Signs of better times ahead

As the smoke clears from 2009, the impact of the previous year’s financial meltdown on the oil and gas industry can clearly be seen. It became obvious fairly early that our prediction last February of a 20% reduction in US drilling was too optimistic. By our mid-year revision in the August issue of World Oil, we were much closer to the truth, with an estimate of 37,966 wells drilled in the US. According to state permitting agencies and other data, there were actually 37,204 wells drilled in 2009, a 32% drop from 2008. However, the “second Great Depression” predicted by some doomsday prophets never materialized, and recovering oil prices—and, to a lesser extent, gas—are allowing operators to plan for a better year to come.

Our survey of US oil and gas companies yielded surprisingly positive results for 2010. Major operators plan to increase their drilling programs 30% in 2010, and independents are even more optimistic; they expect to drill about 79% more wells than they did last year. This operator enthusiasm doesn’t quite jive with E&P budgets for the US, according to Barclays Capital (see p. 45). Their survey of 197 companies indicates a much less dramatic recovery, with spending expected to rise 12% in 2010. Based on state agencies and other data, we predict a 15% increase in drilling activity. This forecast reflects continued tightness in the credit markets, as well as an uncertain price outlook for natural gas, which still makes up the bulk of US drilling despite a sizable shift of rigs to oil-directed activity last year.

World Oil’s forecast for 2010 shows:

• US drilling activity will see a 15% recovery, to 42,749 wells.
• The US rig count will average 1,463 rigs, up 28% from 2009.
• After falling more than 50% from 2008, Canadian drilling will rise 19% to 9,510 wells.

Forecast of 2010 US wells and footage to be drilled

US prices. As oil dropped into the $30 range in December 2008, OPEC tightened the reins on output, with hard-liners Iran and Venezuela setting the trend. But as oil prices recovered in the second half of 2009, the cartel has had trouble maintaining discipline, and compliance with production targets slipped to 56% in December. Last year, the recovery from low crude prices came later than most people had hoped for, but the price of West Texas Intermediate did work its way back up to over $79/bbl by the end of December, for an average 2009 value of $61.95/bbl. With OPEC production up and little sign of US oil demand recovery, the Houston-based firm Groppe, Long & Littell (GL&L) predicts a 2010 average of $80.50/bbl—not much higher than current prices.

GL&L forecasts a significant upturn in natural gas prices, to an average $7.15/Mcf (Henry Hub). This price, representing a 76% increase from last year’s average of $4.06/Mcf, may depend on a continuation of cold weather forcing the US to work off natural gas storage. However, large volumes of natural gas poised to come online from the Marcellus and other shale gas plays this year could easily knock that figure into the $6.50/Mcf range. The US Energy Information Administration is even more cautious, predicting a 2010 average price of $5.36/Mcf.

US operators’ survey. World Oil’s survey of 14 US major drillers (integrated companies and independents with large drilling programs) and 150 independents reports fewer wells in “hindsight” for 2009 than last year’s respondents had originally forecast. The majors drilled 5,090 wells, 382 fewer than forecast last year, while the independents drilled 1,565 wells, down considerably from a 2009 forecast of 3,087 wells. It must be remembered that the respondents are not the same from year to year, which limits the usefulness of these numbers for comparison. But because we received survey returns from more companies this year than in 2009, we think operators actually did reduce their planned drilling programs.

In 2010, major drillers expect their programs to rebound 30% to 6,603 wells. Only 3.3% of those wells will be wildcats, as the majors continue to focus on development drilling. The majors will concentrate their onshore wildcat drilling on Texas, followed by the Marcellus Shale states of Pennsylvania and West Virginia.

US independents, being more dependent on cash flow than the majors, are expecting a bigger recovery as the general economy improves, with 79% more wells planned in 2010 than last year, for a total of 2,795. The independents continue to be more aggressive explorers than the majors, with 13% of their 2010 wells planned as wildcats, the majority of those in Texas and Kansas.

Combined, our major and independent respondents plan to drill 9,398 wells in 2010, accounting for about 22% of World Oil’s US drilling forecast.

