Global E&P weathers the storm

Outside the US, Canadian drilling fell by half in 2009, but other countries saw a decrease of less than 500 wells. For 2010, expect an increase of 6.7% in wells drilled. 

OPEC production cuts took a bite out of global oil output last year, resulting in a total reduction of 2.4% for the world. The cartel began reducing production in late 2008 in response to the steep decline of crude oil prices and demand, and continued into 2009, although, as oil prices returned to the $70–$80 range toward the end of the year, the cartel had trouble maintaining discipline among its members, and compliance with production targets slipped to 56% in December. Nevertheless, OPEC succeeded at reducing its output in 2009 by 1.96 million bpd, or 6.2%, compared with the previous year.

Non-OPEC production was actually up slightly last year (0.4%), driven by increases in the US, Brazil and the Former Soviet Union. Mexico’s giant Cantarell Field and the North Sea continued to see large drops in output, and Canada saw its production increases of the last two years reversed, with 170,000 bpd less output in 2009 than in 2008.

Drilling activity outside the United States contracted by 19%, considerably less than US drilling fell, and almost all of that decrease was due to Canada’s continuing slowdown, which was already well underway before the commodities markets crashed in late 2008. Excluding the US and Canada, worldwide drilling was down by less than 400 wells last year, buoyed by actual drilling increases in China, Brazil, Mexico and Indonesia. This comparatively strong drilling activity is largely due to the power of the national oil companies, which are not as dependent on credit as are the international companies, and many of which are cash-rich from the last several years.

For 2010, we predict a 6.7% rise in wells drilled outside the US, with the biggest increases occurring in South America, the Former Soviet Union, Mexico and a recovering Canada.

World crude/condensate production by countries, 2009 and 2008*

North America. Canadian drilling was already in decline back when the rest of the world was still peaking, having fallen each year since the 2006 record of nearly 25,000 wells. The reasons were weak natural gas demand and prices, combined with a falling US dollar relative to Canada’s loonie. Throw in the economic downturn, and Canada drilled only a shade over 8,000 wells in 2009, a fall of more than 50% from the previous year.

Much like in the US, the majority of drilling in the provinces of Alberta and British Columbia is gas-based, and, without adequate prices, drilling levels have fallen off a cliff. There will be some recovery this year, but drilling activity will remain far short of levels in 2008 and 2007. In contrast, Saskatchewan, where oil is the dominant commodity, saw drilling levels fall last year, but not by the same magnitude. This year, the drilling level will remain stable, as operators in that province enjoy consistently higher prices.

Mexico is planning an ambitious drilling program of 1,714 wells for 2010, almost 80% up from last year, but state-owned Pemex has a record of falling short of its forecasts. The biggest chunk of Mexican activity is focused on the Chicontepec area, whose production has failed to offset the declining output at the giant Cantarell offshore field, despite massive investment. In response to criticism of the area’s performance, the government in December announced a 63% cut in Chicontepec funding, to $1.6 billion from the $4.4 billion level of 2009. Furthermore, Calgary-based Trinidad Drilling, a major contractor in the area, recently said that drilling in Chicontepec will continue this year, but at a more measured pace than last year.

Another cause for skepticism is news that Pemex will begin a corporate reorganization. After its most recent board meeting, the company said it was eliminating its corporate department of engineering and development projects. The department’s workload will be partially transferred to the corporate operations department and the company’s four subsidiaries.

The department is the last remaining unit of the four created at the beginning of former Mexican President Vicente Fox’s administration. The other three had been eliminated by the end of Fox’s six-year term in 2006.

Nevertheless, World Oil confirmed the size of this year’s drilling program with three separate Pemex sources, each of whom was adamant about the 1,714 wells. So, with some reservations, we use that number as our drilling forecast for the country.

South America. The continent’s biggest driller is Argentina, with 1,200 wells last year. Repsol-YPF remains the dominant operator, accounting for 60% or more of the wells drilled. In December, the company discovered an oil field in western Argentina, whose first two wells produced at rates that the company described as “well above average” for that part of the country. For 2010, we predict an increase in drilling to 1,300 wells.

Development of Brazil’s huge offshore pre-salt discoveries will keep activity high in 2010, with an expected 1,155 wells drilled, 4.5% more than last year. Production from these fields could soon make Brazil one of the world’s largest oil producers. In the short term, the US Energy Information Administration is projecting that Brazil’s oil production rate will top 2.0 million bpd in 2010, up from a little more than 1.9 million bpd in 2009.

Venezuela cut its drilling activity by over 40% last year, in line with OPEC’s goal of trimming back production to bolster oil prices, a policy enthusiastically embraced by President Hugo Chavez. It’s uncertain how much of Venezuela’s production decrease is a matter of policy and how much is due to a shortage of operational competence—resulting from dismissals in previous years of personnel who were not Chavez supporters, and from a hostile attitude toward foreign companies that could provide much-needed expertise in Venezuela’s challenging Orinoco heavy oil belt. We predict drilling to hold steady at 800 wells this year.

Europe. Despite a very small drop in drilling of less than 1% forecast for this year, most of Western Europe is on the mend after 2009’s disastrous drop from 2008’s robust levels. There are some optimistic signs emerging from such countries as the Netherlands, Germany, Italy and France. Unfortunately, the region’s two largest players, Norway and the UK, are lagging behind. Due to a temporary decline in Norwegian drilling, Western Europe’s well total is forecast to reach only 647 this year.

In Eastern Europe, outside the Former Soviet Union, the upstream picture will be relatively bleak, with activity falling 3% to 403 wells. The region’s one truly optimistic spot is Romania, where leading operator Petrom is working hard to rebuild crude production. A heavy schedule of development drilling pushed total wells to 300 last year, and this figure should rise another 3% in 2010, to 310. In the very smallest countries, there may also be some small gains, particularly in Bulgaria and Albania.

