UPDATE1-COLUMN-US drilling frenzy slows as natgas liquid prices fall: Kemp
(Updates with chart on NGL prices. John Kemp is a Reuters market analyst. The views are his own)
By John Kemp
LONDON, Oct 12 (Reuters) - Frantic drilling activity across the United States has at last begun to moderate, as the industry responds to the plunge in prices for natural gas and now liquids such as butane and natural gasoline.
Production companies have switched towards oil-rich and liquids-rich plays since 2008, driven by the gas glut and falling gas prices. But now the number of rigs targeting oil and condensate plays also appears to have peaked.
Between July 2008 and July 2012, the number of rigs drilling for gas fell by almost two thirds, from 1,555 to just 522, while the number of rigs targeting oil rose four-fold, from 393 to 1,427, according to oilfield services company Baker Hughes , as the industry responded to a record oil/gas price ratio (Chart 1).
Rigs shifted from dry-gas plays such as the Barnett shale underneath Fort Worth in Texas to wet-gas plays such as Eagle Ford in south-west Texas, where methane is found in association with heavier molecules like ethane, and oil-rich plays like North Dakota's Bakken.
High prices for co-products helped support continued gas drilling and production even as prices sank below $3 per million British thermal units. They have also significantly improved the economics of oil wells drilled in comparatively expensive shale plays.
Bakken wells cost an average $8.5 million each to drill, making them some of the most expensive in the country. But the internal rate of return is almost 60 percent, among the highest, according to a recent study by Bentek, in part because of the high yield of natural gas liquids, which can be stripped from the associated gas production and sold separately ("The Williston Basin: Greasing the Gears for Growth in North Dakota" July 2012).
The massive expansion of liquids output is now causing its own problems, however, as the market becomes flooded with record stocks of ethane, propane, butane and natural gasoline, weighing down prices.
Combined stocks of natural gas liquids (NGLs) currently stand at 188 million barrels, up from 147 million at the same point last year, according to the Energy Information Administration (EIA). Butane prices have fallen to just $62 per barrel, down from $75 in 2011. Natural gasoline prices are down to $87, from almost $100 last year (Chart 2).
The total number of rigs drilling on land for some combination of oil, gas and condensates across the United States has fallen by 189 (9.6 percent) from 1,978 to 1,789 over the last 12 months.
Over the border, in Canada, the number of rigs drilling on land is down by 150 (29 percent) from 521 to 371 over the last year.
*************************************** Chart 1: Chart 2: Chart 3: Chart 4: Chart 5: ***************************************
Rig counts alone provide a misleading indication of total drilling activity, since drillers have become adept at drilling faster, more accurately, minimising downtime and generally becoming more efficient.
As the oil and gas boom has sent the costs of hiring rigs and crews soaring, the pressure to improve efficiency has become intense. Fewer drilling rigs can now drill more wells than before.
Nonetheless, there are signs the drilling market in North American is starting to cool slightly as poor prices for natural gas and now liquids have an impact.
In its second quarter earnings release, oilfield services company Schlumberger noted the hydraulic fracturing market on land in North America has weakened in recent quarters.
The downturn appears to be quite general across the United States, with rig counts down in most major petroleum-producing states (Charts 3-4).
DRILLING SHIFTS AGAIN
Outside North America, where prices are not so affected by freely available shale gas, drilling continues to rise.
In September, there were 1,254 rigs drilling for oil or gas outside the United States and Canada, according to Baker Hughes. It was more than double the number in 1999 and the highest number of operating rigs since 1986 (Chart 5).
The boom centres on the Middle East, where there were 381 rigs drilling last month, up from 292 in September 2011 and 276 in 2010. Latin America has also witnessed a sharp expansion in exploration and production activity, with a smaller uptick in Africa.
As surplus oil and gas production in North America depresses prices, more drilling assets and specialist crews will be redeployed overseas to take advantage of higher returns.
(Editing by Keiron Henderson)
Keywords: COLUMN KEMP/US OIL&GAS