North American rig fleet shrinks as activity climbs

STEVE BERKMAN and TORY STOKES, NOV Downhole

Even as demand for both land and offshore rigs climbs, the number of newly built and rebuilt units could not keep up with those being retired. This trend, along with stable oil prices, could send the utilization rate over 70% next year.

The total available rig counts for both the US and Canada receded somewhat in 2011 in spite of an uptick in activity for both markets, according to NOV Downhole’s 58th annual rig census (previously known as the ReedHycalog rig census). Numerous newly manufactured and refurbished units didn’t overtake the abundance of older rigs retired from the fleet after being dormant for several years. Strong oil prices, however, prompted an activity increase, helping to tighten fleet utilization for the US and Canada.

The global offshore mobile fleet experienced a different scenario, with available rigs climbing due to even more brand-new units coming online in 2011, while few offshore units were removed from service. Regulatory instability may have kept some of these units from consistently working, causing the active rig count to dip.

 NOV Downhole partners with several companies to pull together the industry statistics that are published in this article. RigData and ODS-Petrodata provide detailed information regarding the US land and global offshore mobile rig fleets. The Canadian statistics are provided by NOV Downhole personnel in Calgary, along with Nickle’s Energy Group. The international land rig fleet numbers are collected and summarized annually by NOV Downhole regional managers.     

CENSUS HIGHLIGHTS 

Key statistics from the 2011 census include the following:

The US rig fleet had a net decline of 72 units in 2011, causing the total available count to fall about 2%. There were 262 rig additions and 334 rig deletions during the past year, Fig. 1. 

• A number of US rigs, 315 units, were retired from active service over the past year.
• The largest addition to the fleet again in 2011, newly manufactured rigs, numbered 158 units.
• The total number of US rigs meeting the census definition of “active” increased to 2,059, up 2%, from 2,024 active rigs in 2010.  
• US rig utilization rose to 67%, up from 64% last year, Fig. 2. 
• The total number of rig owners in the US is now 325, up by one from 324 US rig owners last year.   
• Drilling contractors own 85% of all drilling rigs, with operators owning the remaining 15%.
• The Canadian available rig fleet declined to 774 units, down 3% from 795 last year.
• Canadian rig activity jumped 10%, with active rigs numbering 369 compared with 334 in 2010.      
• Canadian utilization is now 48%, climbing from 42% last year.
• The global offshore mobile fleet available count is 794, after growing by 7%, primarily due to newbuilds.    
• Global offshore mobile activity fell 2%, with active rigs at 559 units.
• Utilization for the global offshore mobile fleet is now 70%, after being 77% last year.   
• Most international regions experienced stability or slight increases in land rig utilization, with the overall average coming in at 90%. 

Fig. 1. US available vs. active rigs, 1955–2011.

Fig. 2. US available rigs vs. utilization, 1955–2011.

U.S. RIG ATTRITION CLIMBS

Rigs drop out of the available fleet every year for a variety of reasons.  Newer technology often makes older units obsolete, and these outdated units sit idle when it is no longer as profitable to run them. These rigs are eventually removed from the available census count since they are often lacking equipment and a ready crew. Occasionally, there are also accidents that significantly impair or destroy rigs, and these units can no longer be counted. Furthermore, rigs are sometimes sent abroad and leave the US market for more profitable jobs. Each of these cases are accounted for in the annual census as reductions to the fleet. This year’s total deletions numbered 334, about 29% higher than last year’s 259 units. As mentioned, deletions to the fleet are categorized three ways, Table 1:

• Rigs removed from service
• Rigs moved out of the country
• Destroyed rigs.

Table 1. Changes in the available US fleet (click to enlarge)

Rigs removed from service continues to be the largest category of deletions, rising to 315 units in 2011, vs. 212 last year. Census rules bar rigs from the available count that require a large capital expenditure to be operable, have been auctioned for parts or cannibalized to keep other rigs running, or have been stacked for a long period of time.  The US fleet has undergone a transformation during the last several years with new units quickly coming online, lessening the need for the older-technology rigs.  Some of these older rigs, however, may later be refurbished and brought back into service after an overhaul that makes them more cost-effective to operate. Since activity has picked up during the last two years, there has been a minor surge in reactivations, and these rigs are mentioned in the next section of this article.

Rigs will move both into and out of the US, and these rigs are noted in the census each year. In this year’s count, just 16 rigs moved out of the US, a decline from the 45 that left in 2010. Brazil, Mexico and Canada were the destinations of the majority of the relocations. Rig movement into the US is covered below.

