2013 Forecast: High activity rate continues

World Oil staff

The oil and gas industry has experienced two strong consecutive years, although it remains somewhat on an activity plateau. We expect that 2013 will be another good year with sustained E&P activity, despite a slight drop in WTI and Brent oil prices. World Oil predicts the average WTI price in 2013 to be $87.80/bbl and Brent to $103.50/bbl. A slow, but steady increase in Henry Hub natural gas price through 2013 should offer some sustenance to those independent U.S. operators, who were not able to transition to liquids production.

World Oil predicts the Henry Hub price will average $3.45/Mcf in 2013. Drilling has remained strong in the U.S. and worldwide.

Given these factors and others, World Oil’s forecast indicates the following:

• U.S. drilling will rise 5.2% during 2013, to 47,053 wells.
• U.S. footage drilled will rise 6.5%, to more than 385 million ft of hole.
• U.S. rig count is no longer a constantly reliable barometer of drilling activity.
• U.S. Gulf of Mexico drilling will recover toward a level not seen since pre-Macondo days.

U.S. drilling is poised to increase another 5.2% in 2013. Photo courtesy of Anadarko Petroleum.

2012: A GOOD YEAR

The year began with concerns about the possibility of a double-dip recession in the United States. As the year wore on, it became obvious that the U.S. was going to survive without going through a full-blown second recession, yet economic growth remained anemic. Furthermore, the matter of the so-called “fiscal cliff” has only been temporarily postponed through actions taken by Congress in late December and early January.

Despite the economic and political uncertainties, oil prices were at their highest levels in more than a decade. The high oil prices have provided the basic incentive for North American shale operators to shift from dry gas to liquids production, and a resurgence in the Gulf of Mexico, such that the production of both U.S. oil and gas has experienced recent highs. While the industry receives few plaudits for this remarkable turn of events, conventional wisdom is that the U.S. will become an LNG exporter by 2015 and reduce net energy imports from 19% in 2011 to 9% by 2035.

U.S. oil and gas producers, however, are victims of their own success. Record oil production from the Bakken and other shale plays, and the Permian basin, has created a glut at the Cushing storage hub and resulted in as much as a $23 spread between Brent and WTI prices. Low Henry Hub gas prices have forced operators in the Barnett, Haynesville and Woodford plays to reduce drilling programs severely and even shut in production.

This slowdown in dry gas production is reflected in the U.S. rig count, which declined year-to-year (January to January) from 1,987 to 1,761, a drop of 11.3%. Our analysis suggests that the rotary rig count is no longer a direct indicator of drilling activity, as shale operators are drilling fewer wells, but with extremely long laterals. Deepwater operators are also drilling fewer wells to target deep formations, and extract prolific oil and gas production.

Other activity indicators, which should be taken into account are footage drilled and actual oil and gas production. Accordingly, U.S. drilling last year was on a par with 2011 at 44,732 wells and 385.4 MMft of hole. Texas, driven by the Eagle Ford shale and Permian basin, accounted for 41% of all U.S. drilling. North Dakota continued to expand activity, thanks to the Bakken shale, and is now the seventh-largest state in terms of number of wells drilled.

2013: ANOTHER STRONG YEAR

The economic fundamentals are in place for another strong year for the oil and gas industry. In the U.S., which is expected to achieve a 2.2% GDP growth rate, the unemployment rate has dropped from 9.8% in January 2010 to 7.9% in January 2013. There are glimmers of growth in the manufacturing and housing sectors, as well.

While we expect both the WTI and Brent crude prices to come off their 2012 highs to about $87.80 and $103.50, respectively, the gap between the two benchmarks is likely to reduce as a result of rail shipments of Bakken crude from Cushing to the East Coast refineries, and the reversal of the Seaway pipeline to bring Cushing crude (both Bakken and Canadian oil sands production) to the Gulf Coast refineries. There are projects underway to build gas-to-liquids (GTL) plants for converting shale gas from the Marcellus, Haynesville and Eagle Ford plays into more lucrative gasoil and petrochemicals.

Accordingly, we forecast that U.S. drilling will increase 5.2%, to 47,053 wells. We expect 385.5 MMft of hole to be drilled, up 6.5%. In the U.S., production averaged 6.364 MMbopd last year, the highest level since 1997. The 12.6% gain in U.S. output was achieved through heavy drilling and development in liquids-oriented shale plays. That trend should continue.

U.S. operators’ survey. World Oil’s survey of 11 major U.S. drillers (integrated companies and independents with large drilling programs) reports 8,609 wells drilled last year, accounting for 187% of our total 2012 estimate of U.S. drilling. Only 1.3% of the wells drilled by this group during 2012 were exploratory. Horizontal wells among the majors totaled 4,526, or 53%. A huge majority, 82%, of wells drilled by the majors group were oil-directed. For 2012, major drillers expect their programs to flatten to 8,595 wells. The majors intend to boost the wildcat share of drilling slightly, to 3.3%. The portion of total drilling represented by horizontal completions will actually shrink slightly, to 47%. The ratio of oil wells within the total will rise slightly to 85%.

The switch to oil from gas as a primary drilling target continues in the U.S., including Oklahoma, home to this wellsite. Photo courtesy of Apache Corp.

