Handling success

Global drilling activity does not yet reflect recent higher oil prices, but the forces are gathering.

Global drilling activity does not yet reflect recent higher oil prices, but the forces are gathering. Normally, producers should now be pushing down drillpipe, but activity is delayed beyond the normal price-response trailing period (six months), for a number of reasons:

  • Non-OPEC producers, including many of the large multinationals, are pre-occupied with mergers (underway and studied), and E&P staffers are trying to protect jobs.
  • Global crude storage won't return to normal levels until late December, and producers would rather see more drawdown before resuming drilling.
  • Energy demand growth is still on the slow side, and there is widening concern that it will stop rising with higher price levels.
  • Excellent oil price margins are being used to support poor downstream performance or support equity values, so E&P divisions continue to work under budget constraints.
  • OPEC producers have spare capacity, sufficient to meet near-term demand increases, even though they probably could not sustain higher production levels very long before substantial investments would be necessary.

Earlier forecasts called for a significant boost in drilling activity by year-end. However, normal drilling levels may not return until the middle of the first quarter next year. OPEC and non-OPEC producers must be reasonable in their expectations about present high oil prices and what is propping them up. It is a time to share relief and discuss putting a floor under oil prices, but not to celebrate.

Gas competition still there

Despite the availability of low-cost combined-cycle natural gas turbines and the falling costs of gas pipelines and LNG systems, competitors such as coal, hydro, and nuclear power are not going away. In fact, the three are continuing to expand global stationary plant capacity faster than LNG in many areas and are waging a battle to boost efficiency and deal with environmental effects (Jenner & Associates, CGES-OGJ conference, Houston, September).

Combined cycle gas turbines have the lowest marginal costs for intermittent operation, so they've become the first units to be added or removed when power needs fluctuate. Whether gas can back competitors out of base power load is a question for the future. In the meantime, intermittent cycling is producing problems:

  • New LNG development has slowed, since longer-term supply contracts are becoming more difficult to negotiate.
  • Older gas pipelines are experiencing problems with fluctuating delivery, especially if storage is lacking. Line packing, the next option requires newer thick-wall pipe and attentive pressure management.

Even though natural gas has terrific environmental qualities, market share is not going to be handed to gas producers. If producers are to continue building baseload, they may have to take a hand in reservoir-to-power-line system development.

US gas crisis coming

Annual natural gas depletion rates exceeding 50%, matched with the lack of drilling, will begin cutting into US pipeline throughput and Canadian imports early next year. Few producers are holding back on commercial gas, and undeveloped gas pools are virtually non-existent. Outlying reserves near producing gas wellbores were brought onstream as a result of project high-grading during the recent oil and gas price downturn and there isn't a lot left to go after without a significant drilling increase.

Drawdown could exceed storage volumes, if demand increases 7-10% over last winter, as is projected. The problem is twofold: First, pipeline delivery may be insufficient to assist storage drawdown, especially if wellheads freeze. Second, added production from deepwater and several onshore basins will not meet expectations.

Without a substantial ramp-up of drilling right now, a serious gas deliverability shortfall will develop by February.

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