OUTLOOK 2005: United States
US Drilling

Drilling activity surge will lead to record year

Drilling levels in 2004 exceeded both our original forecast last February and our midyear revision in August. We see growing confidence by operators that higher oil and gas prices are here to stay, at least for the foreseeable future. While 2004 turned out to be one of the strongest years for US drilling in recent memory, 2005 is shaping up to be the busiest year for new wells since 1985. The only limiting factors in meeting our drilling forecast may be the availability of certain classes of rigs and labor.

As we reported in our mid-year survey, most remaining rig capacity in the US exists with large drilling contractors. Many of these units have not worked in several years. According to Baker Hughes, the active US rig count (both land and offshore) grew from an average of 1,032 rigs in 2003 to 1,189 in 2004. As we enter 2005, there is evidence that the rate of increase in the active rig count is slowing. Currently, there are approximately 1,250 active rigs.

World Oil’s forecast for 2005 includes:

• A 7.4% increase in the number of wells drilled in the US, to 39,958.
• Essentially flat drilling in the Gulf of Mexico drilling, at 830 wells.
• Gulf of Mexico rig utilization numbers will continue to improve, as more rigs leave the region, resulting in a supply shortage heading into 2006.
• The US active rig count will continue to grow slowly, averaging 1,285.

PRICES
We use the firm, Groppe, Long & Littell to forecast oil prices. Last year, they forecast a strong oil price of $31.00/bbl for West Texas Intermediate (WTI). Yet, this theoretically optimistic average still widely missed 2004’s actual wellhead price of $40.48. High oil prices have had little effect on US GDP growth that has been above 3% for the past six quarters.

As we begin 2005, oil inventories remain tight. Some experts question how much excess capacity remains in the major oil producing countries to help meet continued worldwide demand growth. Within OPEC, only Saudi Arabia, Kuwait and the UAE have the capacity to produce in excess of their quotas. None can sustain large increases for extended periods without significant investment and development. In Iraq, insurgents are creating havoc with export capacities, resulting in much lower production numbers than anticipated.

Groppe, Long & Littell believe that current price levels are sustainable, and any disruption in supply will send prices even higher. Their 2005 forecast is for $49.00/bbl, average, for WTI at the wellhead. In contrast, Citigroup Smith Barney found that operators were budgeting for $36.36 oil.

For natural gas, the fundamentals that were in place at the start of 2004 remain. Natural gas will continue to drive the US E&P industry. Our forecast last year of $5.50/MMBtu at Henry Hub was close to the actual average of $5.85. This year, we call for a slight increase, to $6.26. Operators surveyed by Citigroup Smith Barney found that they were budgeting $5.66 for gas. Despite high oil prices, natural gas drilling still accounts for the bulk of activity in the US E&P industry. During 2004, 86% of all wells drilled in the US were searching for natural gas, the same level as seen in 2003. Gas-directed drilling has grown from 55% just 10 years ago.

OPERATOR SURVEYS
This year, World Oil surveyed 16 US major drillers and 102 independents to gauge their level of activity for 2005. Although not a scientific survey, it does represent a large portion of the total wells drilled. Together, the firms plan to increase drilling by 19.4%. Drilling will increase 13.6% for the majors and 48.8% for the independents. As in last year’s forecast, our survey showed that the number of wells is shifting more to the exploration side with 7.3% wildcat wells, compared to 6.2% in 2004.

AREA HIGHLIGHTS
There were an estimated 37,257 wells drilled in the US in 2004, up sharply from the estimated 30,498 drilled in 2003. We expect an even busier year in 2005 and are forecasting a moderate 7.4% increase to 39,958. If our forecast rings true, 2005 will see the largest number of wells drilled in the US since 1985.

In the Gulf of Mexico, we estimate drilling to be essentially flat from the estimated 835 wells drilled in 2004. The most active operator in the GOM in 2004 (as in 2003) was ChevronTexaco, with BP, Apache Corporation, LLOG Exploration and Stone Energy rounding out the top five. Notable increases in drilling activity were seen by ATP Oil & Gas, Bois D’Arc, BP, Houston Exploration, Newfield, Nexen and W&T Offshore. Together, these companies drilled 173 wells, up from 91 in 2003, an increase of 90%. In contrast, Devon Energy, El Paso Production, ExxonMobil, and Unocal lowered their total number of wells drilled to 43 from 100, representing a 57% decrease.

