Current Onshore Rig Boom Could Be Halted By Next Year

Wednesday, June 20, 2001
The boom in U.S. onshore oil and natural gas drilling has yet to peak, bolstering forecasts of continued strong demand for rigs, analysts and executives said this week.

But growth in the onshore rig market is likely to slow down next year, and activity in the offshore market is already tailing off, with some companies sending rigs away from the Gulf of Mexico to other countries where profits may be better.

"We expect to see 30 to 33 percent growth in the total U.S. rig count this year over 2000," an analyst said.

"The problem is, we'll only see 8 percent growth from 2001 to 2002, and then companies will have to add units," the analyst added, noting that the 2001 rig count increased 49 percent from 1999 to 2001.

Meanwhile, the CFO of drilling company Grey Wolf, said onshore rig utilization showed no signs of leveling off.

The CFO, David Wehlmann, said that in the past six weeks, "There was a rumor that one large independent was going to drop 20 to 25 rigs into the market."

"That did not happen, but the phone did not stop ringing with customers wanting those rigs. No customers have dropped rigs; the rig market is still very strong."

The expectations of a continuing upside to the rig count are consistent with other industry forecasts. This week Salomon Smith Barney analysts revised their 2001 rig forecast upward for the U.S., Canadian and worldwide markets.

The U.S. rig count is expected to increase by 39 percent this year, compared to a 45 percent increase in 2000 over 1999, led by an increase in demand for land rigs, the Salomon Smith Barney analysts wrote in a research report.

Despite the surging demand for onshore rigs, "offshore rig demand is taking a breather," due to operators reassessing drilling plans or seeking authorization for increased budget funds, according to Salomon Smith Barney.

Other industry experts say additional factors are causing the slower offshore demand, which is being led by current weakness in shallow water rigs, or jackups.

Executives of leading jackup companies such as ENSCO International, Global Marine Inc. and National Oilwell Inc. told investors on Tuesday that current demand had leveled off at close to full capacity.

Analysts have reportedly estimated that offshore rig utilization is at 98 percent, citing the imminent departure of six to eight rigs leaving the Gulf of Mexico for the pricier contracts of West Africa this year.

Energy hedge fund manager Iain Smith puts the number of Gulf Coast jackups leaving for other waters at between eight and 12, which he expects to pressure day rates.

Also pressuring the jackup market, is "a handful of idle rigs," seasonal decline for exploration and production that should pick up in the third quarter, and the effect of majors such as Chevron and Andarko Petroleum dropping a few rigs, Smith says will be picked up again in a few months. - (Reuters)

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