supply and demand, Mr Isenberg ob- Nabors’ Isenberg: Despite weak served. “The overall picture is we think on the rates, equipment needs replacing long term, supply will go down and de- mand will go up,” he said. MARKET VOLATILITY IS a fact of life Mr Isenberg also called for a new rela- THE ELECTRIC CRUNCH in the contract-drilling industry, but de- tionship with operators that recognizes spite weak dayrates and activity, the not only the need for higher dayrates, but Supply is particularly tight for the US head of the world’s largest land-drilling longer contracts, risk allocation, and op- land electric rig fleet, he said. “The count firm is still focused on the need to replace tions, notice and escalation clauses. of rigs that are stacked that could come equipment. “I believe replacement costs into the fleet is rapidly diminishing,” Mr are still relevant in this business,” re- While current utilization has sagged, Mr Isenberg predicts that a decline in the Isenberg said. He added that Nabors marked Eugene M Isenberg, Chairman alone has 50% of stacked electric units. and CEO of Nabors size of the fleet is inevitable. “Inex- Industries, which orably,” he said, “the supply of rigs is go- In the US land fleet, only 266 electrical operates 400 land ing to go down. Even if demand stays rigs exist, compared to 1,182 mechanical and 35 offshore rigs. flat—and we are more optimistic than units, according to the Reed Tool Co Rig Mr Isenberg, speak- that— supply and demand will improve.” Census. Nabors’ data shows more rigs— ing at the 1998 IADC Building new rigs only for long-term com- 313. The discrepancy is that the Nabors Annual Meeting, 23- mitments will hasten the equilibrium of figures include 47 stacked rigs likely not 25 Sept in New Or- included by Reed. (Reed discounts units leans, said that land rig dayrates must US average daily gas production vs gas rigs working practically Working rigs Gas production (12-mo daily average; Bcf/day) double from Eugene M Isenberg 650 60 current levels to justify new capacity and offset 600 59 attrition. Working rigs 57 The Nabors CEO presented data in- 550 dicating that reactivating a Gas production 55 $20,000-ft SCR rig costs some $6.25 500 million, including $3.8 million as 450 54 the existing rig value. A new-build unit would demand $12.45 million, 400 53 he said. To rationalize that $12.45 million, Mr Isenberg indicated that 350 51 dayrates must reach $16,600 at a 15.5% internal rate of return and 300 50 $18,800 for a 20% IRR. Currently, 1/7/94 7/7/94 1/7/95 7/7/95 1/7/96 7/7/96 1/7/97 7/7/97 1/7/98 7/7/98 dayrates linger in the $6,500- $8,500 range. Sources: Nabors Industries, Raymond James & Assoc, US Dept of Energy, And instead of moving upward, land dayrates have faltered since Electric land rig use in the US 1997, he said. Overall US land rates shot up 18.9% in 1997. However, Number of rigs Utilization (%) this year, onshore rates have re- 250 100 treated 5.3%, Mr Isenberg noted. Active 90 The Permian Basin was particular- Inactive 200 80 ly hard hit. Rates rose 24.6% in Utilization 1997, only to fall back 22.5% this 70 year. Still, some areas have experi- 150 60 enced gains even in 1998 (see table). 50 100 40 Higher dayrates will also result in improvements in safety, training 30 and operational efficiency, Mr Isen- 50 20 berg said. These are areas the in- 10 dustry cannot allow to leave fallow in tough times. “We don’t consider 0 0 that a cost we can cut back on,” he 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 said. Source: Nabors Industries