Three rigs were noted as destroyed over the past year, all land units. Two rigs were counted in this category for the US in the 2010 census, which included the much publicized Deepwater Horizon disaster.

NEW U.S. RIGS KEEP COMING

Newbuilds have been churned out regularly for several years, and the average age of the fleet continues to decline. These rig expansion programs are still going strong, and many owners are building better fleets for use in the competitive drilling market. Some companies find that refurbishing and reactivating older units can complement their businesses as well. With assistance from RigData, the census reports that the US fleet added 262 rigs overall during the past year, up 8% from the 243 added in 2010. Although representing an increase, these 262 rigs did not completely offset the total deletions of 334 units. Fleet additions fall into one of four categories, Table 1:

• Newly manufactured rigs
• Rigs brought back into service 
• Rigs moved into the country
• Rigs assembled from parts.

Last year, it was suspected that the rapid fleet expansion that has occurred over the past five years due to newbuilds had started to slow. However, newly manufactured units are still being produced regularly and have actually increased again in 2011. Another 158 units were built from scratch this year, up from 131 last year. The total number of newly manufactured rigs added over the past six years is up to 1,309, indicating that 42% of the total available US fleet is less than six years old.

The number of US rigs that were reactivated also increased this year, coming in at 95 units, compared with 87 in 2010. This number had risen for the past two years due to a dynamic drilling environment. Each of the rigs that were reactivated had been counted in prior censuses, but had been removed subsequently due to becoming inactive or inoperable. These 95 units are rigs that were refurbished or simply reactivated over the past year and are again being counted as part of the US available fleet since they were put back to work on drilling projects.

Rigs moved into the US from other countries are also cited in the census. Just six rigs were confirmed as brought into the US over the past year, vs. 16 in 2010. Most of these rigs came from Mexico, as is common in the offshore market. With 16 rigs moving out of the country and just six moving in, a net decline of 10 units was noted overall from rig moves. Due to the somewhat unstable US drilling environment and regulatory uncertainly, it has been a tendency over the past several years that more rigs are leaving the US than are entering. No immediate signs seem to indicate a reversal of that trend.

Finally, three rigs assembled from component parts were added to the fleet this year. This is slightly less than the nine units added last year. This number may actually be a little higher, but it is often difficult to differentiate between refurbishments and new assemblies, especially when rigs change hands and are renamed. However, it is fairly evident that in recent years, many more rigs have been newly manufactured or refurbished than put together from cannibalized parts.

Total rig additions numbered 262, while deletions totaled 334. The net change in the fleet over the past year was a 72-unit decrease, down about 2%. This shows an increase in rig retirements, but an overall stable fleet, Fig. 3.

Fig. 3. US changes in available rigs, 1956–2011.

Table 2. Changes to the Canadian rig fleet

MORE RIGS DEPART THE CANADIAN FLEET

A few years ago, the overall Canadian fleet began to contract in size. Although market conditions have improved, a significant number of rigs continue to be dropped from the Canadian census as they retire from service or sit idle for long periods. A fair number of rigs were also reactivated this year, but the overall effect was an available count that fell 21 rigs, or 3%. Rig data for Canada is supplied by annual rig reports from Nickle’s Energy Group as well as supplemental information provided by NOV Downhole personnel. Newly manufactured rigs have been dropping off in Canada and totaled just eight units this year, about half of last year’s 15. Reactivated rigs, instead of newbuilds, are now the chief category of units added to the fleet. Rigs brought back into service tallied 34 this year, about the same as last year’s 35. There were also 10 units that moved into the country and just one unit indicated as assembled from component parts. Total rig additions came to 53 units overall for Canada, just one less than in 2010.

As mentioned previously, the primary cause of Canadian fleet attrition this year was rigs removed from service. Data gathered about these rigs indicated that 63 units were no longer considered operational per rig census rules. This is less than the 94 removed from the count last year, but still a significant figure. Another 11 rigs departed the country over the past year, fewer than the 17 in the last census. Rig moves for Canada essentially balanced out at a net of –1. Luckily, no Canadian units were reported as destroyed. Deletions numbered 74 units in total. Adding the 53 additions to these 74 reductions left a decline of 21 units and an available count of 774, a drop of 3%, Table 2.

