March 2021

Drilling advances

Efficiency payback time
Jim Redden / Contributing Editor

When word came down early this year that gazillionaire Elon Musk had supposedly snatched up two idled semis from financially distressed Valaris plc to use as rocket launching pads for his SpaceX outfit, it seemed an apt metaphor for the times. Indeed, a loudmouthed legion wants any rig not in the scrapheap to be used for anything other than drilling for oil and gas.

Unlike their offshore contemporaries, land-based drilling contractors, however, would be hard-pressed to re-purpose rigs that have outlived their competitive viability. With shale operators becoming nearly as picky as their offshore brethren, only those with super-spec rigs need apply, with one major contractor seeing “many idle SCR and less-capable AC rigs” being permanently sidelined. Fortunately, contractors with a hefty fleet of digitally enhanced rigs are finding a market in the early going of 2021 that is markedly improved from a year best forgotten.

“We entered the new year with 94 rigs running in U.S. land. That’s double the number we had in August, and the upward trend continues,” said Helmerich & Payne President and CEO John Lindsay on a Feb. 10 call. “If market expectations for U.S. production levels continue to drop, that should have a positive impact on oil prices, which further supports [a] consensus of expectations for approximately 500 active rigs in the U.S. at year-end.”

Most of those finding work will be of the high-end variety, like H&P’s FlexRig fleet, up to 30% of which is equipped with the company’s proprietary automated sliding technology. “By our count, there are approximately 630 super-spec rigs available in the U.S. market. Looking forward, we believe the vast majority of all working rigs drilling horizontal wells will continue to trend toward the super-spec classification. And, if activity does reach 500 rigs, the industry rig count would begin to approach utilization levels that have historically provided pricing power,” Lindsay said in reporting first-quarter 2021 earnings.

Performance-based models. As with most legacy rigs, Lindsay, for one, suggests traditional day rate contracts should be retired in favor of performance-based models that adequately reflect the efficiency gains, as the industry evolves toward digital technology for improving wellbore quality and well placement. As the company’s website argues, “current day-rate model does not always adequately compensate for value being derived in well cost-savings and productivity gains.”

That assertion seems to be borne out by the U.S. Energy Information Administration’s (EIA) latest Drilling Productivity Report. For the seven U.S. shale plays it tracks, the EIA estimates a rig-weighted average in March of 1,023 bpd of new oil and 6,782 Mcfd of new gas/rig. In March 2020, every then-active rig was responsible for 853 bpd of new oil and 3,845 Mcfd of new gas.

“Today, 25% to 30 % of our rigs are under performance contracts or some new commercial type,” Lindsay said. “And I think the reason is, by definition, that a performance-based contract is a win-win opportunity, when you execute it properly. and it really delivers a higher level of value for the customer and, at the end of the day, for H&P as well. Automation solutions improve the drilling efficiency of the well, but it also has a significant influence on the lifetime value of the asset.”

Others, however, are not quite so taken with performance-based compensation packages. “There’s been much talk of performance-based contracts displacing the day rate model. And while some of our contracts are performance-based, we remain very cautious on this contracting arrangement,” Kevin A. Neveu, president and CEO of Canada’s Precision Drilling Corp. told analysts on Feb. 10. “We continue to have very good success pricing our Alpha digital technology offerings as a la carte additions to the base day rate. While the rig day rate may be exposed to market competition, the Alpha services are not.”

Pay for technology. He was referring to the wide-ranging automation and Alpha technology suite that the Calgary-based contractor rolled out in November 2019, just in time to capitalize on an “industry recovery, which is now underway.” Overall, Canadian drilling activity has rebounded sharply with 163 active rigs as of late February, compared to an industry-wide total of 88 average rigs in the final quarter of 2020.

“In Canada, the market has largely stabilized and is beginning to improve. Second quarter customer demand looks to be almost double what we experienced in 2020,” Neveu said. Reflecting what is expected to be a steadily improving market, digital-heavy Patterson-UTI Energy Inc. has adopted a strategy of insisting on shorter-term contracts, with optional digitalization technologies. “When we sign rigs today on term contract, we’re typically signing as shorter-term, so we can negotiate, because we think there’s upside later in the year,” said President and CEO William Hendricks on Feb. 4. “I think that we’re all thinking that there is some upside, and I believe there is, based on how commodity prices have moved over the last few months. I think that operator cash flow will improve, and then activity will translate to higher rig count. And so, we don’t want to get ourselves locked into too long.”

Patterson expects to average 69 contracted rigs over the first quarter, up from an average 62 rigs in the fourth quarter of 2020. This year, Patterson plans to augment its HiFi Nav wellbore placement algorithms with a cloud-based geosteering guidance system, further complementing its MS Directional entity. “We’re seeing more customers, who look at our rigs, also look at MS Directional. And, following on from that, they’re looking at how can they layer in some of these interesting software services, such as HiFi Nav.”

About the Authors
Jim Redden
Contributing Editor
Jim Redden is a Houston-based consultant and a journalism graduate of Marshall University, has more than 40 years of experience as a writer, editor and corporate communicator, primarily on the upstream oil and gas industry.
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