Weekly Offshore Rig Review: Give it the Gas

This week, worldwide offshore rig utilization moved up significantly, climbing nearly a full percentage point to 84.8% as a net total of 6 idle rigs started new contracts.

Natural Gas Around the Globe
Around the world, there are more than 6,000 trillion cubic feet of proved conventional natural gas reserves. This resource is enough to supply current demand for natural gas for the next 65 years. The largest portion of these reserves belong to Russia, which has nearly 1,700 trillion cubic feet (tcf) of natural gas and accounts for 27% of proved conventional gas. These vast resources are located primarily in Western Siberia which is home to 20 fields with more than 35 tcf of natural gas. But while Russia has the largest total natural gas reserves, it is Qatar and Iran that share the single largest natural gas field in the world. The astonishingly large North Dome / South Pars field contains about 1,200 trillion cubic feet of natural gas, which is more than the combined reserves of the next five largest countries. With such a large base, the Middle East contains the world's largest natural gas reserves, with nearly 40% of all natural gas. The table below provides a breakdown of natural gas reserves by country.

Worldwide Proved Natural Gas Reserves by Country
Country Billions m3 Trillions ft3 % of World
Russia 47,570 bm3 1,679.9 tcf 27%
Iran 26,620 bm3 940.1 tcf 15%
Qatar 25,770 bm3 910.1 tcf 15%
Saudi Arabia 6,544 bm3 231.1 tcf 4%
UAE 6,006 bm3 212.1 tcf 3%
United States 5,353 bm3 189.0 tcf 3%
Algeria 4,561 bm3 160.0 tcf 3%
Nigeria 4,502 bm3 158.9 tcf 3%
Venezuela 4,191 bm3 148.0 tcf 27%
Rest of World 43,513 bm3 1,536.6 tcf 25%
Worldwide 174,600 bm3 6,165.9 tcf 100%
source: CIA World Fact Book 2006

In terms of production, Russia is, not surprisingly, the world leader. The country produced about 20.7 tcf in 2004, which accounts for 22% of world natural gas production. A large percentage of this production comes from Western Siberia where six of the ten largest natural gas fields in the world can be found. Gazprom controls more than 90% of natural gas production in Russia and controls about 60% of Russian gas reserves, or about 16% of all natural gas reserves in the world. But, with growing internal demand and declining production from its older giant fields, Gazprom may be in for some difficult years ahead, as the European gas shortages of this past winter indicate.

Following closely behind Russia is the United States, which is the world's second leading natural gas producer. In 2004, over 19 tcf of natural gas were produced in the United States. This accounted for 20% of worldwide natural gas production, and put the United States just behind Russia but far ahead off all other countries in terms of natural gas production. The next largest natural gas producer was Canada with 5.9 tcf, followed by the UK with 3.6 tcf.

In the Gulf of Mexico
In terms of US natural gas production, the Gulf of Mexico outer continental shelf is a key region that accounts for about 20% of the country's total natural gas output and nearly 4% of worldwide gas production. However, that percentage has dropped somewhat in the last year due to the lingering damage from Hurricanes Katrina and Rita, which reduced 2005 US natural gas production by an estimated 2.8%, according to the US EIA. In 2004, the US GOM produced 3.2 tcf of natural gas, making it the fifth largest producing region in the world behind Russia, the rest of the US, Canada, and the UK. As such, it is the single largest and most important offshore natural gas producing region in the world at this time.

The Gulf of Mexico is also home to the largest fleet of offshore rigs anywhere in the world, with 99 jackups, 34 semis, 7 submersibles, and 6 drillships. But that fleet has been steadily declining, particularly jackups, where a net total of 55 rigs have left the GOM in the last 5 years and the number of rigs in the area is at its lowest levels since the 80s. This drop in fleet size has helped to increase day rates and utilization among the remaining fleet, but there are still fewer jackups under contract in the GOM this year than at any time since 1992 when natural gas wellhead prices averaged below $2/mcf.

In the last several weeks, the US House and Senate have prepared legislation to help drive further exploration for natural gas in the Gulf of Mexico and other areas of the US continental shelf. At the end of June, the House passed a bill opening up all federal waters more than 100 miles from shore to offshore oil and gas exploration and giving states the right to chose whether drilling would be allowed closer to shore. Just this week, Senate lawmakers announced that they had reached a compromise that would open up the Gulf of Mexico Lease Area 181, which lies south of Florida yet close to existing infrastructure. This area is estimated to contain 5 trillion cubic feet of natural gas. This new legislation, if passed and merged with the House bill, could provide the impetus for increased GOM drilling that would make more oil and gas available while keeping the US rig fleet occupied.

Natural Gas Prices
Over the last 6 years, natural gas prices have risen significantly. For the 20-year period of the 1980s and 1990s, natural gas wellhead prices in the GOM remained relatively stable around $2/mcf. During this time, natural gas consumption slowly outpaced production growth, so that by 2000, the US was importing about 15% of its natural gas needs. Since that time, with the market now very tight, natural gas prices have been much more volatile and have risen over 150%. The graph below shows the steady increase in natural gas futures over the last four years, along with the tremendous price spike caused by Hurricanes Katrina and Rita, and the subsequent declines in prices. Today, natural gas future prices have declined back below the 5 year average of $6.18/MMbtu. However, the declines could be short-lived as the US Department of Energy is predicting that prices may surge upwards by 25% to 30% by the end start of next year.

NYMEX Natural Gas Futures
(US$ / MMbtu)

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Brent Crude Oil : $51.78/BBL 0.77%
Light Crude Oil : $50.85/BBL 0.83%
Natural Gas : $2.99/MMBtu 4.77%
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