GLOBAL OFFSHORE MOBILE FLEET CONTINUES TO SWELL   

Growth in the global offshore mobile rig fleet continues unabated due to rig-building programs set in motion several years ago. Another 47 new rigs were added to the worldwide fleet over the past year, up from 40 in the last census. This is the most new units added in one year since tracking began for the global fleet in 2006. In addition to the newbuilds, nine offshore rigs were also brought back into service this year. ODS-Petrodata, which assists in compiling the offshore census data, reports that another 55 units are scheduled for worldwide delivery by the time the 2012 census is taken next spring. Even though some may not meet that schedule, another strong year of fleet additions is likely. No new offshore rigs entering the fleet this year were described as “assembled from parts.” 

The global offshore mobile fleet experienced little attrition this year, with just seven rigs removed from the fleet, all due to being retired from service. This is similar to the six taken out of the tally last year. No units were reported as destroyed due to accidents, Table 3. If an offshore rig has not worked for more than five years and does not have upcoming contracts, these rigs are generally not classified as available since it would usually take a significant capital expenditure to put the rig back into operable condition. Although these drilling units are not counted as “available” by census rules, it is common for some to later be reactivated if market conditions warrant. Note that although the US census is able to track the majority of platform and inland barge rigs in the country, the global mobile offshore statistics do not reflect these types of units since the worldwide statistics are particularly difficult to obtain.

Table 3. Changes to the global offshore mobile fleet

The available count for global offshore mobile units is now 794 units, a net increase of 49 rigs, or 7%. The worldwide offshore fleet is widely distributed, with the US and the Middle East in the lead, followed closely by Southeast Asia and South America, Fig. 4. The fleet composition by specific rig type is shown in Fig. 5.

Fig. 4. 2011 global offshore mobile fleet distribution by region.

Fig. 5. Makeup of the global offshore mobile fleet in 2011.

U.S. ACTIVITY CONTINUES TO INCREASE

After a very steep decline two years ago, drilling activity began to come back in 2010. Figures for 2011 continue to reflect this rebound, although at a much slower pace. Even more rigs went back to work over the past year as oil and gas prices stayed strong. The active count eased up another 2% to 2,059 units after coming in at 2,024 last year. Although not a significant increase, the upward movement in activity paired with the downward movement in availability shows a tightening market. This positive indicator should continue to put upward pressure on rig rates.

The methodology used to count active rigs for the NOV Downhole census is different from most other rig counts that exist in the industry. This census counts a rig as active if it has “turned to the right” at any time during a defined 45-day period in the spring, this year between May 4 and June 17. Since a longer time period is used to monitor activity, this increases the rig count, and therefore the NOV Downhole statistic will always be higher than most others.

An often-quoted drilling industry statistic is rig utilization, which can give a snapshot of the industry at a given time. Rig utilization, defined as the balance between the supply and demand of rigs, is the ratio of active rigs to available rigs. Last year’s utilization was 64%, a rise from the previous year’s 40%. This year, utilization has climbed a little higher to 67%. This improvement is lower than the 58-year historical high of 74%, but is an encouraging sign of continued improvement. 

There were 1,022 available US rigs that were not working during this year’s 45-day census period. Although these rigs were counted as available, they were stacked for various reasons, or being moved to their next drilling locations. These units have been classified according to the length of time they have been stacked. Rigs stacked less than one year numbered 545; one to two years, 141; and two to three years, 336. Census rules state that any rig stacked for longer than three years will be removed from the available fleet. Often, rigs tend to be retired before their stacked classification targets them for deletion. Rigs that fall into this category and are removed from the fleet because they are no longer economically viable, fall into the group “removed from service.”  Since there are an abundance of rigs counted that have been stacked more than two years, quite a large number may be removed from the available fleet next year.

Full-year utilization, the total percentage of available rigs that drilled at any time during the past year, is another interesting industry gauge. It gives a slightly different picture of the overall fleet’s dynamics. Adding the 545 rigs stacked less than one year to the 2,059 active units in the census provides the number of rigs that drilled during the past year. This full-year utilization figure indicates that rig owners used 2,604, or 85% of, available rigs over the past year. This statistic has jumped by 10 percentage points since last year when it was just 75%. In previous years, it has been common to see this statistic surpass 90%. This may also point to there still being some oversupply in the industry.

For 2011, regional results were a mixed bag, with four regions experiencing decreases in rig activity and six showing increases. The regional breakdown, comparing this year’s numbers to 2010, is shown in Table 4. The ArkLaTex region no longer has the highest number of active rigs, having been overtaken by the Permian basin region. ArkLaTex dropped considerably from 598 rigs in 2010 to 388 in 2011, while the Permian basin went from 415 up to 528.

