Whether it is a FlexRig (Helmerich & Payne), ShaleDriller (Independence Contract Drilling), APEX (Patterson-UTI), PACE-X (Nabors Industries Ltd.), Super Triple (Precision Drilling), ADR (Ensign Energy Services), BOSS (Unit Corp.) or other Tier 1 shale rig, operators are opting for the latest technology to gain cost advantages and performance enhancements during the current downturn in the industry.

For example, John Lindsay, CEO and president, Helmerich & Payne (H&P), said during the company’s first-quarter 2015 conference call April 23, “Despite the reductions in our activity, there might be another sign that the market is establishing a bottom. We have recently contracted a handful of FlexRigs in the spot market to customers who are trading up―high-grading rigs in their drilling programs.”

For the week ending May 8, the drop in the Baker Hughes Rotary Rig Count slowed to 11 rigs, perhaps signaling a leveling of the number of working rigs. The count was at 894 rigs compared to 1,855 rigs for May 8, 2014. There were some glimmers of improvement, with increases of two rigs in Colorado and one in North Dakota. The count remained flat in Alaska (10 rigs), Pennsylvania (47 rigs) and Wyoming (24 rigs). By basin, the Barnett and DJ-Niobrara were each up one rig. The Ardmore Woodford, Arkoma Woodford, Haynesville and Williston remained flat.

Many drilling contractors have been able to keep more of the Tier 1 rigs (with AC drive and often top drives and self-mobilization systems) working while the Tier 2 rigs (silicon-controlled rectifiers [SCR] that can be retrofitted with top drives and self-mobilization systems) and legacy rigs (mechanical) are being stacked.

Retirement of Tier 2, legacy rigs

Operators are optimizing their development programs, resulting in greater preference for high-specification rigs, notably Tier 1 AC-drive rigs, said Marc Bianchi, Cowen Equity Research, in an April 9 report on seven land drillers under its coverage. AC rigs were introduced in the early 2000s. At the end of 2009, there were only about 275 AC rigs, accounting for 37% of horizontal and directional activity.

The Permian Basin had the highest number of working rigs in the Baker Hughes Rotary Rig Count at 237 for the week ending May 8. The rig count was down one rig from the previous week and 308 rigs from the same week in 2014. (Photo by Tom Fox)

The industry has added consistently 50 to 150 AC rigs per year, totaling about 800 rigs by the fourth-quarter 2014 peak and accounting for 50% of total horizontal and directional activity. “Since the 4Q 2014, AC rigs have fallen at a slower pace than less capable rigs and now account for about 67% of horizontal and directional activity,” he explained.

“Over time we expect continued newbuild AC rigs to displace older, less capable equipment, albeit at a slower pace given less attractive newbuild economics,” he continued. “Among the various horsepower ratings, we view the 1,500-hp class to be most in demand.”

Retirement of SCR rigs has already begun. In the H&P quarterly report call Lindsay said, “Horizontal well complexity and factory-type drilling requirements in the ongoing U.S. energy revolution have changed the games for drilling contractors and other service providers. As a result, fewer mechanical and SCR rigs will be required in the future, especially in the rig category below 2,000-hp drawworks ratings.”

The company is now decommissioning its first- and second-generation FlexRigs. “These 17 SCR-powered rigs built in 1998 and 2001 were a very important strategic move in the company’s history. Even though Flex 1 and Flex 2 rigs were a dramatic improvement over the legacy rig fleet, it has become evident that SCR power is not the preferred technology for today’s more complex well design,” he explained.

“What customers want is AC drive. The future holds many opportunities for H&P. The FlexRig 3, FlexRig 4 and FlexRig 5 make up approximately 37% of the AC market share in the U.S. today. And FlexRigs have an opportunity to take market share internationally as well,” he added.

Term contracts buoy drillers

Patterson-UTI Energy Inc. does believe the rig count could drop further. “While the pace of the rig count decline has slowed, we believe it is not yet at the bottom. We have not been immune to the reduction in rig count, but we have gained market share as our rig count has held up better than that of the general industry,” said Mark Siegel, Patterson-UTI chairman, during the first-quarter 2015 conference call April 23.

Having a large percentage of rigs under term contracts is one of the reasons for the gain. “Of course, ultimately, the reasons we had so large a percentage of our rigs operating under term contract were the high demand for our APEX rigs and our quality people and operations.”

A forest of stacked H&P rigs near Odessa, Texas, shows the extent of the downturn. The company is now decommissioning 17 of its first- and second-generation FlexRigs built in 1998 and 2001. (Photo by Tom Fox)

Andy Hendricks, Patterson-UTI CEO, pointed out that U.S. land rig count was down 40% from the peak. “The proportion of rigs comprised of APEX rigs increased, positively impacting our daily rig revenue.”

The company completed six new APEX rigs during first-quarter 2015, bringing the total number of APEX rigs in its fleet to 151. Another 10 APEX rigs are scheduled to be completed this year, all of which are under contract. Among these is the first APEX rig to be delivered to Canada, he continued.

Nabors has the largest land drilling rig fleet in the world with about 500 rigs, including more than 215 new AC rigs such as the new PACE-X rig, and more than 150 recently refurbished SCR rigs. The company is pursuing opportunities to add rigs in high-spec drilling markets worldwide. Average utilization for its AC-drive rigs in first-quarter 2015 was 72%, while it was only 31% for legacy rigs, according to the first-quarter 2015 earnings presentation April 22.

Optimal pad drilling

Not all contractors agree with the AC-drive emphasis. One of the newer companies, Independence Contract Drilling (ICD), which was founded in 2011, maintained more than 98% operational uptime during first-quarter 2015. The company delivered two new ShaleDriller rigs during first-quarter 2015. Its 14-rig fleet is entirely AC-driven.

“On a macro level as we progress through 2015 into 2016, we believe the use of pads to optimize operators’ field development economics will continue to grow, as will the wellbore intensity of newer pads. The compelling economics of pad development should drive the demand and utilization for pad-optimal equipment early and even in a modest recovery,” said Byron Dunn, ICD CEO, in first-quarter 2015 earnings call May 7.

“We think the current downturn bottoms during the 3Q 2015, flattens in the year-end and begins to recover in 2016. It is important to note that I am not referring to AC rigs in this demand analysis but pad-optimal rigs as defined by operators. Pad-optimal rigs are not just AC-driven,” he explained. Not all AC rigs are ideally suited for pad drilling.

Pad-optimal rigs have six specific characteristics: 1,500 hp, dual-fuel capabilities, 7,500-psi mud system, safe by design and capable of fast conventional moves, omnidirectional walking systems, and AC drive.

“Rigs with these characteristics will be the first to achieve 100% utilization in a recovery. Equipment that doesn’t meet these characteristics will fill the market niche previously occupied by SCR equipment and returned to work on a slower tempo than pad-optimal rigs,” Dunn continued.

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