WORLDWIDE DRILLING

Status quo persists outside U.S.

Economic and geopolitical events extended largely beyond OPEC’s control last year, particularly during the last six months. As a consequence, the cartel’s carefully titrated production quotas began to unravel, and oil and gas prices slipped substantially. Fortunately, the long-term fundamentals of supply and demand remained relatively sound enough to institute a price floor at about $18/bbl.

Not surprisingly, drilling levels began to slow down, most notably in North and South America, with some minor reductions also experienced in Africa and the Middle East. Nevertheless, drilling outside the U.S. managed to rise 4.5%, to 42,580 wells. This year, the outlook calls for an 8.1% decline to 39,120 wells. It should be noted that if Canada were left out of the total, then the rest of the world would be up 1%. Indeed, we expect increases of varying size in five out of eight regions: Western Europe, Eastern Europe, Africa, the Far East and South Pacific.

North America

While lower oil and gas prices precluded the region from setting another drilling record last year, activity levels were still very solid. Wells drilled outside the U.S. totaled 18,467, which is not very far off 2000’s figure of 18,755.

Finding and developing new natural gas reserves remained the leading factor in Canada’s drilling efforts, as well as in Mexican activity. Cuban drilling was focused on oil. This year, North American drilling outside the U.S. will decline 19.1%, to 14,936 wells. However, that figure is subject to change, depending on geopolitical events.

Canada. Lower oil and gas prices, particularly in the aftermath of Sept. 11, have taken the steam out of Canada’s record-breaking pace. Preliminary data compiled by the Canadian Association of Petroleum Producers (CAPP) and other entities show that the country’s operators were close to setting a new record last year, with approximately 18,000 wells tallied. It will take several more months before the final figures are known. If not for the post-Sept. 11 economic slowdown and lower prices, Canadian drilling could easily have approached 19,000 wells or higher.

Nevertheless, companies are now reining in their drilling programs in a wait-and-see mode that will last until economic and political trends become more apparent at mid-year. Even so, our forecast is for a respectable 14,400 wells this year, and some groups, like CAPP, are calling for a figure closer to 15,000 wells. Compared to levels 10 years ago, this is a very good activity level, yet the many equipment and service companies that ramped up for record efforts do not seem to be comforted by such statistics.

Once again, gas was very dominant in Alberta’s activity. Among 13,623 wells drilled last year, there were 9,174 gas wells, equal to 67% of all activity. Alberta’s Department of Energy predicts that 12,400 wells will be drilled in the province during 2002, including 3,400 wildcats and appraisals. In neighboring Saskatchewan, there were 3,324 wells drilled, including 1,682 oil completions and 1,356 gas wells. The Energy and Mines Department has forecast a one-third drop in activity this year, to 2,200 wells, of which 400, or 18%, will be exploratory. Elsewhere, Manitoba’s Petroleum Branch says that drilling will drop to 75 wells from 104, with 15 exploratory wells expected. Over in New Brunswick, the Department of Natural Resources and Energy reported a very busy exploration year that focused on natural gas. A near-doubling to 15 wells is forecast this year.

Mexico. A push by state firm Pemex to develop natural gas fields (see related articles in World Oil, October and November 2001) has raised drilling levels considerably. Last year, wells drilled totaled 436, for a remarkable 76.5% increase. Within the total, offshore wells held steady at the previous year’s level of 29, equal to just 6.7% of total activity.

The low level of offshore wells reflects the shift away from oil activity in the Bay of Campeche toward gas development onshore. Centerpiece of the gas effort is the Burgos basin, where the Northern Region of Pemex has a multi-year program underway. Indeed, the number of gas wells drilled last year rose an astonishing 66.2%, to 344.

The forecast this year specifies a 13.5% boost in drilling, to 495 wells. Offshore activity is expected to recover back to nearly normal levels, with a 55% gain to 45 wells predicted. There will be 75 exploration wells, including 60 onshore.

