OUTLOOK 2004: United States
US Drilling

Drilling levels will continue upward

Last year saw good drilling levels, at least that's what the numbers indicated. However, despite the fact that global rig activity rose nearly 13% in 2003, the general industry attitude for much of the year was like the half-empty glass. Operators were enjoying high oil and gas prices, but seemed to be anticipating something bad. We were no exception. Based on industry's mind-set and tepid results of our midyear survey of operators' drilling plans, World Oil lowered its forecast for 2003 in August. Had we persevered, we would have missed the final US well total by only 11 wells.

This year will be better, since oil and gas prices are holding at high levels, even after things settled down in Venezuela and Iraq. Further, there is good reason to believe that Iraq will not become a significant player in 2003. As we predicted a year ago, oil inventories in the developed countries remained low throughout 2003, staying near the previous five-year average minimum level. The US Energy Information Agency predicts that stocks will linger near this minimum through 2005. Recent US demand gains, plus growth from China and other non-OECD countries, should keep the demand curve moving upward. However, there is a possibility that should energy prices get too high, they could thwart the “jobless recovery” in the US economy. Although OPEC continues to hold the trump card for supply, if operators are not yet convinced that oil and gas prices are truly demand-related rather than emotionally driven, they likely never will be.

World Oil's forecast for 2004 includes:

• For the US, 33,470 wells are expected, an increase of 9.7%.
• Gulf of Mexico drilling will rise 6.8% to 865 wells.
• The US rig count will average 1,130 during 2004, up 9.6%.

Prices. At least three major factors will contribute to strong oil prices in the US this year. First, the weakened dollar is reducing OPEC members' revenue. The cartel will most likely choose to continue to enjoy the current high prices above the $22 to $28 band, and will not risk stifling demand through still higher prices. Thus, they will probably neither cut nor increase production quotas at their February meeting. Second, oil storage inventories will remain tight as refiners try to minimize expenses. With high prices, companies are reluctant to invest in inventory, but low levels, in turn, contribute to higher prices. Finally, as long as oil stays near $31 or less – which is World Oil's forecast for 2004 – the US economy can continue to grow and strengthen oil demand.

Natural gas will remain the main driver of the US E&P industry this year, which means continued volatility in both prices and drilling activity. Spot prices settled at $5.50 per MMBtu at year end 2003, but the cold snap that hit the northeast earlier this month sent them soaring to as much as $76/MMBtu in the New England states. As spring approaches, gas prices should drop below $5.00, before rising again as storage is rebuilt for 2005. Our average gas price forecast for the US in 2004 is $5.50 at the Henry Hub.

Operator surveys.World Oil's year-end survey of 21 US major drillers (integrated companies and independents with large drilling programs) and 155 independents indicates significantly improved expectations for 2004. Together, the firms plan to increase conventional well drilling by 13.8%. When coalbed methane wells are included, the increase will exceed 21%. The majors will increase total drilling by 19%, the independents say they will be up 32%. The split between exploratory and development drilling this year will shift slightly toward exploration, with 8.2% of planned wells being wildcats as compared to 7.6% during 2003.

Citigroup Smith Barney's (CSB) annual year-end survey of 224 US and international operators indicates that worldwide E&P budgets will rise 4.4% this year. This follows a 9.4% increase in 2003. About two-thirds of the expenditures are earmarked to areas outside the US and Canada, which will account for 22% and 11% of the total, respectively. Respondents' spending plans are based on their average price assumptions of $25.68 per bbl for oil and $4.39 per Mcf for gas.

For the US, the CSB survey indicates total E&P spending of $33.3 billion this year, an increase of only 0.6%. The majors see their spending falling 2% this year, but the independents are more optimistic and project expenditures to rise by 2.4%. Spending by independents is still thought to be limited by the gas merchant firms' cash flow and by a continuing emphasis to maximize investment returns by most of the public independents.

Area highlights. Every state, except perhaps Alabama, drilled more wells in 2003 than in 2002. This national forecast of a 9.7% increase is a conservative estimate relative to the national operators polled, which indicated a 13.8% increase in conventional well drilling. A few highlights follow.

In the Gulf of Mexico, ChevronTexaco was the most active last year, with LLOG, Apache, El Paso and Stone rounding out the top five operators. Year-to year, the number of wells drilled was on par with 2002. A year ago January, the rig fleet utilization rate was at about 66% with 122 rigs under contract. Now, it's 74% with 120 rigs contracted. The small improvement in utilization was due to a decrease in available rigs (186 vs. 163).

To illustrate the effect that gas prices are having, consider that gas-directed drilling in the GOM averaged 81% of all rigs in 2001, 88% in 2002, and increased to an average of 93% in 2003.

According to the Texas Alliance of Energy Producers, Texas finished 2003 with several superlatives, namely, a five-year high of 12,100 drilling permits issued last year, which suggests a strong 2004, as many of these will surely carry over; the highest posted average monthly oil prices at $27.80 (2001 came close with $27.41); the highest year-end rig count. The Alliance only dates back to 1995, but the last two categories remain superlative many years before that.

Texas should see the largest increase in 2004 well drilling of any state, adding some 614 new boreholes. District 10, which is located in the panhandle, will add the most of any district with 129 wells. District 10 will also see the largest percentage increase (31%) in the state for the second year in a row. Drilling the Barnett shale in District 9 is why that area remained the leader in drilling, with 1,220 new-drills in 2003, with Districts 7C and 4 close behind.

   Oklahoma should see a hefty 14% rise in wells, or some 337 new-drills. Utah operators forecast a 27% jump to 571 wells in 2004. Meanwhile, Louisiana will maintain healthy activity levels with a modest 3% increase.

Colorado and New Mexico are continuing to see robust activity, both in conventional gas drilling and in coalbed methane development, with 10% and 11% more activity in 2004, respectively. New Mexico more than doubled the number of reported rigs working there, and these are just for conventional wells. Coalbed wells constitute the majority of activity in that state, Alabama, Colorado, Wyoming and possibly West Virginia.

The biggest change in US drilling patterns is the ongoing and increasing coalbed methane development. These unconventional gas plays now account for 25% of all wells forecast in 2004 according to our operator surveys. Although our survey represents a large portion of all wells drilled, this is not perfectly representative of the US, since it is not a scientifically randomized survey. Nevertheless, the situation in Wyoming makes this barely possible. Last year, Wyoming drilled nearly 2,300 coalbed wells. That state alone could easily drill 5,000 coalbed methane wells, since the environmental issues have been mostly cleared. Some new-found environment challenge could always emerge at any time, which makes forecasting coalbed methane drilling in that state difficult. The 13.5% boost predicted could be very low.

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 other state regulatory agencies. In addition, 175 operating companies with drilling programs responded to this year's survey. Please note credits and explanations in table footnotes.

	Forecast of 2004 US wells and footage to be drilled
	What 21 major drillers1 plan for 2004
	What 155 US independent drillers1 plan for 2004
	Operators active in the Gulf of Mexico, and wells drilled, during 2003

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.