State-by-state statistics. In the U.S. Gulf of Mexico, offshore Louisiana, Texas, Mississippi and Alabama, activity continues to recover, post-Macondo. We estimate that wells drilled last year were up about 22%, and we expect a 15% increase this year, to 305 wells. The recovery in the Gulf has accelerated in recent months, and there are now more than 30 floaters working in the region, up from the low 20s this time last year. Helping to fuel the recovery is a sense of urgency caused by delayed drilling
programs, as well as recent discoveries by Noble Energy, ExxonMobil, Shell and Anadarko.

There is a shortage right now of deepwater rigs that can meet the stricter safety requirements for near-term projects. As a result, day rates have risen. Also, permitting has mostly normalized after the de facto moratorium that occurred in late 2010 and part of 2011.

During 2011, Texas drilling had grown a remarkable 24%. Last year, the number of wells drilled increased 19%, to more than 18,000, which exceeded our expectations. This year, we expect the rate of growth to slow to 5.5%, but this will be enough to push the statewide total to above 19,000 wells. The largest drilling increases will be in Districts 1, 2, 7B, 7C and 8. Districts 1 and 2 are home to the liquids-rich Eagle Ford shale, and District 8 is in the center of the Permian basin. Districts 7B and 7C are home to significant amounts of traditional oil production. By contrast, Districts 5 and 9, which contain most of the Barnett shale, will suffer a second, consecutive year of lower activity, due to reductions in gas drilling.

Given another drilling reduction in the Haynesville portion of northern Louisiana, you might think that there would be no increase in the state, overall, this year—but that would be wrong. According to the state’s Office of Conservation, operators have switched from gas drilling to working in traditional oil areas in the northern half of the state. In fact, the ratio of gas drilling to oil drilling has gone from 71-29 in 2011 to 22-78 last year. In southern Louisiana, where the volume of drilling is only a third of the northern half, but where oil activity is traditionally higher, the well count was up more than 30%. This year, things will be less boisterous, but we do expect a 3% gain in that part of the state.

Oklahoma drilled about 2,400 wells last year, and we expect that number to increase more than 12% this year, to nearly 2,700. While there is some unconventional activity in the Woodford shale, the bulk of activity is conventional oil and gas. One of the areas, where activity has been growing, is the Granite Wash play, in the western part of the state. Among the more active operators in that area are Forest Oil, Apache Corporation and Linn Energy. Overall this year, we expect Oklahoma drilling to be about two-thirds oil-directed, up from about 60% last year. Shale activity will account for 40% of all drilling.

North Dakota continues to attract headlines, thanks to its rapidly expanding drilling and production in the Bakken shale. Last year, drilling was up about 15%, to 1,850 wells. This year, we have been told by state officials to expect a well total of about 1,960, which would be a 6% gain over 2012’s number. Accordingly, the rig count was up 12% last year, to an average 188 units. It should be noted that the state’s largest operator, Continental Resources, nearly doubled its proved reserves in the Bakken last year, totaling 564 million barrels of oil-equivalent. Oil accounts for about 72% of that figure.

The situation remains difficult in the Marcellus shale portion of Pennsylvania, West Virginia, New York and Ohio. Yet, the problems with this gas-directed drilling are being countered by strong activity in the liquids-rich Utica shale of eastern Ohio and Western Pennsylvania. Thus, overall, we see activity in the Northeast increasing more than 13% to over 4,100 wells. In Ohio, there will be a 52% jump this year, from 560 to 850 wells, with almost all of that due to activity in the Utica. Pennsylvania will be up about 8%.

Up in Alaska, there will be about a 3% gain in drilling, to 145 wells. Oil continues to be the overwhelming target for operators, with only 7% of wells directed toward gas. Exploration accounts for about 10% of all drilling. The big concern is Alaska’s rapidly declining oil production rate, which threatens to diminish the state government’s revenues to the point that cash reserves could be wiped out. Governor Sean Parnell hopes to increase oil production by reducing the state's high oil tax rates.

In California, activity remains highly tilted toward oil. Drilling was up about 15% last year, and we expect that figure to go 5% higher this year. Operators continue to take advantage of favorable oil prices by developing relatively safe plays. However, there is growing experimentation with drilling in the Monterey shale, and many industry analysts believe that this could become the country’s next big shale boom. However, much of the Monterey’s layers are folded, which makes it harder to drill horizontally and frac the rock. However, Occidental Petroleum reports that it is having some success with using deep acid injection in place of fracing.

In the Rocky Mountain states, activity is primarily in Colorado, Wyoming, New Mexico and Utah. As a group, these states will be about flat with last year’s activity. We expect just over 6,700 wells to be drilled. Three of the states—New Mexico, Utah and Wyoming—will be up moderately. However, the largest driller, Colorado, will be down about 5%. If it were not for a reduction in gas drilling from 1,500 wells in 2011 to just 1,000 in 2013, Colorado’s well total would be up this year. Activity continues to shift toward oil, with about 1,500 oil wells expected this year. Some of that increase is due to growing activity in at the Niobrara shale. In Wyoming, the ratio of gas drilling to oil drilling has completely flip-flopped. Last year, 61% of all Wyoming wells were gas. This year, just 28% of these wells are gas. In New Mexico, the emphasis on the southeastern half of the state continues, where operators are concentrating efforts in New Mexico’s portion of the Permian basin.

About these statistics. World Oil’s tables are produced with the aid of data from a variety of sources, including the American Petroleum Institute, IHS, the Texas Railroad Commission, other state and federal regulatory agencies, as well as international energy 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.

World Oil editors try to be as objective as possible in the estimation process to present what they believe is the most current data available. 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 a given year.