30 DRILLING CONTRACTOR November/December 1998 are going to stay relatively healthy,” he predicted. Change in US Land Rig Rates: 1997-98 The Baker Hughes count of rigs drilling for gas reached a peak of 654 in January, % Change then plummeted to a low of 544 in July. By Region 1998 1997 September, the count had stabilized, hov- ering around 560. Total Offshore 16.7 61.6 Despite the huge gyrations in gas rig count, however, North American daily Onshore gas production has barely budged over Northern Rockies 5.5 10.0 nearly 3 years. Production stands at roughly 52 Bcf/day, with no spikes and lit- Ark-La-Tex 4.8 18.8 tle indication of going anywhere but hori- Southeast 2.5 25.0 zontal for some time to come. Northeast 2.0 7.0 CONTRACTOR CONCERNS Gulf Coast -3.7 27.7 Reviewing the drilling industry’s con- Southern Rockies 4.8 11.3 cerns, as gauged by the Reed survey, Mr Mid-Continent -8.9 20.6 Isenberg condensed the top 5 burdens to one: “It all boils down to rig rate,” he said. Permian Basin -22.5 24.6 Mr Isenberg noted that 3 of the 5—drill California No data 5.0 pipe, availability of rig parts and equip- ment, and aging equipment—reflect re- Alaska No data 5.0 placement issues. Total Onshore -5.3 18.9 Crew availability is also answerable with higher rates. “If we pay well over a rea- Source: Nabors Industries sonable length of time, we’ll have trained people,” he said. ■ stacked longer than 3 years and which more than $100,000 would be required to return to service.) However, this is precisely what has oc- curred steadily from 1994 on. In 1994, on- ly 143 electric were operating, a recent- time nadir. Also in that year, 101 rigs were stacked and 79 inactive. By 1997, the ac- tive electric rig count had shot up to 225, a 57% increase. Just 68 were stacked and 23 inactive. This year, due to the lacklus- ter demand, the number of inactive rigs more than doubled to 29, while the active count slumped to 217. Interestingly, how- ever, the number of stacked rigs fell to 47 units. Likely those 21 rigs were refur- bished in anticipation of robust drilling, only to join the inactive fleet. Currently, according to Nabors data, uti- lization of electric rigs stands at about 88%, down just slightly from the super- charged 1997, when about 92% of the electric units were operating. GAS DRILLING

Another bright spot, Mr Isenberg said, is gas drilling in North America. The Nabors CEO observed that even though drilling has dropped off overall, drilling for natural gas remains relatively strong. “Over a longer period of time, gas prices

November/December 1998 DRILLING CONTRACTOR 31 was 1986, the rig count would be a lot low- Phillips drilling manager: It’s wide er,” Mr Jones said. “The utilization would be a lot lower.” Also, operators need to open for new-rig development grow their reserve base. However, the and gas is a nag- ONE DAY, THE DEEPWATERdrilling spending. “This is going to be big bucks,” ging concern, as is the political and eco- industry might use nuclear-powered sub- Mr Jones said. nomic stability of developing countries. marines to drill in deepwater directly He said he was amazed that the UK had from the sea floor, suggested Phillips Pe- PRIORITIES AND CONCERNS planned to increase taxes recently. “We’d troleum’s Drilling Manager for World- just gone through that a few years ago,” wide Drilling & Production Services, In the years ahead, Mr Jones said the in- Mr Jones remarked. speaking at the 1998 IADC Annual Meet- dustry should strive for HSE excellence ing, 23-25 Sept in New Orleans. while accelerating the pace of explo- The planned tax increase was warded off ration to decrease the time to production. by a concerted industry effort, in which This is just one example of the non-con- Technology should continue to decrease IADC played a leading role, coupled with ventional thinking that the E&P industry finding and development costs. “If this weak oil prices. ■ needs in the future, noted Morgan Jones. Mr Jones observed that contrac- tors should help develop world-class technology applications. “Drilling con- tractors, you have a wide-open territory to develop new rigs,” he said. At the same time, he said Phillips had no plans to cut capital spending, despite current soft oil. “Phillips is committed to maintaining CAPEX at $14-$15/bbl and we’re looking at how to do it at $12 and $13,” he said. Mr Jones said that the drilling industry’s challenges in 1999 and beyond combine the frontiers to be developed and the tools, people and means through which we develop them. He predicted that the industry would continue to explore in ever more complex environments, in terms of geology, deep water and environ- mental sensitivity. At the same time, the drilling business needs to incorporate “smart” drilling procedures, as well as completion tech- niques. “We’ve all heard of smart comple- tions, but what’s smart drilling?” he asked. “We got to drill with new ideas.” Another area is environmental steward- ship. “Drilling contractors are slowly get- ting with the program,” he said. Mr Jones went on to predict that, “Before I retire, which is not too many days away, all rigs will be drip free.” At the same time, Mr Jones said, the in- dustry needs to review its processes, in the wake of the departure of so many ex- perienced personnel. “We lost our insti- tutional memory,” he said. “The younger generation coming up don’t know why we do things. If they don’t know, they’ll waste a lot of time reworking old problems.” Phillips, Mr Jones said, has introduced a concept caused MAXWELL, shorthand for “Maximizing Well Value”. MAXWELL, he said, will be a focus for the company’s

November/December 1998 DRILLING CONTRACTOR 33