After 20 years of being a gas-driven market, the US industry is now being driven by oil activity, particularly the growing intensity of horizontal drilling. Prior to the economic downturn in 2008, vertical drilling activity was high. Then the shale plays began picking up steam and the switch to horizontal drilling led to a stark change in the land drilling rig market.

Matt Conlan, senior analyst, Wells Fargo Securities, told participants at the 2013 International Association of Drilling Contractors annual meeting in San Antonio that with the switch to horizontal drilling, the vertical market “has never recovered and we don't think it ever will recover, at least not in the time horizon we're looking at.”

The number of rigs drilling vertically has dropped by about 90% since the downturn. With horizontal drilling has come pad drilling, resulting in much more efficient use of drilling rigs and an oversupply of rigs.

“We're doing more with less. We're moving from leasehold drilling to manufacturing-type, pad drilling. We are really cutting down our drilling times and drilling more wells with fewer rigs,” he said.

“Historically, what we found is that when rig utilization is above 80%, day rates go up. Right now, we are comfortably below 80% at 68%. The question is, 'When, or if, will land rig utilization return to 80%?' We do think the rig count will be going up and gas will give us a little help. But overall we don't see utilization getting back to 80% by the end of 2015,” he added.

Jim Wicklund, managing director, energy research, Credit Suisse LLC, agreed the land rig market faces some challenges. “The land rig industry is going to have to spend about one-third of its market capitalization over the next five years just to recapitalize the fleet. That is very difficult. They are spending every nickel they make to recapitalize their fleets.”

Currently, there are about 1,700 land rigs operating in the US, which represents the top 15% of activity in the US onshore market in the past 25 years, Conlan said. The problem facing the industry is too many idle rigs, and there are several ingredients that go into that overcapacity.

“The first is industry spending, which is doing great. Indications are that spending will increase somewhere around 8% to 10% next year. It is a pretty healthy increase. The second is newbuilds. We have had a lot of newbuilds over the past eight years. The third, of course, is rig efficiency. The last ingredient is going to have to be attrition,” he said.

Given that spending and drilling efficiency are going up and newbuilds are continuing to come forward, attrition is going to have to balance the market.

According to Baker Hughes, average drilling times in the Bakken and Marcellus have dropped by 40% over the past 18 months. The Eagle Ford is down 20%, Conlan noted.

“In these three shales in third-quarter 2013, we've drilled about 2,400 wells with 500 rigs. If we had the same drilling time as we had in first-quarter 2012, we would have needed another 240 rigs to do that. Theoretically, you have drilled yourself out of 240 rigs of demand. Of course, that's a fallacy, because there is not money to hire 240 more rigs.”

Gas drilling is seeing the same kinds of efficiencies. In the Haynesville, Fayetteville and Barnett, the industry has had drilling improvements of 25%, he said. “Drilling is very low in these basins, there is a dream of having the gas market turn around, and that is going to save the rig market. We need to recalibrate how many rigs we're going to need. I think that doesn't bode well for the older rigs out there. We predict that 2012 was the last hurrah for older rigs.”

National Oilwell Varco's annual rig census for 2013 showed 3,055 rigs available in the US At 1,700 active rigs, the industry is a long way from 80% utilization.

—Scott Weeden

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