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COLUMN-US drilling frenzy slows as natgas liquid prices fall: Kemp

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(John Kemp is a Reuters market analyst. The views expressed arehis own)

By John Kemp

LONDON, Oct 12 (Reuters) - Frantic drilling activity acrossthe United States has at last begun to moderate, as the industryresponds to the plunge in prices for natural gas and now liquidssuch as butane and natural gasoline.

Production companies have switched towards oil-rich andliquids-rich plays since 2008, driven by the gas glut andfalling gas prices. But now the number of rigs targeting oil andcondensate plays also appears to have peaked.

Between July 2008 and July 2012, the number of rigs drillingfor gas fell by almost two thirds, from 1,555 to just 522, whilethe number of rigs targeting oil rose four-fold, from 393 to1,427, according to oilfield services company Baker Hughes, as the industry responded to a record oil/gas priceratio (Chart 1).

Rigs shifted from dry-gas plays such as the Barnett shaleunderneath Fort Worth in Texas to wet-gas plays such as EagleFord in south-west Texas, where methane is found in associationwith heavier molecules like ethane, and oil-rich plays likeNorth Dakota's Bakken.

High prices for co-products helped support continued gasdrilling and production even as prices sank below $3 per millionBritish thermal units. They have also significantly improved theeconomics of oil wells drilled in comparatively expensive shaleplays.

Bakken wells cost an average $8.5 million each to drill,making them some of the most expensive in the country. But theinternal rate of return is almost 60 percent, among the highest,according to a recent study by Bentek, in part because of thehigh yield of natural gas liquids, which can be stripped fromthe associated gas production and sold separately ("TheWilliston Basin: Greasing the Gears for Growth in North Dakota"July 2012).

CONDENSATE GLUT

The massive expansion of liquids output is now causing itsown problems, however, as the market becomes flooded with recordstocks of ethane, propane, butane and natural gasoline, weighingdown prices.

Combined stocks of natural gas liquids (NGLs) currentlystand at 188 million barrels, up from 147 million at the samepoint last year, according to the Energy InformationAdministration (EIA). Butane prices have fallen to just $62 perbarrel, down from $75 in 2011. Natural gasoline prices are downto $87, from almost $100 last year.

The total number of rigs drilling on land for somecombination of oil, gas and condensates across the United Stateshas fallen by 189 (9.6 percent) from 1,978 to 1,789 over thelast 12 months.

Over the border, in Canada, the number of rigs drilling onland is down by 150 (29 percent) from 521 to 371 over the lastyear.

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Rig counts alone provide a misleading indication of totaldrilling activity, since drillers have become adept at drillingfaster, more accurately, minimising downtime and generallybecoming more efficient.

As the oil and gas boom has sent the costs of hiring rigsand crews soaring, the pressure to improve efficiency has becomeintense. Fewer drilling rigs can now drill more wells thanbefore.

Nonetheless, there are signs the drilling market in NorthAmerican is starting to cool slightly as poor prices for naturalgas and now liquids have an impact.

In its second quarter earnings release, oilfield servicescompany Schlumberger noted the hydraulic fracturing market onland in North America has weakened in recent quarters.

The downturn appears to be quite general across the UnitedStates, with rig counts down in most major petroleum-producingstates (Charts 2-3).

DRILLING SHIFTS AGAIN

Outside North America, where prices are not so affected byfreely available shale gas, drilling continues to rise.

In September, there were 1,254 rigs drilling for oil or gasoutside the United States and Canada, according to Baker Hughes.It was more than double the number in 1999 and the highestnumber of operating rigs since 1986 (Chart 4).

The boom centres on the Middle East, where there were 381rigs drilling last month, up from 292 in September 2011 and 276in 2010. Latin America has also witnessed a sharp expansion inexploration and production activity, with a smaller uptick inAfrica.

As surplus oil and gas production in North America depressesprices, more drilling assets and specialist crews will beredeployed overseas to take advantage of higher returns.

(Editing by Keiron Henderson)

((john.kemp@thomsonreuters.com)(+44 207 542 9726)(ReutersMessaging: john.kemp.thomsonreuters.com@reuters.net))

Keywords: COLUMN KEMP/US OIL&GAS