US O&G drilling sees upswing by 45 % in 2010

Oct 28, 2010 12:00 AM

After slumping in 2009, US oil and natural gas drilling is on the upswing in 2010, the American Petroleum Institute (API) reported.

An estimated 11,297 oil wells, natural gas wells and dry holes were completed in the third quarter of 2010, a 45 % jump from last year's third quarter, according to API's newly released 2010 Quarterly Well Completion Report: Third Quarter. "Third-quarter exploratory well completions climbed 31 % compared with 2009's third quarter, with natural gas exploratory wells up a whopping 68 %," noted Hazem Arafa, director of API's statistics department. "I think this really demonstrates the oil and natural gas industry's continued commitment to finding new energy sources to meet growing US and world demand, as well as the importance of new supply areas, many of which were only opened recently thanks to the industry's ability to apply innovative techniques to existing technologies."

API estimates showed a resurgence in oil well completion activity in the third quarter, with completions rising to an estimated 5,451 oil wells, a 60 % jump from year-ago levels. For most of this decade, natural gas had been the primary target for domestic drilling. But with the continued growth of oil well completions and a drop in natural gas completion activity this year amid historically low prices, this is no longer the case. An estimated 4,434 natural gas wells were completed in the third quarter of 2010, a 28 % increase from 2009's third quarter.

For the first three quarters of the year, estimated natural gas well completions dipped 3 % from a year ago to 12,677, while oil well completions rose 21 % to an estimated 13,865. API also reported total estimated footage of 69,156,000 feet drilled in the third quarter of 2010, a 43 % increase from third quarter 2009. Oil well footage surged 81 % for the quarter, to 32,815,000, while natural gas footage gained 17 % to 29,255,000.

Earnings boost from domestic drilling Land drilling rig operator Nabor Industries credited the solid performance of its North American oil and gas businesses for the $ 164 mm in operating income it recorded for the third quarter 2010. The company's land drilling operations did surprisingly well despite "persistently anomalous, incredibly low gas prices and pretty poor future curve," said Gene Isenberg, Nabors chairman and CEO.

During the quarter, Nabors entered into long-term contractual commitments for 11 more new-build rigs, bringing the total to 23 for the year, including three economically equivalent major refurbishments. Eleven of these rigs are destined for the Bakken Shale where Nabors enjoy a dominant position. Three of the remaining rigs will deploy in the Eagle Ford Shale, one in the Haynesville, the other five rigs to the Marcellus Shale, where the company has a small but growing presence. "The performance of our PACE(R) rigs, especially the new B Series, continues to lead to more inquiries and is supporting modest improvement in leading edge rates. The gap between these rates and our current average rates is significant but they continue to converge as contracts renew. Nevertheless, cost pressure still remains in the most active markets."

"Recent increases in this unit's rig count are the net result of higher activity in the oil and liquids-rich drilling plays, significantly offset by reduced dry gas drilling. We expect this trend to continue given the disparity between the forward strips for oil compared to natural gas. This is leading to a net modest improvement in our rig count through next year and keeps us cautiously optimistic regarding the 2011 outlook," said Isenberg. Isenberg said that Nabors would hold off on its initial public offering of oil and gas joint venture NFR Energy until gas prices improve.

Gas outlook bullish despite prices London-based Investec Asset Management anticipates a reduction in drilling budgets for 2011 among US gas E&P companies, with drilling activity being scaled back in 2011 for both shale and conventional projects. Investec analysts note that current US gas prices of $ 3.41/thousandcf are currently well below the cash cost of supply for this commodity.

"Company actions and company data support our view that he marginal cost for gas extraction is around $ 7.00 per tcf. Extracting gas at less than $ 4/tcf simply does not make an economic return."

However, Investec remains bullish on the outlook for US natural gas over the next 12-18 month time period as the reduction in drilling would lead to a supply response. "Ultimately, we also believe demand recovery will be a further key driver for the market tightening into 2012.

New Environmental Protection Agency rules indicate that potentially 10-15 % of all coal-fired power generation either needs to reduce its CO2 emissions or ultimately shut down. We believe that this coal-fired power generation will ultimately be replaced by gas-fired power generation -- this alone will add 4-5 % to US gas demand over the next five years."

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