Analysis:U.S. land footage rose nine percent during the third quarter for the second consecutive quarterly gain—despite a rig count that has been essentially stalled since sometime in July.
Indeed, a study of drilling footage for the U.S. land market indicates that total quarterly footage is up 21 percent since activity levels bottomed in the first quarter 2002. The study draws upon completion data compiled by Fort Worth-based RigData. Footage in major land drilling markets exceeded 26 million feet for the quarter.
A separate examination of quarterly filings by publicly held land contractors demonstrates industry expenditures on direct drilling costs remained essentially flat during the year.
Both third quarter data sets affirm that operators get the best crews, equipment, prices, and performance at the lower end of the cycle. More on that in a minute.
First, for those who like cyclical comparisons, third quarter 2002 footage trends were similar to those of the second quarter 2000 and the first quarter 1997—two markers that occurred early in industry upcycles. Stellar commodity prices may yet stimulate a return to field work. The number one theorem in oil and gas, after all, is that field work follows commodity prices, something that has been true for most of the last century, but seems to have suffered a disconnect this year.
With one exception only, footage expanded sequentially in every land market during the third quarter. Appalachia witnessed the biggest gain compared to second quarter and was up 15 percent, largely due to seasonal factors related to natural gas drilling. However, footage was up 11 percent in the Gulf Coast, 10 percent in the Rockies, seven percent in the Midcontinent, and five and six percent respectively in the Permian Basin and ArkLaTex.
South Texas footage showed a drop of about five percent and was the only land market to do so, according to RigData numbers.
So what does it mean? There are those today who say the oil and gas industry operates on a just-in-time business model, which works well in the manufacturing sector, but creates distortions in a commodity-based economic endeavor that magnify pricing disparities and efficiencies at both ends of the cycle. That just-in-time model implies there is a theoretical base level of drilling necessary to satisfy market demands, hold leases, or keep the infrastructure functioning on a daily basis.
Within this context, third quarter land market numbers suggest the industry is near that level.
That said, there has been growing speculation over the last three years on the number of active rigs necessary to keep gas production flat in North America, let alone grow it to meet anticipated future demand. Much of this speculation originated from financial industry models exploring the relationship between gas production and rig count.
However, footage is probably a better marker than rig count. Under the footage umbrella, hydrocarbon production is more closely associated with the volume of hole bored through the earth’s crust rather than the number of units boring hole.
Here, too, there are limits as to how far one can stretch the "volume-of-hole" marker in trend analysis. One need look no further than that ubiquitous rainbow-colored slide depicting decline rates for gas wells by year of discovery. The slide was developed by a consultant for EOG Resources but has since become the industry's most frequent benchmark in the endless parade of PowerPoint presentations that characterize oil and gas conferences. The slide, which shows accelerating decline rates, indicates a maturing resource that requires greater effort to maintain the same yield. It is the concept behind today's industry mantra that higher average commodity prices are necessary to finance the levels of field activity it will take to offset depletion and eventually grow production volume.
So how is the industry doing this year? In the land sector, things have been status quo regarding field expenditures. Quarterly earnings make it possible to build a model estimating the amount of money oil and gas companies spend on direct drilling costs in the U.S. land market. Data now covers the first three quarters of the year. The model suggests quarterly expenditures on land rigs have ranged between $720 and $760 million this year, or an annual run rate of about $3 billion.
Now, while these expenditures remained remarkably consistent through three quarters, land footage increased 21 percent year-to-date and nine percent sequentially, while average quarterly rig count was up 14 percent in the third quarter compared to the first quarter, and only up four percent sequentially.
Permit an aside here. Gas production is a tougher nut to crack, particularly that portion of production related to land activity. In the aggregate, several industry estimates speculate total third quarter gas production is down about five percent year-over-year and about one percent sequentially. The nut is tougher yet to crack because of a couple of hurricanes offshore late in the quarter and shut-in production in several land markets.
That said, there has been measurable gain in drilling productivity, as measured by the volume of hole bored into the earth's surface, both on an organic basis and in comparison to dollars spent and rigs employed.
Ask land drilling contractors about this and the explanation is straightforward. When demand for drilling services is slack, operators get the best crews and best equipment since contractors seek ways to keep their best hands employed. Safety improves, efficiency improves, and projects experience less downtime.
This portion of the cycle represents an attractive time to expand field programs, although few operators avail themselves of the opportunity, usually because it is at the wrong end of the commodity price cycle.
That is not the case today. Operators are missing a window of opportunity as far as what they get for their drilling dollar, a window that may not reappear until the cycle turns again a few years down the road.
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