Oil and Gas Drilling Industry Drivers
One of the key business drivers for drilling operations management is the selection of the drilling rig and the contractor. Most wells in the world are drilled by these contractors on behalf of the E&P operators. Accordingly, Oil and Gas Drilling Industry Drivers lesson discusses the key drivers of rig activity and day rates. It includes a discussion of the rig selection criteria and industry participants that provide onshore and offshore rigs.
The Business Drivers lesson consists of the following topics
- Learning Objectives
- Key Driver of Industry Drilling Activity
- Oilfield Services (OFS) Industry Perspective
- Global Drilling Activity & Wells
- Rig activity up but growth has slowed
- Historical Land Rig Activity and Dayrate
- Current Offshore Rig Utilization and Dayrate
- Offshore Rig Dayrate Example
- Oilfield Services (OFS) Segment Expenditures
- Rig Contractors
- Rig & Equipment Manufacturers
- OFS Technical Services
- Rig Contracting – Key Drivers
- Rig Selection – Land Rigs
- Rig Selection – Offshore Rigs
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Oil & Gas Drilling Industry Drivers: Prices are the Key Driver of Drilling Activity
The primary factor that drives drilling activity is the E&P operator’s perception of future oil and gas prices. The late 1990’s and early 2000’s saw ever-increasing crude oil prices fueled by:
- shortages of crude oil production capacity in both OPEC and non-OPEC producers, and
- increasing demand – especially in non-OECD countries like China and India.
Demand drives prices, prices drive E&P budgets, and the chart shows the dramatic increase in global E&P operator budgets — to the range of $300 billion US/year in 2006-7.
Crude oil prices in the recent cycle seem to have peaked in July 2008 at over $145 per barrel. A price retreat later in 2008 has had an impact on drilling activity in the US.
As will be seen later, the US accounts for about half the wells drilled. It remains to be seen whether this price retreat will permanently affect all E&P operator budgets, but it has already slowed US shale gas drilling which requires numerous drilling rigs and pumping services for cementing and stimulation.
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Oil & Gas Drilling Industry Drivers: Oilfield Services Industry Perspective
The oilfield services (OFS) industry provides the assets, technology, manpower and project management that enables E&P operators to explore for, drill and develop oil and gas fields.
Oilfield service company revenues are essentially the capital expenditures of all global E&P operators, whether National Oil Companies (NOCs), Integrated Oil Companies (IOCs), or independents.
The OFS industry has been characterized by a series of boom and bust cycles since the 1970’s that have made the management teams of both large and small OFS companies very conservative.
As the chart shows, at the end of the Arab Oil Embargo in 1974 the US rig count was below 1,500. From 1978 to the beginning of 1981 domestic crude oil prices exploded. At that time, high prices and forecasts of crude oil prices in excess of $100 per barrel fueled a drilling frenzy. By 1982 the number of rotary rigs running in the US alone had peaked at 4,530.
It is important to note that the peak in drilling occurred over a year after oil prices had entered a steep decline, which continued until the 1986 price collapse.
E&P operators cut budgets, reduced activity, cut staff and eliminated recruiting for six to seven years. The OFS industry was reduced to a shadow of its former self and there were numerous consolidations, mergers and acquiring done to keep the industry alive. The industry lost over 400,000 jobs in this last severe downturn.
Wells Planned
The second key driver of drilling and OFS activity is the number of wells planned.
As examples in 2008, outside the US, World Oil forecasts activity of just under 53,000 wells. Key observations are:
- Canadian has had a drop in gas drilling caused by weak North American demand, soft prices and a new, increased tax scheme for Canadian producers.
- China’s growth is led by a surge in coal bed methane (CBM) drilling and an aggressive boost in offshore drilling to secure fossil fuels for their future economic growth.
- Growth is expected to continue from the NOCs. NOC spending is somewhat less sensitive to oil price changes. Their spending is generally tied to political/economic drivers.
Note that offshore activity should be approximately 3,300 of the total wells;
- Led regionally by offshore Angola and Nigeria,
- Far East countries are expected to increase their offshore programs, and
- Some modest expansion in ultra-deep water is forecast in the Gulf of Mexico and Brazil.
Generally speaking, offshore wells have a higher cost than onshore wells.
Oil & Gas Drilling Industry Drivers: US Drilling Activity and Wells
US operators have demonstrated strong optimism in their drilling plans with a (World Oil) US activity for 2007- 2008 of approximately 53,000 wells, equal to the entire rest of the world.
