In the Lower 48, trillions of cubic feet of natural gas in reservoirs at least 15,000 feet below the ground can help satiate the nation's escalating demand for this increasingly popular energy resource. Cash-flush producers are in a good position to bet on these potentially costly wells, but rigs capable of such deep drilling are going to be in extremely short supply for at least the next year. "[Deep-rig] supply is constrained in the near term, and the demand is very strong," says Kenneth Sill, a Houston-based oil-service stock analyst for Credit Suisse First Boston. "2001 is going to stay tight, especially if the majors start getting back into the U.S. land business. They have been looking at rigs and looking to get rigs; they haven't been a major player here for a while." It's easy to see the allure of deep gas reservoirs. In its 2000 Baseline Projection, the Gas Technology Institute estimates there is approximately 180 trillion cubic feet (Tcf) of natural gas in the lower 48 states below 15,000 feet. That represents about 38% of the total Lower 48 onshore new-field potential. By 2015, deep onshore production is expected to increase to 3.5 Tcf per year, representing 19% of total onshore Lower 48 gas production. In 1995, deep onshore production was 0.9 Tcf, or about 7% of the total. "The Lower 48 contains extensive volumes of largely unexplored sedimentary section at drilling depths greater than 10,000 feet," according to the report. Most of the major oil and gas provinces contain deep gas potential, including the onshore Gulf Coast from Texas to Alabama, the Gulf of Mexico shelf and slope, East Texas, the Permian Basin of West Texas, the Midcontinent, the Rockies and the Western Overthrust Belt. The Appalachian Basin also has a deep sedimentary section. But it takes some pretty special equipment to drill so deep; rigs need to have at least 1,500 horsepower behind them to do this work. Overpressured sections and salt intervals can make drilling difficult. Downhole temperatures can exceed 400 degrees Fahrenheit, and often these temperatures occur in an acid-gas environment. This can lead to equipment corrosion, meaning that special alloys, coatings and other preventative measures may be required. One well could cost as much as $20 million. According to Sill, only two drilling contractors, Grey Wolf Inc. and Nabors Industries Inc. , both based in Houston, have many deep rigs stacked and waiting. And very few of those can be upgraded and put to work quickly. Dennis Smith, Nabors director of corporate development, says his company has 150 rigs in the Lower 48 that can drill 14,000 feet and deeper, 50 of which are stacked. Those that are at work are mostly in Texas and Louisiana. Some are in the Rockies, and some are in California. The rigs that aren't at work each need at least $3 million worth of work done on them to get them into shape, and lead times can be a year or more. Grey Wolf has 60 rigs at work in the Lower 48 that can drill to 15,000 feet and deeper, and 22 that are stacked, says David Wehlmann, senior vice president and chief financial officer. "The others need some capital behind them to bring them up to working condition," Smith says. Many of Grey Wolf's deep rigs are working in South Texas, Mississippi, Alabama and Louisiana. The company will expand to the Rockies this spring with a two-year, $11.6-million contract with Burlington Resources Inc. for the ultradeep drilling rig, 558. One of the largest land drilling rigs in the world-it is rated at 4,000 horsepower, with a hoisting capacity of 2.5 million pounds-the rig will be utilized for drilling operations in the Madden Deep Unit of Wyoming's Wind River Basin. Nabors expects to spend approximately $5 million on equipment to fulfill the contract. Though commodity prices and dayrates are looking good right now, contractors are wary to bring on too many rigs too soon. "Capital is not a problem," Smith says. "It's feasible if you have a continuous work program. But that's the risk, and that's why it isn't done in a wholesale manner." Wehlmann says, "We're just taking it slow because our main goal is to increase dayrates rather than add additional capacity." At press time, deep land-rig dayrates were from $10,000 to $13,000, compared with $6,400 to $7,200 a year ago, he says. Adds Sill, "We've seen dayrates for rigs in the U.S. already reach the highs they were at in the last cycle, and they show every sign of continuing upward." Demand and dayrates have also soared for workover and completion rigs that are capable of ultradeep work. East Brunswick, New Jersey-based Key Energy Services Inc. executives say the waiting list for rigs in busy places such as South Texas is between two and 2.5 months, and dayrates are approaching those commanded by drilling rigs. However, rates are still short of replacement level. Last summer Key announced about $25 million in capital projects, including the refurbishment of 50 to 60 deep-gas workover and completion rigs and related equipment. Before year-end, 31 of these rigs were refurbished, and more are expected to come to market in 2001, says Jim Byerlotzer, Key executive vice president of domestic operations. According to Sill, there hasn't been any significant construction of land rigs in the United States in the past 15 to 20 years, and the industry has been working through the excess created in the late 1970s and early 1980s. To unstack some of the rigs sitting in storage, contractors have to overcome the large hurdle of finding-and paying for-quality crews. "Effective [deep land-rig] utilization is 100%," Sill says. "The limiting factor is crew availability. The industry seems to be adding crews about as fast as it can, and demand is growing just as fast, if not faster." Nabors raised wages for its roughnecks and rig hands 20% to 25% in two phases last year, one in January and another in September. It would take quite a while to get an adequate supply of newbuilds onto the market. "You need to finish up the unstacking before you get the impetus to start building rigs. And once you start building rigs, it's going to take you 12 months to 24 months to get very much built," analyst Sill says. Ronald Ivy, vice president of production and operations for Houston-based The Meridian Resource Corp. , knows how difficult it can be to get a deep-gas rig. "If you don't have a rig right now under contract, then you're probably not going to get one for six months out, maybe longer than that," he says. "It's going to be very difficult to execute a timely budget in 2001 without the equipment." Meridian already has equipment under contract for its deep drilling program this year. It focuses on deep-gas plays along the Gulf Coast and inland waters of southern Louisiana, and plans to drill 20 to 25 wells, so executives already have the rigs lined up for the work. "It's very difficult to secure the equipment that we need, but we're in a good position," Ivy says. "We have on contract two barge rigs, two land rigs, and one additional land rig coming in early February." One of Meridian's recent deep-gas successes that will be further developed in 2001 is the North Turtle Bayou/South Ramos Field. The Avoca 47-1 well, located in a newly discovered fault block adjacent to the company's existing Thibodaux wells, was tested and placed into pipeline sales effective December 4, 2000. The well, in St. Mary Parish, is producing from perforations in the Operc. 3 sands from 19,444 to 19,464 feet, and tested at gross daily flow rates of up to 15.5 million cubic feet of gas plus 187 barrels of oil. Meridian holds 91% working interest in the well and is the operator. Plans call for the drilling of the Avoca 47-2 well to develop additional reserves in the area. "[Deep drilling] costs more up front, and it's more difficult, but obviously we do it for economic reasons," Ivy says. "All the easy stuff has been found. We have to go deeper." Ivy adds that in addition to the technical challenges of deep drilling, there are also safety issues. Crews need to be specially trained to handle such tough jobs. "There are rigs that are stacked because the industry does not have the personnel to operate them," Ivy says. "I feel we're going to have to get some of the groups such as the International Association of Drilling Contractors, the American Petroleum Institute or some of the other industry associations to help set up some type of training programs for the rig crews, so we can have more equipment and be safer in 2001."
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