NORTH AMERICA

The Upturn Continues

The 50% rise in drilling looks spectacular, but it follows a 66-year low in the U.S. However, a turnaround there, a blizzard of Canadian activity and sustained growth in Mexico will produce a strong 2000

United States

As 2000 began, expectations included a year of moderate growth in U.S. drilling. However, activity built steadily during the first half, with the working rig count finishing 15% higher than at year-end 1999. The quicker-than-expected resumption in E&P activity is likely due to the preponderance of independents in the U.S., which are able to respond quicker to changing economics. In addition, if several of the majors had not been burdened by merger and acquisition growing pains, the recovery could have been even sharper.

Also affecting activity growth rates were doubts that oil prices would maintain their lofty levels. However, based on industry’s recent leading indicators, operators are more confident that higher prices will be sustained. As a result, exploration and development work should continue at a brisk clip for the remainder of 2000.

Forecast summary. The following forecast of U.S. drilling was formulated using results from two operator surveys (World Oil’s comprehensive survey of major and independent operators’ drilling plans and Salomon Smith Barney’s survey of operator E&P expenditures) and historical drilling figures furnished by Offshore Data Services, numerous state regulatory agencies and the American Petroleum Institute. These surveys and statistics, plus price projections for oil and gas, are discussed below. Highlights of World Oil’s revised 2000 forecast include:

• Some 14,830 wells are expected in the second half, a 19% increase from the first six months.
• Full-year drilling will total 27,273 wells and 145 million feet of hole, up 46% and 52%, respectively, from last year.
• U.S. Gulf of Mexico drilling will improve 16% during the second half, reaching 1,039 wells for 2000.
• The U.S. rig count will average 960 rigs during the second half, bringing the yearly average to 883 rigs.

Some of the percentage increases cited above may seem extreme; however, one should keep in mind that the upstream sector is still recovering from 1999, the worst year for drilling in more than 65 years. Fortunately, the collapse didn’t last long, leaving most of the infrastructure and equipment intact. Unfortunately, people are a different story and a lack of experienced professionals and skilled drilling hands could be the one deterrent to achieving the forecast.

Exemplified by this well site in Louisiana’s Bossier Sand play, U.S. land drilling will increase 19.3% during second-half 2000. (Photo courtesy of Anadarko Petroleum Co.)

Prices. As world oil prices rose during the year, the average OPEC basket price began to exceed the $22- to $28-target the group had set during its March meeting. Then in June, the group – excluding Iraq – agreed on a quota increase of 708,000 bpd. But since most OPEC members are unable to increase production to take advantage of higher quotas, the net gain probably will not reach 600,000 bpd.

However, Saudi Arabia subsequently announced in July that it would raise production by an additional 500,000 bpd if oil prices remained high. This prompted an immediate drop in spot prices as the NYMEX speculators reacted. But the panic quickly ebbed, and WTI futures prices again exceeded $30.

For the remainder of 2000, the U.S. Energy Information Agency sees world oil prices declining to $27 per bbl by the end of summer, but remaining at or above $25 per bbl ($27 per bbl for WTI) for the rest of 2000. These oil prices, plus a much-reduced concern over the effects of OPEC cheating, should prompt operators to get back to work.

Spot wellhead gas prices are hovering around $4 per Mcf, about double the price at the beginning of the year. While rising crude prices encouraged these higher gas prices, the primary reason has been the slow rate at which gas is being injected into storage for next winter’s heating season. In addition, gas demand has been growing with the expanding economy in recent years. While natural gas imports have been rising, the U.S. could yet run into some short-term supply constraints caused by several years of reduced exploration and drilling. The EIA projects the yearly average price to exceed $3 per Mcf. In nominal terms, this would be the highest annual wellhead price on record and, in inflation-adjusted terms, the highest since 1985.

Operator surveys. Despite a significant increase in drilling during first-half 2000, companies responding to World Oil’s operator survey anticipate even more activity in the second half. The 25 companies with major drilling programs and 190 independents said they would raise overall drilling levels by 31% the last half. Operators continue to focus on field development, which will account for 87% of second-half wells. Gas targets will receive more attention, as respondents plan to boost gas drilling by 71%.

While planning to increase overall drilling by 25%, the majors see even more emphasis on exploration and say wildcat drilling will rise 55%. The independents are more bullish and plan to raise total drilling by 58% and exploration by 57%.

Salomon Smith Barney‘s mid-year survey of operators’ E&P expenditures indicates that U.S. oil companies will boost spending by nearly 23% this year. The firm states that this is the sharpest year-to-year increase since it began the survey 18 years ago. Independents, who are historically quicker to modify their plans, will account for 73% of the increase over 1999. However, the majors are not far behind, as 67% expect second-half spending to exceed the prior six months.

More specifically, the 145 independents responding plan to spend $12.9 billion in 2000, up 30% from the $9.9 billion they spent in 1999. The ten major oil companies surveyed say their 2000 expenditures will rise 13.6% to $9.5 billion, vs. $8.4 billion in 1999.

Operators’ oil price assumptions for 2000 have risen, but remain conservative compared to current NYMEX futures. The independents’ average oil price expectations are now $24.09 per bbl, compared to $19.40 last December. The majors now see oil running at $21.57 this year, up from their earlier $17.75-per-bbl expectation. Since the current 12-month futures strip is about $28, operators are still being cautious on prices. However, Salomon expects that, as time passes, oil companies will gain greater confidence in the outlook for long-term prices above $20, potentially yielding even higher spending in 2001.

Independent operators’ gas price projections are optimistic as well. Long-term (three-year or more) projections are for $3.12 per Mcf. The majors see long-term prices running at $3.32 per Mcf. Because of these gas price expectations, 79% of independents say they will increase the gas portion of their spending compared to 1999. Of the majors, 25% see improved gas prices as a reason for raising spending.