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
"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
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
Joe Fisher, Houston