Oil and Gas

Slip Sliding Away

As south Louisiana’s rig count slides to its steepest point in decades, north Louisiana is making history.   Just 12 months ago, the oil and gas industry was experiencing an old fashion boom. Oil prices were climbing to a record high of $147 per barrel, natural gas prices were at $10/mcf and there were 1928 rigs drilling in the U.S. If you were in the oil and gas community, life was good. Only a few oil and gas analysts were predicting corrections in oil and natural gas prices, not the economic crash that has occurred in the past months. In past economic downturns in the oil and gas industry, there have been contributing circumstances to each downturn. The crash of 2009 was no different. High oil and natural gas prices caused a contraction in demand by consumers around the world, sending prices into a decline. Oil commodity speculators bailed out the market when prices began to fall; the sub-prime lending debacle brought the world’s financial institutions into chaos and created a world recession. Making it worse, we elected an administration in Washington that is not favorable to the growth or survival of our industry. All circumstances considered, it was the perfect storm.

The U.S. rotary rig count as of July 17 was 920 rigs, down 1,008 (52 percent) from the 1928 active rigs one year ago. The current average rig count for 2009 is 1,117 rigs. Is it the worst U.S. average rig count? No, it’s not; 1999 was the worst with an average of 625 rigs for the 12 months. At one point in 1999 the rig count fell to 484 rigs, the lowest dating all the way back to 1949 when recording the U.S. rotary rig count started. One more tidbit: the average rig count in 1949 was 2,016 rigs.

One other important note before getting into Louisiana’s rig count: Of the currently active 920 rigs drilling in the U.S., only 244 are drilling for oil and 665 are drilling for natural gas. As a rule of thumb 75-85 percent of the U.S. rigs drill for natural gas, not oil. Three decades ago the reverse was true. This is important to remember in that the percentage of rigs drilling for natural gas is a contributing factor in Louisiana’s total rig count.

Louisiana’s rotary rig count for July 17 was 126 rigs, down 47 (27 percent) from the 173 active rigs one year ago (Chart 1). In comparing Louisiana’s percentage decline of 27 percent to the total U.S. market of -52 percent, Texas of -63 percent and Oklahoma of -60 percent, Louisiana is doing fairly well. However, when breaking down Louisiana’s rig count by area, the picture is considerably different.

Louisiana’s rig count is broken down into four areas: GOM (Gulf of Mexico), SLA Land (South Louisiana Land), SLA Inland Water (South Louisiana Inland Water), and NLA Land (North Louisiana Land).

The SLA Land rotary rig count is currently at an all time low of 10 rigs. In 1999, which was Louisiana’s lowest average annual rig count of 141 rigs, SLA Land rigs averaged 21 that year.

The SLA Inland Water rig count is at an all-time low and a disaster for the inland water drilling and exploration business. The inland water rig count reached a low of five rigs this year and has recently climbed to eight rigs.

In the analysis of the SLA Land rig count one can conclude that active drilling rigs declined due to the contributing factors previously mentioned. The same would apply to the SLA Inland Water rigs.

Observe in Chart 2 how the active rig count for both SLA Land and inland water tracked along with the price of oil until nearly 2002-2003. Starting in 2002 oil prices began a six-year climb until mid 2008. The SLA Land and inland water drilling activity did not follow the upward trend. Activity did climb to some degree in 2005-2006, only to decline during a period of unprecedented growth in oil and natural gas prices.

Why did the rig count decline in a period of historic growth in prices?

One contributing factor to the SLA Land decline in rig activity is from what industry calls “Legacy Lawsuits.” Legacy Lawsuits are lawsuits that have been filed against the industry for alleged environmental damages caused by drilling activities that occurred in years past. The drilling technology would be illegal today but was the legal technology of the time. Nearly 200 legacy lawsuits have been filed involving almost every oil and gas operator that has ever operated or drilled a well in Louisiana. The bottom line is simple: No company wants to explore and drill in a business environment that is litigious and hostile.

Inland water drilling has become increasingly costly in the past four to five years. Hurricanes have taken their toll on the industry. Insurance costs to insure production facilities have increased ten-fold for operators, making the economics difficult in the inland waters. The permitting process continues to be difficult even with immense improvement through the leadership of DNR Secretary Scott Angelle. Legacy lawsuits have also been filed against operators drilling and producing in the inland waters of coastal Louisiana.

Another factor contributing to the decline in south Louisiana land and inland water drilling activity is the migration of oil and natural gas operators to non-conventional plays, often referred to as “resource plays,” such as the Haynesville Shale in north Louisiana (Map 3).

A conventional play is illustrated in Graphic 4. The risks to drill conventional plays are high compared to a non-conventional play, as illustrated in Graphic 5. One of the factors luring companies to the non-conventional resource plays is that Wall Street likes them. Using the leased acreage of a company, analysts can readily calculate production and revenue out 10 to 15 years. The low-risk resource plays have long-term lives, rapid payout and a low natural gas price for return on investment.

The conventional play is not being shut out. Operators will continue to explore for the deep gas plays in south Louisiana. However, the drilling activity tells the story — the trend is focused on the non-conventional gas plays. There are 77 rigs drilling in north Louisiana and 18 in south Louisiana on land and inland waters.

The GOM rig count in Chart 6 is also at an all-time low, tracking closely with the record low in 1992. Drilling activity in the GOM has been in a downward trend for the past decade even as prices climbed to record highs. The finding cost to discover a barrel of oil is the highest in the world in the GOM. Hurricanes in the past four years have wreaked havoc on the Gulf of Mexico infrastructure, driving insurance costs to historic highs and forcing some producers to retire from the Gulf.

The Gulf of Mexico still remains an important part of the U.S. energy infrastructure and its national security. The Department of Energy estimates that the Gulf of Mexico has more than 85 billion barrels of oil and 420 trillion cubic feet of natural gas. There is still uncertainty in the politics of the GOM in Washington, making it difficult for companies to make long-term decisions. The recent MMS Lease Sale 208 brought in $703 million in revenues, compared to $1.7 Billion in 2008.

Can it get any worse? Will the rig count continue to decline? I hope not, but then I never thought it would get this bad. The recession is now driving the train. Hopefully we are looking at the bottom.

Don Briggs lives in Lafayette and has been president of the Louisiana Independent Oil and Gas Association since 1992. To comment on this column, e-mail [email protected] .