Cuba. As Canadian operators continue to rehabilitate old oil fields and appraise new extensions to them, the drilling rate remains relatively high for this country. The Ministry of Basic Industry reports that there were 25 wells drilled, or one more well than 2000’s total. Onshore, 24 wells, including 22 oil completions, were drilled for 201,320 ft. One offshore wildcat was a dry hole drilled to 13,525 ft. This year, 30 wells are slated, all onshore. Four exploratory tests will be included.

South America

Blossoming receipts from high oil prices in 1999 and 2000 fueled a spending spree last year, prompting a 14% gain in wells drilled to 3,552. Most of the major countries posted drilling gains. By contrast, 2002 should be a year of diminished expectations. The three largest countries – Venezuela, Argentina and Brazil – will all register double-digit declines. Overall, South America will see activity shrink 12%, to 3,133 wells.

Venezuela. The country continues to struggle with the effects of impulsive meddling in petroleum affairs by President Hugo Chávez. A new hydrocarbons law devised by Chávez and signed into law last December resulted in heated criticism from private and foreign operators. They complained that the law is hostile to private investment. Thus, Energy Minister Alvaro Silva last month said that the administration is willing to clarify "polemic elements." Meanwhile, state firm PDVSA said it would cut 8% of its workforce, or 3,000 employees, from all departments.

All the uncertainties about policies are affecting drilling activity. Wells drilled stayed roughly even last year, but the 2002 outlook calls for a 20% decline to 1,028 wells.

Argentina. The country has been poised to surpass Venezuela as the continent’s leading driller this year, but that momentum may be halted by the current economic crisis. Staggering inflation and empty government coffers had prompted officials last month to propose a 20% emergency tax on oil exports. E&P firms protested, saying such action would harm activity levels and shut in marginal oil fields. As an alternative, officials then proposed that oil companies make a $1.2-billion "contribution" to government accounts. At press time, the matter was under negotiation. Meanwhile, drilling rose 19% last year. A 10% decline to 1,125 wells is forecast for 2002.

Brazil. Higher oil prices certainly affected Brazilian drilling activity positively. Wells drilled hit a 12-year high in 2001, totaling 568. This level was 33% greater than the 2000 total. Offshore wells totaled 155, up 28%.

Following the success of its third bidding round last June, regulator ANP will host a fourth round in June 2002. There are 54 blocks on offer in 18 sedimentary basins. The blocks cover a variety of acreage, ranging from deepwater tracts to mature basins. Despite successful bidding rounds, good exploratory drilling results and ongoing field developments, lower oil prices are having an effect on capital spending. Accordingly, ANP forecasts a 13% decline to 495 wells, including 129 offshore.

Colombia. Drilling is estimated to have risen 11%, to 117 wells. Rig activity also rose 9%, to 15.3 working units per month. The outlook for 2002 specifies a small decline, to 110 wells, reflecting cautious operator attitudes spurred by lower oil prices.

The single largest threat to vigorous upstream activities remains violence launched by guerillas and local tribesmen. Nevertheless, national oil firm Ecopetrol said there are plans to invest $160 million to explore 20 oil-prone geologic structures. Ecopetrol last year signed 30 new exploration contracts with private companies, vs. 32 in 2000.

Western Europe

Last year’s activity appears to have exceeded expectations. Wells drilled rose 14%, to 764. Six of eight countries with significant drilling activity tallied increases. This year, a 6.7% increase to 815 wells is forecast. Nevertheless, North Sea service / supply firms are pursuing expansion into international markets, to cope with a decline in major projects perceived for the future.

United Kingdom. Drilling fared better than our forecast last August expected. Preliminary data from the Department of Trade and Industry show that wells drilled rose 15%, to 345. Of that total, offshore activity accounted for 320 wells. Exploratory drilling comprised 20%, or 70 wells, including 62 offshore. It was the first increase in exploratory drilling since 1996. Kerr-McGee announced that it will spend $310 million, or 40% of its 2002 E&P capital budget, on the UK North Sea, including two new field developments, Gunnison and Tullich. This year, DTI predicts an 11% gain, to 384 wells, of which 360 will be offshore. There should be 72 exploratory wells, including 60 offshore.