Rig utilization in the GOM continues to rise, now standing at 89%, with 153 rigs under contract out of 172 available. This is up from 76% a year ago. Last year, we reported that GOM utilization increases were largely driven by a reduction in the number of available rigs. While the exodus of rigs from the GOM has slowed, up to 13 more jackups are forecast to leave the region by third-quarter 2005, resulting in a supply shortage heading into 2006.

On land, Texas, Wyoming, Kansas, California, and Pennsylvania are the top five drillers numbers-wise. But that’s not the whole story, as well depths are a major factor. For example, Texas wells average 7,200 feet, whereas California wells average only 2,400 feet deep. Deep gas in south Louisiana pushes well depths to over 10,000 feet.

As in 2003, Texas will see the largest number of new wells of any state, with 600 more wells forecast to be drilled. All but two of the 12 districts show increases. Significant rig increases in 2004 correlate with districts involving strong gas well activity. District 7B, in the Abilene area, will see the largest percentage increase in activity (up 29%), adding 142 wells over 2003. District 8, in the Midland area, will see the largest number of wells drilled in 2005 at 1,632. This is due primarily to a resurgence in Permian basin activity, driven by high oil prices and revitalization of mature fields, where infill and extension drilling are rapidly adding to the well count. We continue to see large gains in District 10, located in the Texas panhandle, where drilling will be up 17% over 2003, to 910 wells. These gains are driven by activity increases in the western Anadarko basin, particularly in the Granite Wash and Morrow gas plays.

The Rocky Mountain region continues to see accelerated demand through improved access to federal lands and increased pipeline capacity. Despite the Bureau of Land Management’s recent halt to an environmental study that would have paved the way for increased drilling on the Rocky Mountain Front, Montana should see the largest percentage gain (24.9%) in the region, representing a 177-well increase over 2004. Utah comes in a close second, with a 21.5% increase representing 115 wells. Activity in Utah continues to be centered in the Uinta basin, primarily in Duchesne and Uintah counties. Colorado will see an 18.0% gain, from an estimated 1,847 wells in 2004 to a forecast of 2,180 in 2005. Many of these will be coalbed methane. Wyoming continues to have the largest well count with some 4,000 wells expected in 2004, up from 3,631 in 2004 (a 10.2% increase). As in recent years, coalbed methane development in Wyoming represents a large portion of all wells drilled. The rig count in the eight-state region of Colorado, Idaho, Montana, New Mexico, North Dakota, South Dakota, Utah and Wyoming has increased 23% in the past year from approximately 229 units under contract last January, to an estimated 281 now.

Activity in the Eastern US continues to grow as well. For instance, New York will have the largest percent gain at over 200%, from 92 wells in 2004 to a forecast 282 in 2005. Fueling this growth is increased activity in shallow gas in the southwestern part of the state. Rounding out activity in this region will be moderate increases in Ohio, Virginia, West Virginia, Pennsylvania and Kentucky. Coalbed methane activity continues to flourish, but there are signs that the rapid growth is beginning to diminish.

About these statistics. World Oil’s tables are produced using the aid of data from a variety of sources, including the American Petroleum Institute, ODS-Petrodata Group, the Texas Railroad Commission and most other state regulatory agencies. In addition, 118 operating companies with drilling programs responded to this year’s survey. Our survey is not scientifically randomized and new environmental and political challenges may emerge at any time. Please note credits and explanations in table footnotes.

World Oil editors try to be as objective as possible in this estimating process to present what they believe is the most current data available. It is realized that sound forecasting can only be as reliable as the base data. In this respect, it should be noted that well counting is a dynamic process and most historical data will be continually updated over a period of several years before the “books are closed” on any given year.  

	Forecast of 2005 US wells and footage to be drilled
	What 16 US major drillers plan for 2005
	What 102 US independents plan for 2005