North America

United States

August 1999 Vol. 220 No. 8
Feature Article

NORTH AMERICA

Nowhere to go but up

Despite a 20% increase in completions the second half, U.S. drilling is on target for a 66-year low. Canada has fared better, especially in East Coast offshore projects, and Mexico will have a mediocre year

United States

Collapsing oil prices and operator consolidations have contributed to what could become the lowest level for U.S. drilling in 66 years. Indeed, the pessimism has been so pervasive that some operators still do not plan to increase activity in the second half of 1999, despite a near doubling of oil prices since the beginning of the year. However, there are several indications that the worst is over and that a moderate recovery is imminent.

To anybody watching the weekly rig count figures, it was abundantly clear that 1999 was going to be an awful year when the figures reported by Baker Hughes plummeted to only 488 active rigs in April. This was the lowest number of rigs operating since the company began the count in 1944. But back then, rigs were counted in thousands, not hundreds.

To get a truer indication of how low U.S. drilling has fallen, it was necessary to consult World Oil’s predecessor, The Oil Weekly. And if the forecast below holds, the last time drilling was lower was in 1933 during the Great Depression when only 12,170 wells were drilled.

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. A summary of World Oil’s revised 1999 forecast include:

The drilling of 9,462 wells the second half, a 20% increase from the first six months.
Full-year 1999 drilling of 17,329 wells and 95 million feet of hole, both down about 32% from last year.
Even with the projected 55-well increase the final six months, Gulf of Mexico drilling will be down 15% from 1998.
An average of 630 rigs working the second half, bringing the yearly average to 584 rigs.

Midyear revision, 1999 U.S. drilling forecast
		1999 wells			1999 footage (1,000 ft)
State or district		First half	Second half	Year	First half	Second half	Year

Alabama¹		78	76	154	300	292	592
Alaska		52	47	99	421	381	802
Alaska-offshore²		3	1	4	29	10	39
Arkansas		52	65	117	318	398	716
California		600	680	1,280	1,297	1,469	2,766
California-offshore²		3	14	17	16	74	90
Colorado		250	285	535	1,269	1,446	2,715
Gulf of Mexico²		370	425	795	3,411	3,919	7,330
Illinois		162	170	332	400	420	820
Indiana		44	50	94	77	88	165
Kansas		215	275	490	793	1,015	1,808
Kentucky		312	380	692	706	860	1,566
Louisiana¹		373	422	795	2,923	3,315	6,238
	North	231	260	491	1,307	1,471	2,778
	South	142	162	304	1,616	1,844	3,460
Michigan		162	200	362	300	370	670
Mississippi¹		50	65	115	448	583	1,031
Montana		69	96	165	325	452	777
Nebraska		4	11	15	20	55	75
New Mexico		383	511	894	2,351	3,137	5,488
New York		41	45	86	106	116	222
North Dakota		22	55	77	210	524	734
Ohio		213	248	461	994	1,158	2,152
Oklahoma		622	650	1,272	4,011	4,191	8,202
Pennsylvania		415	460	875	1,606	1,781	3,387
South Dakota		4	6	10	23	34	57
Tennessee		40	56	96	79	111	190
Texas¹		2,277	2,898	5,175	15,853	19,997	35,850
	Dist. 1	82	96	178	543	636	1,179
	Dist. 2	199	221	420	1,363	1,514	2,877
	Dist. 3	224	270	494	1,826	2,201	4,027
	Dist. 4	374	413	787	3,308	3,653	6,961
	Dist. 5	98	128	226	889	1,161	2,050
	Dist. 6	223	275	498	1,956	2,412	4,368
	Dist. 7B	172	200	372	643	748	1,391
	Dist. 7C	193	224	417	1,197	1,389	2,586
	Dist. 8	239	397	636	1,608	2,671	4,279
	Dist. 8A	113	213	326	638	1,203	1,841
	Dist. 9	159	204	363	678	870	1,548
	Dist. 10	201	257	458	1,204	1,539	2,743
Utah		118	142	260	615	741	1,356
Virginia		121	178	299	293	431	724
West Virginia		289	350	639	1,184	1,434	2,618
Wyoming		503	579	1,082	2,860	3,292	6,152
Others³		20	22	42	64	71	135

Total U.S.		7,867	9,462	17,329	43,302	52,165	95,467
¹ Excludes state and federal offshore wells, which are included in the GOM total.
² Includes state and federal offshore wells.
³ Includes Arizona, Florida, Georgia, Maryland, Missouri, Nevada and Oregon.

Prices. The key to a recovery is oil price, and as discussed in last February’s issue, the fundamentals of oil supply and demand suggested that West Texas Intermediate (WTI) crude prices would reach $20 by mid-year. They ended June just $0.70 shy of the mark. And while a reduction in Opec production quotas is credited for much of the price rise, it actually was a tightening in supply, mostly through inventory contractions, that caused the improvement.

For some industry watchers, the concern for the rest of this year is whether Opec members will start cheating and undermine current oil prices. However, with tight supplies and world demand that is inching up, there should be room for some fudging by Opec. Conversely, continued rigorous compliance by Opec could conceivably push WTI into the $26 to $28 range by year-end.

Wellhead prices for natural gas should stay around $2 per Mcf, or about 37% above those seen during the previous mild winter when underground storage volumes undercut prices. This assumes a normal winter and increased demand by the industrial sector.

On the demand side, the U.S. Energy Information Administration (EIA) projects world oil demand to grow by about 1.2 million bpd in 1999, and by another 1.7 million bpd in 2000. EIA assumes that overall Asian oil demand will begin recovering this year from the sharp slowdown seen last year, and that the recovery continues through next year. However, the growth rates in petroleum demand experienced before the region’s recent economic crisis likely will not return until sometime after 2000.

Operator surveys. Although participation in World Oil’s operator survey was down from prior years, probably due to restructuring and consolidation, companies responding were bullish in their plans for the next six months. The 16 companies with major drilling programs and 175 independents said they would raise overall drilling levels by 68% the last half.

Operators’ focus will be on field development and gas drilling where activity levels will rise 62% and 76%, respectively. For the majors, 96% of their wells will be development and 64% will target gas. The independents say 69% of second half drilling will be development and that gas will be the objective for 56% of them. And while exploration will receive less emphasis, both groups still plan to more than double wildcat drilling.

Salomon Smith Barney’s mid-year survey of operators’ E&P expenditures also saw a decrease in the number of respondents. And since the survey covers yearly plans, it continues to indicate a steep drop in 1999 spending. U.S. E&P expenditures are estimated to contract by 32% this year, and both majors and independents have reduced investment plans significantly in the past six months.

However, the rebound in oil and gas prices since March is beginning to impact spending plans. The Salomon survey found that 52% of the independents and 63% of the majors are currently reviewing their plans for 1999. And of these companies, 83% of the independents and 50% of the majors say they will raise those 1999 budgets.

Operators’ oil price assumptions for 1999 have risen from $14.67 per bbl for WTI last December to $15.54 currently, which is consistent with the average price during the first half. However, these projections are below an $18-per-bbl average for the rest of the year, as suggested by current futures prices. This demonstrates a cautious reaction to recent oil price increases.

Operators’ gas price projections have held steady at about $2.00 per Mcf, closely matching actual prices. Again, futures suggest a $2.50 gas price for the coming 12 months, which indicates that E&P companies are being conservative about near-term trends.