Onshore rig count rose an unexpected 10% in 2011 to finish the year at 1,562 units, according to Hart’s Unconventional Activity Tracker.

But the narrative for 2011—and forecast for 2012—is not about the size of the drilling expansion domestically. Rather, the storyline is that the domestic drilling market is undergoing transformation, which suggests the onshore market at the end of 2012 will be measurably different than the drilling market that existed at the beginning of 2011.

First, the expansion of domestic drilling activity that characterized 2011 will continue through 2012. Assuming no precipitous change in oil prices, 2012 onshore rig count should rise another 10% as newbuild rigs exit fabrication yards and establish residence under multi-year contracts in plays such as the Eagle Ford, the Bakken, and the Marcellus shales. To date, there are roughly 160 units in the queue for delivery to the drilling market in 2012.

More rigs, likely, will be ordered as operators move into the harvest phase of unconventional drilling.

Meanwhile, a combination of existing and emerging plays will keep the legacy fleet busy in areas such as the Permian Basin and the Midcontinent where operators are adapting techniques perfected in unconventional drilling to conventional tight formation reservoirs such as the Wolfberry in the Permian Basin and the Mississippi Lime in the Midcontinent.

Figure 1 illustrates market share changes in onshore drilling activity involving oil versus gas targets. Gas-directed drilling dominated the domestic drilling market for more than 17 years until 2011 when activity split evenly between both targets for most of the third quarter before breaking in favor of oil-directed drilling as the year came to a close.

There are four ways to illustrate the transformation that occurred in the 2011 domestic market. The first (figure 1) is marketshare for rigs based on target. The year 2011 witnessed the end of a 17-year cycle in which gas-directed drilling was the primary target in U.S. onshore drilling. That cycle coincided with the exit of major oil and gas companies from the U.S. onshore market in the early 1990s in favor of exploration targets overseas. That exit was followed by the rise of the U.S. public independent that grew to dominate the domestic market by drilling for natural gas.

But that changed in 2011 as the majors returned to North America to pursue gassier reserves while the independents sought to become liquids rich. This was reflected by mid-2011 when the balance of onshore drilling activity shifted in favor of oil/liquids-directed targets, a trend that accelerated in the fourth quarter 2011. Consequently, the liquids-oriented trend will continue in 2012 as the industry enters a longer-term cycle favoring oil over gas.

Part of the change is found in the pricing disconnect between natural gas and oil— two markets characterized by divergent conditions. For natural gas, the issue is one of excess supply thanks to the technological successes operators have brought to the shale plays.

Graph shows rig count for the liquids rich Eagle Ford shale versus combined rig count for the dry gas Barnett and Haynesville shales. Both dry gas plays dropped to multi-year lows in 2011.

That story line is illustrated (figure 2) by comparing drilling activity in the liquids-rich Eagle Ford versus combined rig count for the dry gas Barnett and Haynesville shales. Activity is headed in opposite directions with rig count in the dry gas plays declining steadily in 2011 (rig count fell 43% peak-to-trough for the combined Barnett and core Louisiana Haynesville). At the same time, the Eagle Ford shale witnessed a significant expansion (82%) in drilling activity as the play transitioned from the delineation and optimization phases into the harvest phase.

Graph illustrates rig count for two emerging liquids rich plays, including the Niobrara shale in Colorado and Wyoming, and the Mississippi Lime in Oklahoma and Kansas. After a series of property transactions and joint ventures over the course of 2011, both plays witnessed a ramp in drilling activity in the fourth quarter 2011, which will continue in 2012.

A third way to illustrate the gas to liquids drilling transformation in 2011 is found in emerging plays. Figure 3 illustrates rig count for the Rocky Mountain Niobrara shale and the Midcontinent Mississippi Lime. Combined, both regions topped activity in the Barnett and the Haynesville shales as 2011 came to a close. Operators jockeyed for position in both plays through a series of transactions and joint ventures in 2011. Operators are moving forward with broader based programs in the DJ Basin portion of the Niobrara, which appears to offer the greater possibility of success at the current time.

Similarly, recent transactions in the Mississippi Lime will provide the capital for a significant expansion in 2012 activity.

The graph outlines regions that accounted for the incremental increase in oil-directed drilling in 2011. More than two thirds of the increase occurred in the Permian Basin and South Texas (Eagle Ford).

The final way to illustrate the grand transformation under way in the onshore drilling market is a look at which regions account for growth in oil-directed activity. Of note, two thirds of the incremental oil-directed rigs added in 2011 were found in the Permian Basin and the Eagle Ford shale. While the Eagle Ford has been a greater headline generator, the unheralded Permian Basin finished 2011 as the hottest activity market and is likely to repeat in 2012. --Richard Mason