Norway. In terms of number of wells, Norwegian drilling remained nearly flat last year. However, the recovery in exploratory drilling’s share of the total – which began in 2000 – continued in 2001. Exploratory wells jumped 29%, to 31, and they constituted 15% of overall activity, compared to the 10% share experienced in the second half of the 1990s. Last December, the government announced that 32 blocks or partial blocks would be included in the 17th Licensing Round. Awards will be made in second-half 2002. The drilling forecast this year calls for 200 wells, of which 25 to 27 should be exploratory.

Eastern Europe/FSU

Recovery of the region’s upstream sector continued, as wells drilled increased 19%, to 5,345. Operators again plowed windfall revenues from higher oil prices back into new drilling and production rehabilitation. Oil prices are now lower, but they are still strong enough to sustain the higher drilling level. Thus, a further 2.4% gain to 5,472 wells is forecast.

Russia. Nowhere in the region has the effect of higher oil prices on activity been greater than in Russia. Operators last year boosted drilling 15%, to an estimated 4,400 wells, up from 3,835 wells in 2002 and only 2,696 wells in 1999.

Some additional hefty increases in capital spending are planned this year, particularly by the larger firms, including LUKoil, Yukos and Sibneft. LUKoil will spend $1.5 billion on upstream projects, followed by Yukos at $1 billion and Sibneft with $600 million. Accordingly, Russian drilling overall should rise 2.2%, to 4,960 wells.

Other FSU countries. The outlook for the remainder of the FSU is essentially flat. In the other 14 republics combined, drilling was up 61%, at 455 wells. Another 450 wells are expected this year. Kazakhstan will again drill more than 200 wells, and an ENI-led consortium will continue to appraise the giant Kashagan field. Other significant drillers (50 or more wells) will include Azerbaijan and Ukraine.

Countries outside the FSU. The recovery in drilling rates predicted for Eastern European nations materialized as expected. Drilling outside the FSU increased 30%. This year a 4% gain to 512 wells is forecast. In Romania, state firm Petrom is being restructured to streamline operations and improve bottomline results. Northward, in Poland, operators drilled 57 wells. Within the total, foreign oil companies drilled six wells. This year, 71 wells are expected nationwide.

Africa

A steady string of discoveries and numerous major development projects underway should ensure that African activity levels remain high. Wells drilled rose 9% in 2001, and a further gain of 6.5% to 819 wells is forecast this year. Offshore drilling is an important component of African activity, and an 8% increase to 300 wells is expected for that sector.

Egypt. Officials are fast-tracking development of gas fields as part of a gas export scheme. A new governmental firm, Egyptian Natural Gas Holding Co., has taken over supervision of the sector from state firm Egyptian National Petroleum Corp. The new entity allows a more focused approach to gas, separate from oil. Officials expect great interest from operators in the current E&P licensing round in the Mediterranean offshore. The round’s deadline for offers was set for February 28, 2002. In the Western Desert, Apache Corp. continues to hit significant discoveries. Nationwide, drilling was level, at 197 wells. A 20% jump (including 81 wells offshore) is forecast this year by EGPC.

Algeria. State-run Sonatrach has announced a corporate restructuring, including a decentralization of departments. The action strives to enhance management’s ability to determine policy and strategies, while also streamlining chains of command and improving information flow. Drilling increased 28% last year, but a 6% decline is expected during 2002. Nevertheless, the 165-well level is still relatively robust, bolstered by major, ongoing field development projects.

Nigeria. Activity finished higher than expected, registering a 29% gain to about 110 wells. In the short term, that momentum will not be sustained, as only 95 wells are forecast this year. That having been said, Shell reinforced the medium-to-long-term picture by announcing a new $7.5-billion investment program. Much of the spending will go toward helping the country double its reserves by 2010. Additional funds will go toward the program of eliminating gas flaring by 2008.

Middle East

Last year’s slip in oil prices put the brakes on Middle Eastern spending in the second half. Drilling rates slowed, so that the region finished just ahead of 2000’s pace, at 1,289 wells. This year, a small decline to 1,245 wells is likely.

