
In terms of this country's rig count, you can see that we've had a very dramatic change over a very few years. If you kind of look back to 1996, where, in effect, the rig count was a little over 500, and then you look to 2008, almost 2000 rigs, you can see kind of a 4-to-1 change in terms of the rig count. For a very mature industry, I think this really reflects the organic growth that's going on sometimes overlooked by people who are looking at the micro moments.
In terms of the wells drilled, this again reflects that same kind of change that we talked about in terms of the rigs operating, and it corresponds directly with the price of the commodity. Here you can see that we've gone from approximately 7500 wells per year to about 30,000 wells per year as the price of the commodity has changed from, as I said before, in that $2 area to approximately a $7 kind of price range.
Despite the tripling of the number of wells drilled and the quadrupling of the number of rigs running, you can see that production stayed pretty flat. We've recently heard the talk about the [914's] evidencing and the increase in production, but I want you to realize and see that in the context of many, many years, pretty much kind of a 15-year long-term trend of extremely flat production with now, finally, some modest increase that we think is going to be very useful for this country's energy needs.
In terms of the industry, the first thing I'd like you to think about is the industry has significantly consolidated. When I first got into this in 1995, basically it was a very, very fragmented industry. You see now that the top three players have more than 50% of the industry. It has become a significantly more consolidated industry -- not trying to say that it won't consolidate further, but that it is a very different place than it was, in effect, 10-plus years …