GRI Predicts Technology to Boost Supply
Major improvements in well productivity from new technology and
higher success rates in gas drilling will help producers meet
anticipated robust growth in U.S. gas demand over the next two
decades, according to a Gas Research Institute study.
"U.S. Oil And Gas Drilling Costs: Historical Trends And A Look
Into The New Millennium" (GRI-98/0137) concludes that producers
will meet the expected growth in consumption with drilling levels
and expenditures that remain well below historic highs. GRI
projects a 2% annual increase in U.S. gas consumption over the next
two decades, from the current 21.5 Tcf to more than 31 Tcf in 2015.
Increased offshore drilling is expected to make a major
contribution in meeting growing gas demand. GRI projects
ultra-deep-water drilling will increase from 3% of total offshore
activity in 2000 to 24% in 2015. During this period, the average
cost per foot of drilling offshore wells is expected to remain
relatively flat, although the mix of water depths will change. The
average cost of drilling at any specific water depth is projected
to decrease because of technology improvements.
"Technology is critical to drilling economics, and advances in
drilling technology are allowing drillers to work much smarter,"
said John Cochener, who announced the GRI findings Monday at the
annual Offshore Technology Conference in Houston. "Technologies
that improve drilling efficiencies reduce the required drilling
time, resulting in lower costs. Rigs that reduce drilling time are
also able to drill more wells, thus alleviating the need for
"This means that drilling productivity improvements and higher
drilling success rates can be expected to partially offset
anticipated increases in expenditures normally associated with
growth in drilling footage."
Major technology advances cited in the study include 3D seismic
and improved drills bits and fluids.
Among the study's other key findings:
- Drilling costs account for about one-third of the total
cost of finding and developing new onshore gas resources and
about 40% of the cost of new offshore resources.
- Total onshore and offshore drilling expenditures will
increase slowly during the 17-year projection period, growing
from $16.4 billion in 1997 to $24.4 billion in 2015.
- Combined improvements in drilling success rates and
drilling rig efficiency will allow the current onshore
drilling fleet to meet drilling requirements through 2007,
without substantial new rig construction. As a result,
drilling day rates are expected to remain below
rig-replacement costs in the near-term.
GRI forecasts drilling efficiency (measured in annual
drilling footage per active onshore rig) will improve at an
average of 1.5% per year, which is consistent with the past
three decades. Drilling costs per foot for each onshore depth
interval are expected to increase slowly. Because the depth of
the typical well will increase by 500-600 feet, the general
trend will be to higher drilling costs per well.
GRI's projections of future drilling activity and costs are
based 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
drilling activity accounts for about 70% of changes in
drilling costs. Hence, drilling costs can be expected to rise
as activity levels increase. This is particularly true during
short-term cyclical spikes in activity.
- Increases in oil and gas prices translate directly into
higher drilling costs. Rising oil and gas prices spur drilling
of additional marginal wells. These wells drive up drilling
costs because they are deeper or located in more difficult
environments, making them more expensive to drill. Higher oil
prices also lead to increases in drilling costs because energy
costs are a major component of total drilling costs.
- A declining rig population creates a tighter market for
available rigs, triggering upward pressure on day rates. The
U.S. onshore rig population has been declining since
1981. Until rig day rates increase sufficiently to justify
significant new investment in rig construction, the market
will continue to become tighter for rigs. Ultimately, this
will lead to higher rig rates and drilling costs.
- A tight rig market is needed over a sustained period to
achieve day rates that justify investments in new
equipment. At year-end 1998, onshore rig rates were well below
the break-even point needed to justify new rig
construction. In a tight market for rigs, days rates are
likely to increase until they reach levels that trigger new
equipment investments. Between late 1996 and early 1998,
certain offshore rig rates increased briefly to levels
required to justify the limited new construction now under
way. Much of the rate increase was attributable to new deep
and ultra-deepwater prospects requiring new or upgraded drill
ships to develop effectively.
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