Major improvements in well productivity from new technology andhigher success rates in gas drilling will help producers meetanticipated robust growth in U.S. gas demand over the next twodecades, according to a Gas Research Institute study.

“U.S. Oil And Gas Drilling Costs: Historical Trends And A LookInto The New Millennium” (GRI-98/0137) concludes that producerswill meet the expected growth in consumption with drilling levelsand expenditures that remain well below historic highs. GRIprojects a 2% annual increase in U.S. gas consumption over the nexttwo decades, from the current 21.5 Tcf to more than 31 Tcf in 2015.

Increased offshore drilling is expected to make a majorcontribution in meeting growing gas demand. GRI projectsultra-deep-water drilling will increase from 3% of total offshoreactivity in 2000 to 24% in 2015. During this period, the averagecost per foot of drilling offshore wells is expected to remainrelatively flat, although the mix of water depths will change. Theaverage cost of drilling at any specific water depth is projectedto decrease because of technology improvements.

“Technology is critical to drilling economics, and advances indrilling technology are allowing drillers to work much smarter,”said John Cochener, who announced the GRI findings last week at theannual Offshore Technology Conference in Houston. “Technologiesthat improve drilling efficiencies reduce the required drillingtime, resulting in lower costs. Rigs that reduce drilling time arealso able to drill more wells, thus alleviating the need foradditional rigs.

“This means that drilling productivity improvements and higherdrilling success rates can be expected to partially offsetanticipated increases in expenditures normally associated withgrowth in drilling footage.”

Major technology advances cited in the study include 3D seismicand improved drills bits and fluids.

Among the study’s other key findings:

Drilling costs account for about one-third of the total cost offinding and developing new onshore gas resources and about 40% ofthe cost of new offshore resources.

Total onshore and offshore drilling expenditures will increaseslowly during the 17-year projection period, growing from $16.4billion in 1997 to $24.4 billion in 2015.

Combined improvements in drilling success rates and drilling rigefficiency will allow the current onshore drilling fleet to meetdrilling requirements through 2007, without substantial new rigconstruction. As a result, drilling day rates are expected toremain below rig-replacement costs in the near-term.

GRI forecasts drilling efficiency (measured in annual drillingfootage per active onshore rig) will improve at an average of 1.5%per year, which is consistent with the past three decades. Drillingcosts per foot for each onshore depth interval are expected toincrease slowly. Because the depth of the typical well willincrease by 500-600 feet, the general trend will be to higherdrilling costs per well.

GRI’s projections of future drilling activity and costs arebased on an analysis of historical data that identified five”mega-trends” that shape the cost of drilling:

Drilling activity drives drilling costs. The level of drillingactivity accounts for about 70% of changes in drilling costs.Hence, drilling costs can be expected to rise as activity levelsincrease. This is particularly true during short-term cyclicalspikes in activity.

Increases in oil and gas prices translate directly into higherdrilling costs. Rising oil and gas prices spur drilling ofadditional marginal wells. These wells drive up drilling costsbecause they are deeper or located in more difficult environments,making them more expensive to drill. Higher oil prices also lead toincreases in drilling costs because energy costs are a majorcomponent of total drilling costs.

A declining rig population creates a tighter market foravailable rigs, triggering upward pressure on day rates. The U.S.onshore rig population has been declining since 1981. Until rig dayrates increase sufficiently to justify significant new investmentin rig construction, the market will continue to become tighter forrigs. Ultimately, this will lead to higher rig rates and drillingcosts.

A tight rig market is needed over a sustained period to achieveday rates that justify investments in new equipment. At year-end1998, onshore rig rates were well below the break-even point neededto justify new rig construction. In a tight market for rigs, daysrates are likely to increase until they reach levels that triggernew equipment investments. Between late 1996 and early 1998,certain offshore rig rates increased briefly to levels required tojustify the limited new construction now under way. Much of therate increase was attributable to new deep and ultra-deepwaterprospects requiring new or upgraded drill ships to developeffectively.

Joe Fisher, Houston

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