US drilling practices are very different today than, for example, the previous drilling booms of 1973 and 1979. Then,
- The industry’s focus was on oil exploration. In 1981, the industry drilled over 30,000 dry holes as a testament to that effort;
- Most wells were vertical holes
- Oil wells exceeded gas wells by two to one
As the chart for the US indicates, new technology gives this expansion a very different character, especially the application of horizontal and directional drilling.
Today, the US the industry focus is on development of natural gas and unconventional resources development, i.e., shale gas and coal bed methane (CBM). According to the API, gas wells now dominate oil wells two to one.
Directional drilling is used extensively offshore and along the us Gulf Coast. The current leveling in directional drilling activity is due in large part to a recent decline in offshore drilling.
Oil & Gas Drilling Industry Drivers: Rig Activity
Wells drilled translates to active drilling rigs, the most common reported business barometer for the drilling industry and its suppliers.
Baker Hughes has issued a count of rotary rig activity as a service to the oil and gas industry since 1944 when Hughes Tool Company began weekly counts of US and Canadian drilling. Hughes initiated the monthly international rig count in 1975.
The active rig count acts as a leading indicator of demand for OFS products and services used in drilling, completing, producing and processing hydrocarbons.
As the chart indicates, drilling rig count has had fairly steady growth in the US and internationally since 2002.
It also indicates that there is high seasonality to the Canadian rig count because of severe winter weather in Alberta – affecting gas drilling.
Note that the current US rig count peak of approximately 2,000 rigs is less than half the 4,530 rig count peak in 1981.
Historical Land Rig Activity
Drilling rigs are capital intensive pieces of equipment that are leased from drilling rig contractors by their users (E&P operators).
Like other large equipment, especially marine vessels, rigs have a cyclical and fluctuating dayrate charged which depends on the demand for their services and the supply of available drilling rigs.
The term used by the industry is rig utilization rate and the historical chart shows how closely operator dayrate (and corresponding profitability) follows the rig count.
Offshore Rig Dayrate Example
Offshore rigs are complicated, expensive pieces of equipment that take time to design and build. New rig construction by rig contactors could not keep up with the increased demand from operators in the 2004-2008 oil price surge. The number of wells drilled has increased at a 14% annual growth rate in this period.
Offshore rig supply and demand has very different characteristics;
- Supply is essentially inelastic because of the high cost of the rigs, and
- Demand is highly volatile depending on E&P operator budgets and perceptions of future oil price.
As shown in the chart from Matt Simmons International in Houston – a respected industry consulting group that specializes in the OFS industry – tight utilization from 2004-2008 caused semi-submersible rig rates to increase dramatically.
Dayrates for semi-submersible offshore rigs (a very common type of offshore rig) now approach $500,000 US dollars per day – depending where the rig operates in the world.
For the E&P operator, this means that every possible technique is used to make sure each offshore well is effectively planned, drilled as safely and efficiently as possible, and any rig trouble time is kept to a minimum.
Oilfield Services Segment Expenditures
Today, US and European service companies dominate the industry, and with routinely high drilling activity, the US sector has a market value almost four times greater than that of the Europeans.
As shown in the chart above, of the OFS industry expenditures of approximately $200 billion/year at current
activity levels:
- Drilling accounts for about 30%
- Completion and production is 25%
- Other field equipment and supplies is 25% and
- Seismic and data analysis, discussed in the Exploration module, is 20%
The OFS industry can generate operating margins of 30%-50% for the US services – when times are good.
The size of the US market and these margins explain why the US sector is very valuable to the OFS industry.
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Oil & Gas Drilling Industry Drivers: Rig Contractors
Today, most of the global drilling rig fleet is owned by contract drilling companies. Because of drilling rig design and operating complexity, contract drillers tend to focus their efforts on ether onshore or offshore, with a few companies participating in both markets, as shown in the chart above and the list below:
Representative Drilling Rig Contractors- Land (ranked by 2007 market capitalization, from Oil & Gas Journal)
- Nabors Drilling
- Helmerich & Payne
- Patterson UTI
- Grey Wolf Drilling
- Unit Drilling
Representative Drilling Rig Contractors – Offshore (ranked by 2007 market capitalization, from Oil & Gas Journal)
- Transocean (Now includes Global SantaFe)
- Diamond Offshore
- Noble
- Nabors
- ENSCO International
- Pride International
- Rowan Companies Inc
- Hercules
- Parker Drilling
Rig & Equipment Manufacturers
An excellent source for corporate information on the OFS industry is Spears & Associates in Tulsa, Oklahoma. They routinely estimate product line revenues for about 300 public and private OFS companies around the world. Their Annual Oil Market report presents detailed data on 32 different OFS market sectors.
