Richard Mason

The image of two ships passing in the night is a fair analogy for changes in 2012 domestic oil and gas activity.

Four years ago, the mighty Haynesville debuted with high-IP (initial production) dry-gas wells and unprecedented EURs (estimated ultimate recoveries). Eventually more than 180 rigs were targeting Haynesville objectives in Louisiana, East Texas and the Shelby Trough extension.

So it was a complete surprise this August to discover that drilling targeting the liquids-rich Utica shale in eastern Ohio employed the same number of horizontal rigs as the core Louisiana Haynesville shale. Specifically, both the Ohio Utica and the core Louisiana Haynesville in DeSoto, Red River, Caddo and Bossier parishes hosted 15 rigs drilling horizontally, according to Hart’s Unconventional Activity Tracker ( UGcenter.com? ).

But these are two regions sailing in opposite directions with the core Haynesville on the way to a half-dozen rigs while the Utica is expanding to 30 units as it passes the one-year anniversary of the discovery well.

Ohio and Louisiana have become analogs for the domestic market, and similar fluctuations in rig count nationwide provide insight into how the E&P market is evolving as 2012 heads for home.

The first take-away is that commodity prices matter. The drop in gas prices early in 2012 accelerated a trend of reduced dry-gas drilling. Conventional gas rigs went down first, but softness quickly spread to unconventional dry-gas basins like the Barnett, Fayetteville and Rockies, though none were impacted as dramatically as the 75-unit drop in the core Haynesville over the past year.

The slowdown recently reached the Marcellus shale, where operators such as EOG Resources, Talisman, Chesapeake Energy and Anadarko Petroleum reduced drilling in Bradford and Lycoming counties in northeastern Pennsylvania, and in southwest Pennsylvania’s Washington County.

The Pennsylvania Marcellus dropped 26 rigs in 60 days to just 82 active in August.

Secondly, the second-quarter decline in natural gas liquids prices generated lower drilling activity in the Anadarko Basin and Eagle Ford as two “liquids-rich” areas turn out to be “liquids middle class.”

The one market that stands in contrast to all others is the Mississippi Lime. The play reached 75 rigs drilling horizontally in August, making it the hottest growth market in the U.S. nominally (up 36 rigs in 120 days) and percentage-wise (up 105%). In August, Chesapeake and SandRidge represented 50% of Mississippi Lime activity, up from 40% earlier in 2012, with Chesapeake readying a Mississippi Lime joint venture.

The third trend is a flattening of rig employment in oily areas such as the Bakken and the Permian Basin as WTI dropped from $100 to $80 per barrel before recovering to $90 in August.

The rig count topped out in the Permian early in the second quarter, although horizontal drilling is gradually gaining market share. Operators are making quick progress in mastering horizontal completions involving multiple-pay zones in a play characterized by nearly a dozen stacked oil and gas formations.

Two methods are under development. One incorporates multiple laterals from a single wellbore. A second involves multiple horizontal wells off a single-pad site targeting a dozen or more producing horizons. Progress is reflected in the anagram geology of the region, where names such as Wolf-bone, Wolfberry or Strawberry reference commingled production from multiple zones.

Elsewhere, operators are responding to commodity-price volatility by releasing the least efficient rigs with substandard crews. Or, they are high-grading those rigs with newly available equipment or better crews in an oversupplied rig market.

New-build discussions regarding fit-for-purpose rigs continue, though there have been few orders as operators take a wait-and-see approach. Over 100 new rigs have entered the land sector in this year, with another 100 expected before year-end.

Meanwhile, operators suggest fewer rigs are necessary to achieve program goals even as those program goals change. For example, Chesapeake will reduce its rig count from 200 this year to 100 by the end of 2013. Less than eight of the 100 rigs left standing at the end of 2013 will target gas.