This year will mark the most significant one-year increase in average drilling depth that the United States has ever seen, as producers look beyond the more mature natural gas fields, according to Raymond James Stat of the Week on Monday. Recent gas production data confirms that the country faces a difficult task to produce more gas, which in turn will lead to a boom in business for oil service companies, poised to gain as demand for services increases with well depth.

According to Raymond James, as the “low hanging fruit” quickly disappears, the U.S. has been forced to drill deeper to tap more mature and under-explored regions. “Improvements in technology and higher gas prices have allowed operators to go after discoveries that a decade ago wouldn’t have been economically feasible,” and the trend has increased the average U.S. well depth about 40%. “We expect average well depth this year to increase 800 feet or a whopping 14% over last year,” said analysts.

Despite the technological advances of the past few years, analysts noted that the “pricing environment” has to be favorable for deeper drilling to be cost effective. The single biggest reason for the decline in well depth in 1999 was lower commodity prices, said analysts. “Even though 2001 natural gas prices have fallen substantially from levels seen in late 2000, they are still well above historical levels”…providing “strong support for deeper drilling programs over the past several years.”

Also contributing to deeper drilling is the move toward more natural gas drilling and away from oil drilling, said Raymond James analysts. “Natural gas is typically found in horizons that average 10% to 20% deeper than oil wells. In 1990, roughly 45% of U.S. rigs were drilling for natural gas. Today, rigs drilling for natural gas make up over 80% of the U.S. rig fleet.”

The Minerals Management Service also led to an increase in drilling following its incentives put in place earlier this year, when a new royalty relief program was begun to promote deep gas drilling in shallow water regions of the Gulf of Mexico. “Overall, this incentive program has fueled interest in exploring the deeper zones in the shallow water region and should continue to drive further increases in well depth.”

Accordingly, Raymond James analysts believe that oil service companies will gain the most from deeper drilling. “Almost all service-related volumes and costs increase exponentially with deeper wells. If we compare a typical 8,000 foot gas well with a 16,000 foot gas well, the deeper well will consume 25 times more drilling fluid, two and a half times more drill pipe, three times more OCTG (Oil Country Tubular Goods) and three times more drilling days (at a higher day rate).” The analysts noted that the United States is “likely to consume more OCTG in 2001 than it did in 1981 despite the fact that there were more than three times as many rigs drilling in 1981.”

The regions most likely to be affected by the deeper drilling will be deepwater and natural gas onshore, said analysts. “Additionally, technology is only scraping the surface in terms of ability to drill deeper and we are likely to see rapid technological advances in the coming years.”

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