Drilling Rig Equipment Manufacturers
- National Oilwell Varco (NOV) – Market Leader
- Cooper Cameron
- Aker Kvaerner
- Oil States International
- Vetco Gray
- Numerous shipyards in Japan & Korea for offshore drilling rigs
Equipment Manufacturers – Drill Bits
- Hughes Christenson
- Smith International
- Grant Prideco
- Halliburton
Wellhead and Downhole Equipment
- Cooper Cameron
- FMC Technologies
- Vetco Gray
- Aker Kvaerner
- John Wood, PLC
Oil Country Tubular Goods (OCTG)
- Tenaris: a Mexican company, listed on NYSE – Market Leader
- V&M
- US Steel
- Grant Prideco
OFS Technical Services
With all the consolidation and mergers in the OFS industry, many companies provide a full spectrum of drilling and completion technical services, as shown in the chart. However, Schlumberger, Halliburton and Baker Hughes dominate this segment
Representative Technical Services segments and companies, include:
Logs and wireline
- Schlumberger
- Halliburton
- Baker Hughes
- Weatherford
Pumping Services – Cement & Stimulation
- Halliburton
- Schlumberger
Drilling mud and additives
- Smith International
- Halliburton
- Baker Hughes
- Newpark Resources
- Tetra Technologies
- BJ Services
Oil & Gas Drilling Industry Drivers – Rig Contracting – (KEY Drivers)
Having the right rig for the right job creates tremendous economic advantages.
- E&P operators are able to use their drilling budgets more efficiently.
- Contractors are better able to match their fleet capabilities with market conditions.
To more effectively use their drilling budgets, E&P operators need:
- Knowledge of rig capabilities including recent contracts and activities.
- Knowledge of rig availability and future commitments.
- The ability to quickly develop multiple contingency drilling scenarios.
- Easy collaboration with joint venture partners, service providers and the rig contractor.
To provide the best service and match their fleet to the market, contractors need:
- Knowledge of upcoming E&P Operator drilling projects
- Clarity on the needed rig capabilities.
- Knowledge of competitors’ rig dispositions and capabilities.
- Knowledge and technology to manage their fleets.
This balanced set of objectives can lead to a well matched set of rigs that help keep day rates at a level to provide a reasonable rate of return to the contractor and reasonable well costs for the operator.
Oil & Gas Drilling Industry Drivers: Rig Selection – Land Rigs
When selecting a land rig, many factors need to be considered by the E&P operator:
- In what type of geographic environment will the well exist?
- How deep will the well be?
- What will the well produce; oil or gas?
- How will the rig need to be set up to produce the oil or gas once the drilling operation is complete.
Once these questions are answered, there are a number of land rig types available to the E&P operator from land rig contractors. They include:
Heavy Land Rigs – This type of rig is setup to drill very deep wells. Heavy land rigs are big and powerful enough to handle the severe duty and the weight of the longer drill-string. These rigs can be at the wellsite for extended periods of time, even years.
Light Land Rigs – This type of rig is suitable for wells that are from zero to 2,100 m (7,000 feet) deep. Rigs in this category are typically easier to setup and require less onboard equipment. They are less permanent than their heavier counterparts.
Heli-Rigs – This type of rig is capable of being disassembled so as to be flown to remote sites by helicopter. This rig type is commonly found in densely wooded jungles or swamp lands.
Mobile Rigs – As the name suggests, these are mobile units, typically mounted on large trucks that travel from site to site to drill very shallow wells. Mobile units can also be used for drilling operations that are not always oil or gas related, such as water or disposal wells.
Oil & Gas Drilling Industry Drivers: Rig Selection – Offshore Rigs
As the chart shows, water depth plays a big part in what type of rig will be used and how an offshore well will be drilled.
The various types of offshore rigs available to the E&P operator are listed below:
- Barge rigs – Built on a large rectangular hull that is anchored over a well, for shallow water.
- Submersible rigs – Platforms that are submerged until the hull rests on the sea floor.
- Jack-up rigs – A mobile drilling platform rests on the sea floor with supporting legs.
- Semi-Submersibles – A floating rig with superstructures supported by columns sitting on hulls or pontoons.
- Drillships – Maritime vessels, fitted with drilling equipment in the center of the hull.
- Platform rigs – Drilling equipment assembled on top of a fixed platform.
Global offshore rig chartering is a significant business, exceeding $10 billion in annual expenditures, and with huge backlogs of new rigs under construction in the 2007-2008 time frame.
Barge Rigs
Barge rigs consist of a large rectangular hull that is anchored over a well and are used only in shallow waters (up to 50 m or 160 feet). The units are not self-propelled and must be towed or pushed by tugboats.
