Rig Rates Drop As Bakken Drilling Market Softens

Synopsis

Demand for drilling services is weakening in the Bakken Shale and will be soft through year-end, particularly outside the play’s core, as oil and gas operators cope with non-economic commodity pricing.

The contractors reporting steady work in the core Bakken have long-term relationships with customers, but have cut pricing for drilling rigs and report fewer rigs working now than previously.

Survey respondents cite regional rig utilization at 40%, down from 66% in the August Bakken land drilling survey. Several contractors said they don’t expect Bakken demand for drilling services to improve until 2017.

Rig rates continue to decline in the low demand environment and spot market rates now average $18,000 for the benchmark 1,500 horsepower AC-VFD rig. Some rigs remain on contracts at higher pricing but pricing drops to spot market upon contract expiration.

In the current market, some operators are not interested in a rig at any price since oil development is uneconomic outside the core. The rigs that are capturing new work are doing so on a well-to-well basis, or a project basis with both operators and contractors reluctant to sign long-term contracts in the current depressed market.

Watch for the next Bakken drilling report in February 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Weakens Further
  [See Question 1 on Statistical Review]
  ​In the last three months demand for land drilling rigs in the Bakken Shale has weakened, according to six of the eight respondents. Most of the respondents believe demand will remain weak through the end of the year.
  • Mid-Tier Driller: “Demand has weakened mainly because people were hopeful when we saw $60 oil prices in July that we were on the rebound. However, the price did not stick and now there is financial strain on companies.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​Six of the eight respondents said that demand had continued to weaken in the Bakken area as operators pulled back on drilling. Two respondents said that work had remained steady as they had good relationships with their clients who continued to work, and had good crews and equipment. However, both of these respondents said they had dropped rates to be more competitive.
  • Mid-Tier Driller: “The area went from a maximum of 200 rigs to 80 mid-year. Now we are down to 67 in the market. Our fleet went from seven working to only one working.”

• Rig Utilization Estimated At 40%
  [See Question 3 on Statistical Review]
  ​Respondents estimated that rig utilization is around 40%, down considerably from the 66% respondents estimated in the August report. Most agreed that utilization would not increase before the end of 2015 and possibly could take until 2017 before it cycled back up significantly.
  • Top-Tier Operator: “We have seen things stabilize but we are only running at 20% capacity right now.”

• 1000-HP, 1500-HP Rig Day Rates In Teens
  [See Question 4 on Statistical Review]
  ​Day rates in the Bakken area for a 1500 HP AC rig average between $15,000 and $22,000. Rig rate averages given by survey participants can be seen in Table I below and have declined somewhat since the August report.
  • Top-Tier Driller: “Our 1500s are going in the $18,000 range, but recently we offered a rig out at a $15,000 and it didn’t get picked up. So it doesn't matter what the rate is, it matters if there is demand for it.”

• Rig Rates Expected Flat
  [See Question 5 on Statistical Review]
  ​Although Bakken area drillers and operators earlier said rates could not go down any further, rates continued to fall in the last three months as oil and gas prices remain low and more operators pulled back on drilling. All eight respondents said that rates would not drop any further in the next three months.
  • Small, Local Driller: “We drill for ourselves so we are not competing with other companies in the market, but we have pulled back considerably.”

• No Recent Contract Cancellations
  [See Question 6 on Statistical Review]
  ​None of the eight respondents said they were hearing about contract cancellations.
  • Top-Tier Driller: “Our rigs are under a long-term contracts and there have been no cancellations.”

• Contracts Mainly On Short-Term Multi-Well Projects
  [See Question 7 on Statistical Review]
  ​Four respondents said they are working on two-to-three well projects, while three said that they have seen no contracts in the past three months. One said their rigs are under long-term contracts from last year.
  • Top-Tier Driller: “We are not seeing long-term contracts like last year. Most work here is well-to-well or by project or multi-month.”

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 Bakken Shale area. Participants included two oil and gas operators and six managers with drilling companies. Interviews were conducted early November 2015.

Part II. – Statistical Review

U.S. Land Drilling

[Bakken Shale]

Total Respondents = 8

[Oil & Gas Operators = 2, Drilling Companies = 6]

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

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet fourth-quarter 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? By what percentage?

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