Oman. The sultanate retained a firm grip on its role as the region’s leading driller. An estimated 345 wells were drilled, or 8% higher than the previous year. For 2002, drilling activity is expected to remain even. Low oil prices have not deterred Oman’s plans to raise production capacity. Two new concessions were being negotiated with two oil majors, with a signing expected in the first quarter. The concessions are located in the north, where most of Oman’s proven oil reserves are located.

Saudi Arabia. Wells drilled were up slightly, at 265. The number of working rigs averaged 30, up from 25 a year earlier. Saudi Aramco plans to continue its activity at about the same level as in 2001, although a small reduction in wells drilled may occur. Meanwhile, activity within the new natural gas concessions will be little or none, given that the operators and the government had yet to sign final deals for the tracts at press time. Planning for the projects continued under letters of intent. Elsewhere, three deep exploration wells are planned during fourth-quarter 2002 for Dora field in the Neutral Zone shared with Kuwait.

Iran. Although exploratory work continues to comprise 10% or less of total activity, several firms are nonetheless actively shooting seismic and/or drilling wildcats. One example is China’s Sinopec, which is exploring the Zavareh-Kashan Block of central Iran. Other operators include OMV, Norsk Hydro and Italy’s Edison Gas. Drilling activity totaled 142 wells last year, but the 2002 forecast calls for only 120 wells. In an interesting twist, onshore wells will slide to 77 from 125, but offshore holes will jump to 43 from 17.

Far East

Dominated by Chinese drilling, activity increased 2%, to 12,150 wells. On a percentage basis, nice gains were posted last year by Brunei and Indonesia. This year, wells drilled should rise 2.4%, to just below 12,450. Outside of China, the region will be up 11%.

China. Still operating at full drilling capacity, China is losing ground in its battle to regain self-sufficiency in oil production. Nevertheless, there were about 10,200 wells drilled last year, up from roughly 10,050 in 2000. Offshore wells were up 25%, at 65. China is expected to be an exploration hotspot this year. Among the state companies, 920 wildcats and appraisals are planned, including 600 by PetroChina, 270 by Sinopec and 50 by CNOOC. In turn, the increased exploration effort will boost drilling overall by about 1%, to 10,275 wells.

Indonesia. The new oil and gas bill was signed into law by President Megawati. It revokes state-run Pertamina’s monopoly over upstream activity, converting the firm into a limited liability company. A new agency will take over management of upstream tracts. The government will also give higher revenue splits to operators of the 17 blocks that it will offer during 2002. Drilling was up about 15% last year. Activity is forecast to gain another 4% this year.

Malaysia. After plunging 43% last year, Malaysian drilling is set to stage a major comeback during 2002. State firm Petronas said that it expects 169 wells this year, up from only 36 wells last year. Much of the gain will come from an ongoing satellite fields program conducted by ExxonMobil offshore Terengganu. After an initial small platform installation last year, four more platforms will be installed during 2002, with drilling to follow. The platforms will be brought onstream slowly, from 2002 into 2003.

South Pacific

Improvements in Australia and New Zealand pushed the region 7% higher last year, to 244 wells. A similar performance is expected this year, with 263 wells forecast. Onshore work will be responsible for most of the increase.

Australia. Activity posted a second straight gain, registering 216 wells, including 81 offshore. A further increase to 233 wells is expected this year. Onshore activity should grow to 148 wells, while offshore wells will be up slightly at 85. Last October, the Western Australia government released three prime offshore tracts in state waters for bidding. Awards are set to be made at the end of this month. Onshore, the large gas development projects are continuing in Queensland and South Australia.

Others. Good exploration results continued in New Zealand. The vast majority of activity was onshore, with wells drilled totaling 24 (up 14%). This year, drilling will remain nearly steady, at 22 wells. New Zealand Oil and Gas plans to be active both onshore and offshore.

   In Papua New Guinea, four oil wells were completed onshore last year. The government expects activity to double this year, to eight wells. Again, all the drilling will be conducted onshore. Six of these wells will be wildcats and appraisals.