Barge rigs are located primarily in shallow coastal waters, lakes, bays, rivers and marshes. They operate predominantly in the US Gulf of Mexico (GOM), Caspian Sea, Venezuela, Nigeria and Southeast Asia.
Once the rigs are towed to location, the hull is submerged and the rig is anchored to the seabed.
Submersible Rigs
Submersible rigs are platforms that are submerged into the water until the hull rests on the sea floor, once they are towed to the wellsite location.
The units are sunk by partially filling the subsea structure. They can work only in shallow water, as the top of the hull must break the surface by 8 m (25 feet) to provide stability and prevent being capsized by waves.
The hulls contain accommodation space for the crew, supplies, and a drilling derrick.
All seven of the world’s submersibles were built between 1979 and 1983 and currently work in the GOM.
Jack-up Rigs
Jackups constitute more than half of all offshore rigs. A jack-up is a type of mobile offshore oil and gas drilling platform that is able to stand on the sea floor, resting on a number of supporting legs. The most popular design today has three legs. Jack-ups are differentiated by the leg design and the placement of the drilling derrick structure.
The supporting columns may be moved up and down by a hydraulic or electrical system. During transit, the platform floats on its hull and, typically, is towed to a new location by tugs. Jack-up rigs provide platforms that are more stable than semisubmersibles, but only can be placed in relatively shallow waters, generally less than 300 m (1,000 feet).
They can work in both benign and harsh-weather environments. In the US jack-ups primarily drill for natural gas, while internationally they most often drill for oil.
Depending on market conditions, a newbuild jack-up can cost $125 million. However, construction of a long-legged heavy duty (HD) jack-up can average $200 million–$250 million.
The largest cluster of jack-ups are in the GOM and offshore Mexico. The next-largest area of operations is the North Sea, where the HD units work. Finally, Southeast Asia and West Africa also have a sizable number of jack-ups.
Semi-Submersible Rigs
Semisubmersibles account for roughly one-third of all offshore drilling.
Semi-Submersible Rigs (Semis) are mobile structures. Their superstructures are supported by columns sitting on hulls or pontoons which are ballasted (flooded or un-flooded with water to maintain a level plane) below the water surface.
They provide excellent stability in rough, deep seas. They are free-floating drilling (and production) units that are kept in place by mooring systems (anchored to the seabed), dynamic positioning (GPS), or a combination of the two.
Semi-submersible platforms have legs of sufficient buoyancy to cause the structure to float, but are of a weight sufficient to keep the structure upright. Semi-submersibles can be used in depths from 180m (600 feet) up to 10,500 m (35,000 feet).
Conventionally moored units are generally preferred for development drilling because of their reliability, as the mooring lines can be more effective in keeping the rig in position. Semi-submersibles are also preferred over drillships for development drilling, because of their superior motion stabilization characteristics.
Construction cost for a new semisubmersible is $450 million – $550 million and typically takes three years to complete.
Semisubmersibles are mostly concentrated in the North Sea and the GOM, with a significant presence in Brazil, Asia Pacific and West Africa.
Drillships
Drillships are maritime vessels that have been fitted with drilling apparatus in the center of the hull. Most often these ships are used for exploratory drilling of new oil or gas wells in deep water. Drillships are often built on a modified tanker hull and outfitted with a dynamic positioning system to maintain its relative position over the well.
Drillships are able to drill in water depths of over 2,000 m (6,500 feet). In order to drill, a marine riser is lowered to the seabed with a blow out preventer at the bottom. High-specification units can now operate in up to 3,000m (10,000 feet) of water.
Given that so much of the structure of the rig is above the water line and the shape of the hull versus a square or triangle, these rigs tend to experience greater degrees of motion. Typically, they are found in mild-water environments, as the rigs are unable to work in harsh environments.
The largest concentration is offshore Brazil, followed by the deep GOM, Asia Pacific and West Africa, where the lack of offshore drilling infrastructure makes less mobile rigs impractical.
Construction costs have averaged $400 million–$450 million, and the rig takes typically three years to build
Platform Rigs
Platform rigs consist of drilling equipment and machinery assembled on top of a fixed platform.
Fixed platforms are the steel or concrete towers that sit on the ocean floor to provide the foundation where the platform rig is placed. The platforms, which are typically used for production operations, are owned by the oil company, and the platform rigs are owned and/or managed by drilling contractors.
The platform rigs are temporary and will stay on location long enough to drill all the wells of the planned drilling program, often drilling deviated wells from a single offshore platform.
Platform rigs are used in all offshore regions where drilling occurs, with the greatest number being located in the more mature basins such as the North Sea and GOM.
The advantages of using a platform drilling rig reside mostly in the costs. Dayrate ranges for platform rigs are usually a significant discount to jackup dayrates.
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