Table 4. US regional census results (click to enlarge)

Regional utilization also shows diverse results, with four regions going up and six going down. Even in the areas where utilization went up, there still appears to be excess capacity. Utilization figures for each region are:

• Alaska, 43%
• Northern Rockies, 69%
• Southern Rockies, 71%
• Northeast states, 62%
• Permian basin, 82%
• Gulf Coast, 71%
• ArkLaTex, 59%
• California, 76%
• Southeast states, 51%, and
• Mid-Continent, 60%.

The previous figures are a combination of land and offshore statistics, but for US land rigs alone, gross utilization came in at 68%. This is an increase from 65% in 2010, Fig. 6, Table 5. The US marine fleet, however, showed a reversal in course, with lower offshore utilization than a year ago. This year’s number came in at just 43%, falling from 59% in 2010. Demand does vary somewhat by rig type, with bottom-supported rigs in the greatest demand at 49% and offshore platform rigs having the lowest utilization at just 29%.

Fig. 6. US land rig utilization, 1988–2011.

Table 5. US land rig counts and utilization

The total US rig fleet, both land and offshore, was broken down by depth capacity, revealing even greater differences in demand. Most units within the same depth capacity range were about the same utilization or slightly higher in 2011 compared with the previous year, with the exception of the deepest rigs. Those over 20,000 ft dropped somewhat from 68% in 2010, to 57% in 2011. This is the lowest utilization level for any of the depth ranges. The rigs with the highest utilization continue to be those in the 16,000–19,999-ft range at 81%. Even at this level, the market still seems to have some excess capacity, Table 6.

Table 6. US rig utilization by depth capacity

CANADIAN ACTIVITY RISES

Canada experienced another sizeable increase in rig activity for 2011. Canadian figures have experienced wide swings since the census began tracking them in 2005, but for the last two years activity has moved upward. Market volatility has somewhat dissipated, and the active count rose to 369 units from 334 in 2010, a 10% increase. With available rigs declining and active rigs increasing, Canadian utilization figures have also improved for 2011—to 48% from 42% last year. Just two years ago, Canada experienced a low of 22%, after being at 84% in 2006, Fig. 7.

Fig. 7. Canadian available vs. active rigs, 2002–2011.

Regarding Canadian drilling capacity, almost 41% of Canada’s rigs lie in the 6,000–9,999-ft range. Fleet utilization by depth capacity shows that demand is now highest in this range as well (51%) and continues to be lowest in the 3,000–5,999-ft range (38%), Fig. 8.

Fig. 8. Canadian rigs by depth capacity, 2011.

GLOBAL LAND RIG UTILIZATION

Utilization for the primary international areas has been tracked for several years. Regarding individual regions, European utilization decreased due to a soft North Sea market and lower utilization in the areas around the FSU. Middle Eastern utilization climbed primarily due to high activity in Saudi Arabia and Iraq. Latin American utilization also increased, as Pemex activity recovered to more normal levels. Note that some international areas have large numbers of available rigs, but these units are typically of older technology and may not be universally mobile or marketable. Also, in some cases, available rigs are actually under contract awaiting a project start, and are realistically unavailable for other work, Table 7.

Table 7. International land rig utilization

GLOBAL OFFSHORE MOBILE FLEET DOWN SLIGHTLY

During the census active period for 2011 (May 4 to June 17), the global offshore mobile fleet figures showed a minor slowing in activity. Total working rigs numbered 559 units during this window, down 13 rigs, or 2%. The 2010 count was 572 and had been virtually unchanged since 2009. All offshore mobile units, with the exception of platform and inland barge rigs, are included in these statistics. With available rigs rising and activity dropping somewhat, utilization fell to 70% from 77% in 2010, Fig. 9.

Fig. 9. Global offshore mobile available vs. active rigs, 2001–2011.

OTHER U.S. INDUSTRY TRENDS

In addition to looking at individual rigs, the census also counts the number of companies that own the units. After experiencing increases since 2003, the number of rig owners in the drilling business has leveled for the last few years. Despite the fact that commodity prices have been stronger in recent years, the number of new drilling companies to form has been balanced by the number ceasing operations. This year, the overall net number of rig owners rose by just one company to come in at 325, Fig. 10. 

Fig. 10. US rig owners, 1987–2011.

Historically, there have always been many more rigs in the possession of drilling contractors than operators, although the number of operator-owned rigs has generally risen. This year, another slight increase in rigs owned by operators was noted in the census. Operators now own 455 rigs, or 15% of the overall fleet, with drilling contractors owning the remaining 2,626 rigs.

