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GRI Predicts Technology Will Enable Producers to Meet Demand Growth

GRI Predicts Technology Will Enable Producers to Meet Demand Growth

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 last week 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 additional rigs.

"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.

Joe Fisher, Houston

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