A more efficient drilling sector is set to rebound
In my 43 years in the industry, this cycle has been No. 6 for me. I thought that after going through my first cycle in the 1980s, that I would never see another one like that in my career. Unfortunately, I’ve been proven wrong again. This cycle is both very similar and yet very different than the 1980s. It’s similar in that the Saudis abandoned their role as swing producer, just like they did in 1986, causing oil prices to plummet, leaving OPEC in disarray. Even though our low point during this cycle was $26/bbl, when adjusted for inflation, it is very close to the 1986 low of $9/bbl.
Rig supply. During the time period from about 1978 to 1982, a huge amount of new rigs was built and added to the market. An unprecedented amount of new start-up drilling contractors got into the business, myself included. In fact, in 1981, there were over 1,000 new rigs built, which equates to about three per day. The Hughes rig count peaked in the last week of December 1981 at 4,530 rigs in the U.S., with Reed Tool (now NOV) reporting the available rig fleet at 5,644 units in 1982. Now, that’s a number that I don’t expect to see again in my lifetime! However, this cycle is much different, in that we don’t see the huge amount of drilling equipment being dumped on the auction market, due to bank repos, or a large number of drilling contractors going out of business.
The U.S. hit a new all-time record-low in activity during May, with 404 rigs running, beating the previous record-low of 488 set during a cycle in 1999. Since then, we have seen oil prices move from their bottom of $26 to the upper-$40s range, and the rig count has increased 46%, from 404 back up to 588. The Saudis have even cried “Uncle,” and admitted that their strategy during the last two years of protecting market share, instead of supporting pricing, has failed—it has not caused U.S. shale oil producers to go away, as was anticipated.
In fact, given our country’s history, the nature of our free market economic system, our technology, and our entrepreneurial
mindset, our industry has become much more efficient, and has weathered this storm. Sure, there have been bankruptcies and carnage, but unlike drilling rigs that might be sold piecemeal or scrapped, oil reserves don’t go away. They just change hands, and someone with financial wherewithal and technical expertise takes them over.
Costs and efficiencies. The E&P segment of our industry has been able to lower its $/bbl break-even price to a much lower level, based on both increased efficiencies and greatly reduced oilfield service costs. As activity levels continue to increase, hopefully the efficiencies gained will not go away; however, as with all cycles, the service sector pricing will start to increase again. It has to, otherwise this segment of the industry will wither and die.
Because of these newly gained efficiencies in drilling horizontal wells, some say that we will only need about half the number of rigs that were running at the peak in 2014. Less rigs might be needed to drill the horizontal oil wells, but have we thought about how many rigs might be needed to drill natural gas wells? If you recall, in 2008 at the peak of the gas drilling boom, 80% of the U.S. rigs were drilling for gas, and only 20% for oil—we drilled ourselves into a huge oversupply. Well, it didn’t take long for those ratios to reverse and, for the last several years, 80% of the U.S. rigs have been drilling for oil, and 20% for gas. Due greatly reduced drilling for gas, are we setting ourselves up for another boom in gas drilling, and have we taken this into account, when we say only half the number of rigs will be needed going forward?
By the time you read this article, the OPEC meeting on Nov. 30th will be history. Regardless of what OPEC does, the free market is working. Global demand for oil has been increasing 1.2 MMbpd/year to 1.4 MMbpd/year, and supply is coming down at almost the same rate. Supply and demand are coming into balance.
To the young men and women in our industry, for whom this is your first cycle, let me share a few things, based on my experience. If you stick with the industry, you will gain confidence, having gone through a cycle, especially one this bad. Look at your failures as learning experiences. Things happen for a reason and, in hindsight, they are usually for the best. Persistence and tenacity trump intellect any day. It’s not how many times you fail that matters, it’s how many times you pick yourself back up, dust yourself off, and keep moving forward. Remember—this too shall pass. 
