Drilling Industry Stretched By High Demand

Monday, March 26, 2001
The lure of higher oil and gas prices has pushed the number of rigs exploring for oil and natural gas in the United States to a 10-year high, stretching the drilling industry close to its limits. The domestic rig count reached 1,163 during the week ending March 23 - the highest number since December 10, 1990 - when 1,179 rigs were in use, according to oil services firm Baker Hughes Inc. Spurred by record gas prices and the biggest oil market boom for two decades, independent U.S. energy companies are putting their record revenues back into extra drilling, but are finding it increasingly difficult to staff the growing number of rigs. Unlike 10 years ago, exploration for natural gas has eclipsed that for oil, and analysts say the increase in rig use this year has not yet peaked. This year's rig count, for example, should average 1,200, an increase of 31 percent over last year, and the busiest level of activity since 1985, Solomon Smith Barney analysts said in a research report. The drilling extravaganza was pushing the exploration industry up against its capacity, industry experts said. "We expect some growth this year, but relatively modest compared to what we had last year. We've basically employed what we can employ," Baker Hughes' Director of Investor Relations Gary Flaherty said. "Our folks would indicate that we might be able to get up to about 1,250 rigs, and that's probably the maximum." Nearly 80 percent of the current drilling activity -- 904 of the rigs in use -- is for gas, the largest proportion it has ever taken up. "With growing demand for natural gas and limited supplies, prices are hovering near $5 per million British thermal unit, making the economics of drilling for gas highly attractive," Salomon Smith Barney said. "As a result operators are scrambling to find rigs and must wait for months to secure spare capacity." It marks a complete turnaround from the highs of a decade ago when nearly 60 percent of rigs were looking for oil, according to Baker Hughes. "You can see we've come from being an oil and gas industry to a gas and oil industry," said Flaherty. The lack of idle rigs means that hiring costs are rocketing. Day rates have moved into the $15,000 to $20,000 range, the highest ever for U.S. rigs. Another bottleneck is the availability of crews, in turn increasing costs. "Land drilling contractors have stepped up their recruiting and training efforts, and salaries have risen dramatically, by 40-50 percent, Salomon Smith Barney said. The emphasis on gas means the drilling boom has failed to translate into much new oil, helping to keep U.S. inventories of crude near historic lows. Current U.S. domestic production of 5.9 million barrels per day is right where it was two years ago, when oil prices were at historic lows. Gas production rose three percent last year to 52 billion cubic feet last year, according to the Energy Information Administration (API). This year analysts project gains in U.S. gas production of between 1.5 and 3 percent. - (Reuters)
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