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Drilling Fleet Grows in 2012

Monday, 01 Oct 2012

[PUBLISHED IN Oilweek] Last November, the Canadian Association of Oilwell Drilling Contractors (CAODC) forecast that the drilling rig fleet in Canada would grow through 2012.

CAODC now expects the rig fleet to sit at 830 rigs by year-end. All in all, 2012 is shaping up to be a year of reasonable growth: the fleet had only 807 rigs at the close of 2011.

Such growth might be surprising in the uneven confidence of today’s economic environment. Globally, uncertainty stems from financial concerns in Europe and slowing growth in China. Gas continues to hover at bargain-basement prices. Oil has been sliding unevenly, up, then down, throughout the year. But contractors are building, and the fleet is expanding.

This expansion is a response to market demand for deeper wells. The ‘new builds’ coming off production lines are predominantly bigger rigs: telescopic doubles and light triples.Canadian Drilling Fleet: Wells Drilled vs Operating Days

Curiously, this demand is the exact opposite of what the market was looking for less than a decade ago.

Five years ago, the industry was—like today—in a period of fleet growth. The high demand then, however, was for rigs in shallow depth categories—rigs that reach between zero and 900 metres, and between 901 and 1,850 metres. Building programs focused on these smaller rigs. In 2007 and 2008, the Canadian rig fleet offered more small rigs—singles—than ever before: slightly more than 420, representing close to 50 per cent of the fleet.
The shallow depth categories have since contracted. Today, smaller rigs represent only 22 per cent of the fleet.
By contrast, fully half of today’s fleet is made up of rigs that reach deeper than 3,000 metres. (Back in 2008, rigs rated for these deeper categories accounted for only 19 per cent of the fleet.) And this is where today’s new iron continues to be added.

Between January and August, contractors added 32 rigs to the fleet. Three of these 32 have a depth capacity of 2,800 metres. Everything else reaches 3,400 metres or deeper. Contractors have removed 26 rigs from the CAODC registry. Most of this equipment has been from shallow drilling categories.

The composition of the rig fleet is morphing to offer more deep-drilling equipment while whittling away at the number of small single rigs.

This restructuring is symptomatic of a fleet that’s been hard-pressed to meet the market’s deep drilling demands. It’s a window of opportunity, one that’s been identified by both established companies and those that are just entering the industry. These companies are reshaping the fleet to meet market appetite.

Rig activity is rarely evenly distributed across depth categories. The market favours certain plays based on factors in the investment climate.

The kind of drilling that dominated the 2001—2007 period involved going after shallow gas plays. Between 2001 and 2006, gas wells made up about 75 per cent of rig activity, and oil wells about 25 per cent.
In 2007, when the small rig count peaked at 430 rigs, investor focus was starting to shift. Natural gas was coming to market in abundance. In 2008, commodity prices began to fall. Global economic factors were having a significant impact on investor confidence and, closer to home, a changing royalty framework in Alberta compounded industry’s uncertainty. Investors pulled back on gas drilling. They pulled back enough on gas plays that by 2010, rig activity was at an even split between gas wells and oil wells.

Then the balance shifted completely: in 2011, wells were 61 per cent oil and 39 per cent gas; through July this year, the gap widened, to 82 per cent for oil wells and just 18 per cent for gas wells. New technology and commodity pricing has improved the economics of going back to old deep plays. Some of these deep-drilling plays were gas but the significant majority were oil.

The move away from shallow drilling is an important consideration to keep in mind when comparing year-to-year statistics on industry activity.

The CAODC Forecasting Committee expects the rig fleet will drill 11,834 wells in 2012. To compare this well count with 2006, the year industry drilled a record number of wells (over 22,000), today’s activity appears much less robust. But well count tells only half of a story about industry activity. The other half of the story lies in how deep a rig is drilling.

A small rig hits its target within a few days. A large rig, on the other hand, could require weeks to complete a drilling program. In 2006, when the focus was on shallow drilling, the fleet averaged seven days on a well. This year, that average is 12 days per well.

Looked at another way, the larger rigs are drilling deeper wells: in 2006, the average well drilled in Canada in the January to July period was 1,237 metres deep. Through the same period this year, the average depth has climbed to nearly 2,040 metres.

CAODC’s Forecasting Committee anticipates this year’s 11,834 wells will require over 140,000 operating days. The operating day measure shows an industry that’s almost as active as it was in 2006. (Operating days that year totalled 158,427.)

No one is talking about record-setting well counts these days, and rig utilization is not anywhere near 2006’s ‘boom times.’ But long-reach drilling is now a highly competitive piece of the rig business. A larger portion of the fleet is needed to drill deeper. Drilling contractors are expanding their equipment offerings as a response to the recent experience of a tight deep-drilling market.

What will this new equipment mean for 2013?

As has been CAODC’s tradition, the association reviews industry trends and economic factors each fall. The CAODC 2013 Forecast will be available in November.

This year, CAODC is hosting an associate member breakfast in conjunction with the release of the forecast.
The breakfast is an opportunity for CAODC Associate Members to gain insight on the economic environment, as seen from the drilling sector’s perspective. The event will feature a panel of CAODC directors and the chair of the CAODC Forecasting Committee. CAODC’s website provides event details.

Certainly, the recent rig building programs are a symptom of interesting shifts in oil and gas activity. Dynamics in the Canadian ‘patch’ continue to emphasize that success in this industry lies in the ability to adapt to fickle market forces.