OUTLOOK 2006: United States
US rotary rigs

2005 makes it a hat trick

Average number of US rotary rigs in operation Click image for enlarged view

In case you are not familiar with the term, a hat trick means three consecutive successes. As the heavy blue line on the graph below shows, with 2003, 2004 and last year all trending upward in a nearly straight line, this year’s forecast was easy: up by the same amount.

The effects on prices cannot be understated, but there’s growing optimism – in trading markets, too large of a consensus usually produces the opposite effect. Hurricane-related effects, while slowly improving, will be felt by markets for most of 2006. This assumes that 2006 will not see the same bad luck. The storms had a divergent effect on prices, with oil prices falling immediately in their wake, while gas prices soared, and are only slowly coming down, despite warm winter weather. The oil price fall that began the day after Katrina hit on August 29, from $70 down to $56 in November, climbed back to $66 by late January, mostly due to the geopolitical worries of Nigeria and Iran.

The October ReedHycalog rig census says that there are barely enough rigs to meet a 16%-up scenario, although that depends on which rig-counting service you look at. For example, a 16% increase using Baker Hughes or Smith International’s 2005 yearly average rig counts would yield a utilization rate of 75% to 76%, while Land Rig (using land only) and RigData yield 105% to 106%. Obviously, rig-counting methods vary widely, and we understand that BHI and Smith are conservative counts.

With apparent declining rig efficiency, a more conservative 12% rise, to 1,548, seems doable.