Another way to examine rig ownership in the US is by examining the fleet sizes of companies and how this trend has developed over the years. Statistics along these lines have been compared since 1993, when consolidation was on the upswing. In more recent years, only slight differences have been observed, and the larger companies (those with more than 20 rigs) continue to hold over 60% of the fleet.

CONTRACTORS CONCERNED ABOUT RIG RATES

A survey has been sent out annually for more than 20 years to most US drilling contractors. This poll invites participants to provide some statistics and opinions about current business conditions. These professionals generously take the time to give valuable insight regarding their viewpoints, industry concerns and future projections. The 2011 survey was completed by 35 contractors from a wide variety of regional areas and company sizes.

Some key issues that are typically of concern are listed on the survey, and contractors are asked to rank them by importance. “Rig rates” is often the most significant concern of contractors, and again this year it has risen to the top. Although drilling activity has picked up and the gap between rig demand and supply is shrinking, there is still room for improvement. Another issue almost always ranked high by contractors is that of “crew availability”, which came in as the No. 2 concern again this year. Companies often have difficulty obtaining qualified and consistent help, especially when demand for experienced personnel is increasing in more remote areas. “Government regulations,” another key issue, was again rated No. 3. Real and potential regulatory changes have been looming over the industry for several years, especially since the Deepwater Horizon disaster and recent moratorium in the Gulf of Mexico. The uncertainly about future government intervention dampens decision making in the drilling business and costs the industry time and money.

For the survey, contractors are also asked to share some of their business figures. On average, labor rates have increased for them about 8% over the past year. This noteworthy increase ties in with the concern of “crew availability” since not only are good crews hard to find, but they also continue to become more expensive. Another major expenditure for companies is rig repair. On average, contractors will have spent 15% more in maintenance this year than in 2010. Skyrocketing maintenance for older rigs can cause a company to abandon using those units to the extent that they are eventually retired from service.

Contractors responding to the survey indicated that their rig activity has gone up 16% on average for 2011. This number is considerably higher than the overall rig activity increase of 2% this year. However, this may partly reflect some perception in overlap from 2010’s remarkable increase in rig activity, as well as a general optimism about industry conditions. Most contractors have told us that they are expecting further improvements in the near future. The enthusiasm for specialty rigs, technological advancements and specialized applications were mentioned as being current industry developments. Concerns that were indicated primarily related to the current economic situation and how government policies will impact their companies’ profitability. Overall, contractors’ estimates about their future business expectations vary widely, but on average they expect a modest rise of 4% over the coming year.

MANY CONTRACTORS PLAN TO EXPAND

Contractors appear to be encouraged enough about the current market to be planning growth strategies for the future. When asked to describe their companies′ plans for the next five years, the largest percentage of survey respondents, 46%, said they are preparing to expand their current fleets. The second largest group, 26%, has no plans for change during the next several years, while 17% are seeking merger opportunities. Fewer companies mentioned diversification (9%), pursuing international opportunities (9%) or downsizing (0%).

U.S. FORECAST FOR 2012

New rig rollouts are predicted to continue during the next 12 months, but with most of the new units being offset by retiring rigs. Overall, it is anticipated that the US available count will remain stagnant or increase just slightly in 2012. Active rigs may climb further than even contractors expect, and are forecast to rise another 8–10%. This would push US utilization over 70%, a welcome sign for an industry used to experiencing ups and downs. 

US rig census historical data, 1955–2011 (click to enlarge)

ACKNOWLEDGMENT
The following are recognized for their contributions to this year’s rig census:  Michael Wayne (RigData); Tom Kellock (ODS-Petrodata); Diane Henderson (Nickle’s Energy Group); Leonora Compton, Wade Dannhaus, Amy Dismore and Dave Macneil (NOV Downhole).

THE AUTHORS
	STEVE BERKMAN has been the Director of Strategic Marketing for NOV Downhole since January 2009. Prior to that, he had been Marketing Manager for ReedHycalog since July 2004. Mr. Berkman has served as Regional Sales Manager in Latin America.  He began working with ReedHycalog over 29 years ago as a Design Engineer.  Mr. Berkman has been all over the world in various engineering and sales positions. He received a BS degree in mechanical engineering from the University of Texas in 1981.
	TORY A. STOKES is a consultant for NOV Downhole, after being employed by ReedHycalog as Senior Marketing Analyst for eight years.  She graduated with a BS degree in applied mathematics from Texas A&M University in 1985, and earned an MBA from the University of Houston in 1993.