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There is no barrier to entry for drilling rigs in the Permian Basin.
While horizontal rig count continues to rise—the Permian now features the greatest concentration of rigs drilling horizontally in any North American market—demand for the higher-spec rigs involved in horizontal drilling is being met by equipment upgrades or by rigs rotating into the Permian from other markets.
Those are some of the findings from a Hart Energy survey of six oil and gas operating companies and two drilling contractors over the last two weeks in March 2014.
While some of the estimated 90 newbuilds under construction in the domestic market are destined for the Permian, drilling contractors say they are upgrading existing larger-capacity rigs with top drives or, occasionally, self-mobilization packages to meet customer needs for horizontal drilling going forward.
But in many cases, contractors are simply rotating drilling equipment into the basin from other regions—the Eagle Ford is the most cited origin of migrating rigs—rather than doing custom newbuilds.
Consequently, rig rates are flat, and few contractors or operators expect pricing power for drilling rigs to increase during the next 90 days. Survey respondents reported average day rates for 1,500 horsepower (hp) rigs with AC-VFD drives at $23,000 per day vs. $22,000 per day for a similarly-equipped electric SCR rig.
Survey respondents, on balance, noted that the supply of rigs in the market was sufficient to meet demand, despite the varied nature of drilling across such a huge geographic area. In other words there is demand for rigs in all classes, although the tendency is toward a growing preponderance of horizontal work. This tendency is attracting rigs from outside the region, or prompting equipment upgrades.
The main issue in the Permian market is labor availability, not just in oil and gas but across the economic spectrum. One respondent noted walking into restaurants that were half-filled with customers, but having to wait in line for service because the business was understaffed.
While horizontal drilling as a percentage of all work is rising, the rate of increase in the total volume of Permian activity has slowed in 2014 vs. the rapid increases in 2013.
“The basin is reaching equilibrium with current prices and leasehold availability,” noted a mid-tier driller who provided observations in the Hart Energy survey. “Economic growth has slowed somewhat from 15% year-over-year [yoy] to 5%, which is still good, but it has leveled off. This is not a boom time for drilling, but it is for the service companies, who are making out like bandits.”
Contact the author, Richard Mason, at rmason@hartenergy.com.
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