Dry Gas Basins: Less Than Half Of Rigs In Use

Synopsis

The drop in oil prices that hit the tight oil markets has had less impact on drilling in the traditional dry gas basins. Then again, drilling in the Haynesville, Barnett and Fayetteville shales has been weak for some time with horizontal work in the Fayetteville falling to zero briefly in August.

Contractors participating in Hart Energy’s market intelligence survey pegged rig utilization at 42%, virtually unchanged since the last survey of traditional dry gas basins in April.

However, pricing has dropped significantly since then and is now below $18,000 per day for the benchmark 1,500 horsepower (HP) AC-VFD rig.

Contractors participating in the Hart Energy survey say rig rates are at cash cost and can’t go lower before equipment is stacked. Bid requests remain on a well-to-well basis, or small package of wells. There are no bid requests for term contracts at the present time.

Watch for the next dry gas basin drilling report in April 2016.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Weak
  [See Question 1 on Statistical Review]
  ​Demand for land drilling rigs in the Dry Gas Basin has remained sluggish, but steady according to seven respondents, and continues to show weakness, similar to findings in the April report. One respondent said demand had shrunk again in the past three months when oil prices dipped further.
  • Mid-Tier Driller: “We are still making money with our rig. People are not completing the horizontal wells because the fracking costs are too high for the product, but the vertical wells we are drilling are being completed.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​All respondents agreed that there is an excessive amount of land drilling rigs in the Dry Gas Basin area. Respondents are not seeing any more rigs being stacked, but they are not seeing rigs going back to work either as was hoped a few months ago.
  • Top-Tier Driller: “We were pretty optimistic. Then oil prices dropped back and it affected us. We dropped 30% of our rig population.”

• Less Than Half Of The Rigs In Use
  [See Question 3 on Statistical Review]
  ​Respondents said that rig utilization is about 42% in the Dry Gas Basins. Most agreed that utilization would not increase before the end of 2015 or into 2016.
  • Mid-Tier Driller: “This is my third downturn since 1975 and it is the worst one I've experienced.”

• Rig Day Rates Stable, But Very Low
  [See Question 4 on Statistical Review]
  ​Day rates in the Dry Gas Basin area for a 1500 HP rig varied between as low as $11,500 and as high as $18,000. These rates have dropped considerably from the April report when 1500 HP rates ranged from $18,000 for an SCR type to $21,800 for an AC powered rig. Rig rate averages given by current survey participants can be seen in Table I below.
  • Mid-Tier Operator: “The rates for drilling rigs are as low as some of them can go. Some contractors may have to start charging footage contracts rather than day rates. Footage didn't go away but we may see more of it.”

• Rig Rates Steady But Low
  [See Question 5 on Statistical Review]
  ​All respondents expect rates to stay steady, but low during the next three months, similar to findings in the April report. However, two respondents now question if rates might be reduced again if demand dips any lower.
  • Mid-Tier Operator: “I know an operator who has a rig that used to be $22,000 and is now at $11,500. This operator went on and drilled because it is cheap, but decided not to complete until oil prices come back.”

• Contract Cancellations Cease In Dry Gas Basin
  [See Question 6 on Statistical Review]
  ​Respondents said that contracts were no longer getting cancelled because that had been the response to the market earlier in 2015. Instead, rigs are being used on short-term or spot jobs only.
  • Mid-Tier Driller: “We have not engaged in a contract this year.”

• Rigs Working Mostly Well To Well
  [See Question 7 on Statistical Review]
  ​Four respondents said that rigs were mainly working on well-to-well contracts because of current low demand. Two respondents reported some rigs are working two to three well projects at a time. Another two respondents said they had not engaged in a contract all year.
  • Mid-Tier Driller: “The rigs that are still on contracts are stretched out to whatever term, but there are few—if any—term contracts.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with eight industry participants in the land drilling segment in the Dry Gas Basin, including the Fayetteville, Haynesville, and Barnett shale regions. Participants included three oil and gas operators and five managers with drilling companies. Interviews were conducted during mid-September 2015.

Part II. – Statistical Review

U.S. Land Drilling

[Dry Gas Basins]

Total Respondents = 8

[Oil & Gas Operators = 3, Drilling Companies = 5]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in third-quarter 2015 compared to the second quarter?

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet third-quarter 2015 demand?

3. In percentage terms, what is your estimate of drilling rig utilization in your area?

4. What are the average rig day rates in your area? Is this rate for an AC power, diesel-SCR, or conventional mechanical type of rig?

5. Do you expect rig day rates to increase, remain the same or decrease over the next three months?

6. Are any contracts being cancelled and if so, what is the penalty?

7. How would you describe contractual market share in your area of operations?

End Statistical Survey