COLUMN-Faster, deeper, more power in N. American rig market:Kemp

Mon Dec 10, 2012 1:05pm EST
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By John Kemp

LONDON Dec 10 (Reuters) - North American oil and gas production is on the verge of another revolution as older drilling rigs are replaced by equipment that can drill the same well in half the time and bore much longer horizontal sections underground.

The number of land-based rigs drilling for oil and gas in the United States has fallen 12 percent since November 2011, according to oilfield services company Baker Hughes International.

The drilling of new wells is sensitive to forecast oil and gas prices. Slumping gas prices over the past year have resulted in a sharp drop in the number of rigs employed. Some rigs have been shifted to oil or liquid-rich "wet" gas plays, while more than 200 mostly older ones have been idled over the past 12 months.

In a sign of the coming industry-wide rationalisation, Precision Drilling, one of the largest drillers in North America, announced on Monday it was decommissioning 42 of its older tier-3 drilling rigs and another 10 tier-2 machines. The company plans to exit the tier-3 contract drilling market altogether as it refocuses its operations on the more profitable tier 1 and 2 markets.

Crude rig counts tell only half the story, however. New technology and the development of standardised "assembly-line" or "factory" drilling practices mean the industry can now drill more wells faster and with fewer machines - slashing costs and lowering the breakeven price for U.S. and Canadian producers.

Most oil analysts still focus exclusively on rig counts, but counts are misleading when the rig fleet is changing rapidly. Relying on these raw figures has caused many oil analysts to underestimate the total amount of exploration and production, while focussing on day rates for rig hire has caused them to overstate costs.

Just as the perfection of long-known but expensive hydraulic fracturing techniques in the mid-2000s paved the way for the first shale gas (and then oil) revolution, improvements in drilling efficiency and better reservoir management will open the way for a second revolution - provided that oil and gas prices remain high enough to incentivise the investment.   Continued...