Steep Declines to Precede Land Rig Recovery

 

The international rig fleet is a critical enabler of global energy production but the quantity and quality of available information on both the international rig fleet and demand has historically been limited, particularly in core markets such as the Middle East, Asia and Russia. 

 

The new Douglas-Westwood (DW) World Land Drilling Rig Market Report addresses this problem by providing analysis of prospects and five-year business forecasts for the international drilling business in difficult-to-access, frontier and developing regions, as well as the established North American market. DW has been monitoring the global land drilling market for many years and has performed numerous studies into both difficult to access and ‘frontier’ areas. The report uses input from DW’s large client network formed of NOCs, IOCs, nationalized drilling companies and independent contractors, and provides valuable insight into lesser-known markets within Africa, Asia-Pacific, Eastern Europe and the Former Soviet Union (FSU), the Middle East and North Africa (MENA) and Latin America. 

 

This insight is gained through detailed integral analysis of rig demand, fleet quality, fleet specifications and the potential rig construction requirements needed to fulfill the foreseen growth in demand to 2020. Since producing the previous version of the report, DW has gained improved visibility of core markets such as Russia and Iran. Analysis on two additional countries, Chad and New Zealand, has also been added to the publication for the 2016-2020 edition. Information on individual rig specifications and equipment has also been expanded. Key drivers of this foreseen growth include rising global production targets and the increasing complexity of well requirements. Overall this has enabled production of a unique study which we believe goes a long way to filling in the gaps found in drilling market information. 

 

The downturn in commodity prices had a significant impact on onshore drilling activity in 2015, with the total number of onshore wells drilled declining by 32 percent from 90,784 to 61,873. This reduction in drilling activity had a detrimental effect on rig demand, with the global number of operational rigs falling by 25 percent from 6,334 to 4,746. The number of rigs engaged in drilling activity experienced a similar decline, falling by 24 percent from 5,427 units to 3,965, with Eastern Europe and FSU being the only region not to witness a reduction. 

 

North America, a region which is particularly susceptible to fluctuations in oil price, witnessed a 48 percent reduction in onshore drilling activity in 2015, with the number of rigs drilling also declining by 48 percent from 2,25 to 1,166 units. The market in Latin America has also been considerably impacted by sustained low oil prices, with the Venezuelan economy heavily dependent on revenues from oil, and NOCs such as Ecopetrol and Petrobras having announced significant reductions to their spending plans. The total number of onshore wells drilled in the region declined by 80 percent in 2015, resulting in a 21 percent reduction in the number of rigs drilling. 

 

Eastern Europe and FSU and MENA have been relatively more resilient. This is due mainly to OPEC’s strategy of maintaining production and conserving market share, as well as the ability of Russian operators to capitalize on low extraction costs due to the devaluation of the ruble. MENA witnessed a 10 percent decline in onshore wells drilled in 2015, driven by reductions in activity in Algeria, Egypt and Libya, with the number of rigs drilling falling by 7 percent from 389 to 361 units. Russia experienced post-Soviet record levels of production in 2015, driving a 7 percent increase in the number of onshore wells drilled in Eastern Europe and FSU, and an 11 percent rise in the number of rigs engaged in drilling activity.

 

Following announcements of further reductions to capital expenditure for 2016, DW expects an additional decline in onshore drilling activity to result in further compression to the land rig market as operators adjust to working in a sustained low oil price environment. The global number of onshore wells drilled is forecast to decline by a further 21 percent in 2016, resulting in a 24 percent reduction in the number of rigs drilling. North America will again see the largest percentage decline in terms of the number of rigs drilling at 42 percent. The Latin American market will also continue to contract, with the number of rigs drilling forecast to decline by 12 percent. In Sub-Saharan Africa, the total number of onshore wells drilled is forecast to decline by 14 percent, resulting in a 17 percent reduction to the number of onshore rigs drilling, due to financial difficulties faced by operators within the region, and security concerns in countries such as Nigeria and Sudan. In contrast, drilling activity is expected to increase marginally by 2 percent in MENA, driven predominantly by projects in Kuwait and Saudi Arabia, with the number of rigs drilling forecast to rise by 3 percent. 

 

Post-2016, DW expects to see an improvement in market conditions, with drilling activity forecast to rise again following a recovery in commodity prices. The global number of onshore wells drilled expected to increase at a CAGR of 9 percent over the next four years from 49,128 in 2016 to 69,407 in 2020. Subsequently, the global number of rigs drilling is forecast to rise by 38 percent from 3,414 units in 2016 to 4,703 in 2020. The global capable fleet size is expected to increase by 188 units over the forecast period, reaching 9,255 units by 2020. Eastern Europe and FSU will account for approximately 49 percent of the additional units to the fleet, as increased horizontal drilling activity results in Russia results in rising demand for high-HP rigs.

 

In North America, the total number of rigs drilling is forecast to increase at a 25 percent CAGR over the next four years as drilling activity recovers, with the capable fleet size increasing marginally from 2,837 units in 2016 to 2,846 by 2020. This growth is until expected to occur until later in the forecast period, with rig demand being insufficient to require additions to the fleet until 2020. In Asia-Pacific, the total number of rigs drilling is forecast to increase by 8 percent over 2016-2020, despite a marginal decline in drilling activity. This is due to increased geological complexity as China seeks to develop its unconventional reserves, resulting in a larger number of rigs needed to satisfy the increased number of drilling days required. Eastern Europe and FSU is expected to see the largest regional growth in terms of capable fleet size, with the number of rigs drilling forecast to rise at a 2 percent CAGR over the next four years. MENA is expected see a 7 percent increase in its capable fleet size, with the number of rigs drilling forecast to rise at a 5 percent CAGR. The development of the Vaca Muerta region in Argentina, as well as the ITT project in Ecuador, will contribute to rising drilling activity in Latin America over the forecast period, resulting in a 29 percent increase in the number of rigs drilling in the region. 

 

Despite the growth forecast in the market over 2016-2020, global rig fleets are not expected to return to 2014 levels by 2020. This indicates that whilst the outlook for the market in the short-to-medium term is relatively positive when compared to the trends seen over the previous eighteen months, it is unlikely to experience the level of activity seen in the pre-downturn environment until well into the 2020s. 

 

Sustained low oil prices are placing increased pressure on operators to reduce costs. Subsequently, technological developments within the market have been driven by the need to maximise drilling efficiency. Notably, developments for AC rigs have focused on using automatic processes to increase the speed of the drilling operation and improve safety levels. The downturn environment has also resulted in an increased trend in the North American market towards the recycling of components such as mud motors and drill pipes from idle rigs.

 

Demand for high-specification, high-HP rigs (rated above 1,250HP) is expected to remain high despite the downturn environment, with AC rigs offering a greater degree of control and flexibility. In MENA, the increased use of Enhanced Oil Recovery (EOR) techniques in Oman, as well as the development of unconventional reserves in Saudi Arabia, is expected to contribute to rising demand for high-HP rigs. Iran’s development of shared fields along the border with Iraq, as well as Kuwait’s tight oil and Jurassic gas projects, will also drive demand for high-specification rigs in the region. Subsequently, the total number of high-HP rigs drilling in MENA is forecast to rise at 5 percent CAGR over 2016-2020.

 

Horizontal drilling in Russia has increased significantly in recent years as a means of maximizing production and increasing cost-efficiency. Notably, Eurasia Drilling Company reported that horizontal drilling accounted for 35 percent of meters drilled in 2015, compared with 23 percent in 2014.This trend is expected to continue over the forecast period, contributing to a 14 percent rise in the number of high-HP rigs drilling in Eastern Europe and FSU through to 2020.