US rigs. The Baker Hughes rig count average for 2009 saw a 39% drop to 1,143 from 1,878 units the previous year. This decrease was steeper than the drop in US wells drilled, reflecting a rise in rig efficiency as operators stacked older, less-efficient rigs. The biggest drop was seen in Texas, which lost an average of 359 rigs, with other big decreases in Oklahoma and Colorado. Pennsylvania, Kansas and Louisiana’s North district bucked the trend, increasing their average rig counts by 87%, 82% and 34%, respectively.

The US rig count hit a low of 876 units in June and has been increasing steadily since, to 1,282 rigs on Jan. 22. We think the rig count will continue to rebound this year to an average of 1,463, up 28% from 2009’s level, buoyed by unconventional gas drilling in the San Juan Basin and the Marcellus and Haynesville Shales.

Drilling details. As oil prices recovered much more than gas prices during 2009, natural gas drilling suffered much more from the downturn than oil drilling did, shifting the traditional 80%/20% split between gas-directed and oil-directed rigs such that, by year-end, 35% of rigs were drilling for oil. In the year ahead, activity is expected to shift back toward gas, driven by drilling in the Marcellus Shale play, where leases typically have a short drilling window of six months to two years. This is supported by recent data from energy investment bank Tudor Pickering and RigData, which shows that the rig count in the Appalachian Basin has risen steadily to around 120 in early January—about 10% of all the rigs running in the country.

Given last year’s weak gas prices, it’s no surprise that West Virginia, which has a lot of conventional gas as well as part of the Marcellus Shale, saw the largest percentage drop in drilling last year—over 70%, to 607 wells from 2,062 wells in 2008. Pennsylvania, also active in the Marcellus, saw a drop of 20%, or 1,038 wells, from 2008. In 2010, we expect West Virginia to double its well count to 1,200, while Pennsylvania will see a modest increase to 4,570 wells.

The Haynesville Shale of northern Louisiana held up pretty well in 2009; the state’s North district saw only a 10% drop in drilling last year. Much of the Haynesville Formation is sandwiched between layers of conventional reservoir rock, making it more economic than other shale plays at low gas prices.

The Bakken Shale oil play of Montana and North Dakota contributed significantly to a 7% jump in US crude oil production last year, the largest increase since 1955. Operators flocking to the Bakken include XTO, recently bought by ExxonMobil in a $30 billion deal. The company plans to double its drilling program in North Dakota this year. We predict a 44% increase in wells drilled in that state for 2010, and a 23% increase in Montana.

Texas retained its activity lead, drilling more wells than any other state in 2009. Last year we predicted a big drop in Permian Basin oil drilling and just a minor reduction in the Barnett Shale. It turned out to be just the opposite: District 9, in the Barnett, saw a 1,621-well (64%) reduction, while District 8, in the Permian, drilled 565 fewer wells than in 2008, for a “mere” 25% drop. We expect District 8 to gain most of those wells back this year (31% increase), while District 9 will stay relatively flat. Overall, Texas should see a gain of just over 11%, for a 2010 total of 10,967 wells.

According to the Texas Alliance of Energy Producers, the Texas Petro Index continued to decline throughout 2009, falling to 188.4 by year-end 2009 from a peak of 285.4 in September and October 2008. The index is a composite of E&P indicators including oil and gas prices paid to producers, rig counts, drilling permits and well completions, volumes and value of production, and industry employment. Economist Karr Ingham said a steady uptick in well permits and rig count and a bottoming-out of industry employment suggest that the proverbial light at the end of the tunnel is near, but it remains to be seen whether “the resurgence of oil-directed drilling activity will be enough for the economic contraction to continue to ease … [when] natural gas accounts for most of the value created by Texas producers.”

About these statistics. World Oil’s tables are produced with the aid of data from a variety of sources, including the American Petroleum Institute, Groppe, Long & Littell, ODS-Petrodata Group, the Texas Railroad Commission, other state and federal regulatory agencies, as well as international agencies. Most importantly, operating companies with drilling programs responded to this year’s survey. Please note credits and explanations in the table footnotes. We thank all contributors for their time and effort in providing data and analysis for this report.

World Oil editors try to be as objective as possible in the 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.