U.S. Land Market at Record Footage Levels

A glance at footage totals in major U.S. land markets shows continuing improvement in the volume of bored hole over the last three drilling cycles. And the trend has yet to peak in the current cycle. As a result, new records are likely over the next two quarters.

The picture is starting to come into focus just 15 months into the waxing phase of the current drilling cycle.

The U.S. land drilling industry has put up impressive performance numbers--essentially modern-day records in drilling volume. It is unequivocally the best performance since the storied boom of 1979-81. And it is occurring with fewer rigs, which makes the performance of special note.

This performance proves something that contractors have been discussing for some time anecdotally: that is, that efficiency is increasing in significant ways. Ultimately drilling is an industrial endeavor that involves portable industrial systems operating in remote locations to bore through the earth's crust. Generating more hole means providing operators with greater exposure to hydrocarbon-bearing formations.

This is especially so in light of the current nature of land drilling which involves harvesting existing reserves and monetizing the gas resources.

The efficiency question is an intriguing topic. At the Society of Petroleum Engineers meeting in Denver last October, the president of a major international service company stunned attendees by showing a set of slides correlating the Baker Hughes rig count and total footage, and arguing there had been no efficiency improvements in 10 years.

Yet contractors have described anecdotally significant performance improvements over the last half-decade. It is not uncommon to hear contractors discuss projects that took 22 days a few years back being drilled in 14 to 16 days currently. These are the same formations at the same depth levels, usually within short distance of one another. These improvements sometimes amount to a 40-percent reduction in the time it takes to reach total depth.

But there are no comprehensive studies that expand the anecdotal evidence to the industry in general.

This is a major reason the footage totals during the last three quarters are of interest. During the last three quarters of 2003, the U.S. land sector generated more than 105 million feet of hole, or about four percent more hole than the previous peak of 101 million during the first three quarters of 2001.

Remember, performance in the summer of 2001 was jaw-dropping at the time it occurred. Yet current drilling activity produces a shrug at best, as though it is business as usual nowadays.

But it is unusual business indeed.

The numbers for the final three quarters of 2003 are arguably the best performance on a nominal basis since the 1977-81 period, an era that will (probably) never be repeated in the U.S. land market.

There have been three main upcycles since then, all occurring within the last seven years. The third one is underway currently and has not yet reached peak level performance.

If one breaks each drilling cycle into consecutive quarterly drilling volumes, it is possible to demonstrate significant improvements in drilling volume. For example, the three peak quarters in 1997 produced about 93 million feet of hole with slightly lower rig intensity than the two ensuing cycles. The 1997 performance was topped by an eight percent gain in volume in 2001 with slightly greater rig intensity.

The final three quarters of 2003 topped the 2001 performance by four percent with slightly lower rig intensity.

And it is not over yet. Footage is likely to continue increasing in the first quarter 2004. And one can argue that footage will grow further in the second quarter. Rig counts during the first week in March topped the 2003 peak, which occurred in mid-fourth quarter. There are indications that this strong surge in rig activity is going to continue during the first half of 2004.

One can make an argument that the land drilling sector could exceed the 2001 peak rig count sometime this summer if large drilling programs continue their current activity coupled with the return of smaller E&P firms, or the moms and pops, to the drilling picture. This latter group is down approximately 50 rigs versus fourth quarter levels. Meanwhile, larger volume E&P programs are up more than 100 rigs--primarily since mid-December.

Here is where things get interesting. Looking at quarterly footage, the industry's performance during each of the final two quarters in 2003 was within striking distance of the volume drilled during the third quarter 2001, which remains the most recent record for the land sector.

Footage during both the third and fourth quarters was within a percentage point of the 36 million feet the industry recorded in the major U.S. land markets during the July-September period in 2001.

There is one other argument in favor of improved efficiency. A Land Rig Newsletter study of the most active U.S. land rigs shows footage totals moving up 23 percent over the last four years for the top 20 units, and up about 14 percent for the top 75 units.

These units are invariably employed harvesting reserves on tighter spacing requirements. The process emphasizes the ability to schedule rig moves and other elements of operational efficiency. The rigs spend most of their time turning to the right. These rigs were located either in the Sonoran Arch of West Texas or the Denver-Julesberg Basin, and account for the 1.5 percent of all drilling rigs. That this segment can continue to improve footage in the aggregate suggests something is at work here.

There are a number of reasons cited for the improvements, depending on with whom you discuss the issue, but the one item that comes out tops on everybody's list is improvements in drilling bits.

The bigger picture is that a sector that had been written off 10 years ago as a declining footnote in the oil and gas industry has experienced three cycles of resurgence and has increased its productivity at each occurrence.

This cycle will be the most interesting yet.