Former Soviet Union. In the FSU, activity will be optimistic, rising more than 6%. We expect Russian drilling to rise 6.5%, to about 5,310 wells, actually surpassing its 2008 drilling number after a slight estimated decrease to 4,986 wells last year. The vast majority of Russian drilling is focused on development work, with exploratory wells comprising only about 3–5% of the total. Russian oil production appears to have gained just over 1% during 2009, to about 9.47 million bpd.

Elsewhere in the FSU, Kazakhstan and Azerbaijan will remain the two largest drillers, with small gains to above 650 and 240 wells, respectively. In Ukraine, state firm Naftogaz has increased its activity level in the last couple of years to above 100 wells annually, and we expect about 115 for 2010.

Africa. The continent is poised to rack up nearly 5% growth this year to just over 1,560 wells after experiencing a 16% drop in drilling last year. Once again, Egypt will be the continent’s leading driller, with a gain of 2% to 556 wells. According to Petroleum Minister Sameh Fahmy, activity will be unusually oil-heavy, with 520 oil wells and 36 natural gas wells to be drilled.

Algeria will remain Africa’s second-largest driller, with a small gain to 268 wells. The country is also the continent’s leading total liquids producer, averaging 1.4–1.6 million bpd. However, that output level is subject to OPEC quota restraints. Foreign operators have steadily increased their portion of Algerian oil production. The largest foreign producer is Anadarko, with total output capacity of more than 500,000 bpd, from its operation at the combined Hassi Berkine South and Ourhoud Fields in eastern Algeria.

Oil continues to account for 95% of export earnings and 85% of governmental revenues in Nigeria. The country reportedly has an oil production capacity of 2.7 million bpd, but sabotage caused by militant groups has restricted actual output to about 2.0 million bpd in the last few years. It is no surprise that most development efforts have been focused offshore, where there is greater security of operations. This year, the country should post a moderate drilling increase to 150 wells.

Middle East. Most countries in the region will see moderately increased activity in 2010, with the exceptions being Saudi Arabia, Dubai and the Neutral Zone. Saudi Arabia made good on a threat to reduce drilling during 2009 and cut the number of working rigs by an average 15%. Since the kingdom has plenty of excess oil capacity in the short term, it plans to continue development drilling at a somewhat lower rate and divert some of that capital expenditure into other budgetary needs. We expect the kingdom to drill 375 wells, down from 450 last year. However, that number doesn’t provide a true picture of drilling activity, since the country plans to drill many expensive multilateral wells. After Saudi Arabia, Oman is the region’s second-largest driller, as the country continues to make progress in rebuilding its oil production rate after several years of decline.

Iraq plans to drill 180 wells in 2010, and 250 wells annually from 2011 onward. We don’t think that they will be able to ramp up activity quite that quickly this year, but we predict they’ll achieve half of their plan, or 90 wells. Overall, drilling in the region will gain just over 4% in 2010.

Far East. Massive stimulus spending in China allowed the country’s oil sector to defy the global recession, drilling over 1,200 more wells in 2009 than the previous year, based on comparison of our February estimates last year and this year. Over the last five years, and probably farther back than that, the country has recorded repeated gains in wells drilled. The progress has been quite impressive; the combined activity of China National Petroleum Corp. (CNPC), Sinopec and China National Offshore Oil Corp. (CNOOC) was 12,878 wells in 2004, followed by 16,207 wells in 2005, then 16,299 in 2006, 18,230 in 2007 and 20,739 in 2008. Last year, the total is estimated at 21,050, with another, smaller gain to 21,140 expected in 2010. If this year’s forecast is realized, then Chinese drilling will have increased 64% over the last six years. CNPC consistently accounts for 80% of China’s drilling, followed by Sinopec at 19% and CNOOC at 1%.

Indonesia also increased its activity last year, drilling 1,215 wells. The country left OPEC a year ago after its production fell to 978,000 bpd from a 1995 peak of 1.6 million bpd. It hopes to boost output to 1.1 million bpd by 2015 while simultaneously reining in domestic consumption through increased biofuels use. The government has said it may rejoin the cartel if it can regain net exporter status. For this year, we predict a slight increase in drilling, to 1,230 wells.

Elsewhere in the region, India will slip nearly 10%, due to budgetary concerns. Nevertheless, state-owned Oil and Natural Gas Corp. (ONGC) will devote 142 wells out of its 360-well program to exploration. However, ONGC’s offshore work will fall to 40 wells from last year’s 51-well figure. Meanwhile, Myanmar is forecasting a 55% increase in drilling to 99 wells.

South Pacific. In Australia, oil production peaked in 2000 at 828,000 bpd, and has declined every year since then, through 2008. In recent years, the main frontier for pure exploration has shifted to the deep waters of the Timor Sea, even though Western Australia still has the highest overall drilling activity. Several major discoveries made between about 1997 and 2003 are now in the process of being put onstream. Although these efforts initially did not improve the country’s output rate noticeably, there were signs last year that producers were finally turning the corner. Indeed, through the first 10 months of 2009, oil production was up very slightly, compared to 2008. Australia will drill 185 wells this year, 11 more than last year. New Zealand’s emphasis remains on exploration, with a higher proportion of the country’s 32 wells this year devoted to wildcats and appraisals.

Offshore. Drilling activity offshore should inch up 4.6% this year, to 3,165 wells. The biggest increase will be offshore South America, led by Brazil with 30 more wells than in 2009, followed by Trinidad and Tobago with a 16-well increase. In Africa, 45 more wells will be drilled than in 2009, most of them offshore Angola, Egypt and Nigeria. North Sea drilling will continue to suffer, with an 18% drop in drilling offshore Norway.