During the mid-1980’s, the drilling industry contracted sharply, correcting a condition of significant over capacity that existed in the supply of oilfield service and equipment. For the last 15 years, global rig count has cycled up and down with factors such as world economic and political trends that influence supply and demand for energy, the price of oil and natural gas and the level of exploration and drilling for those commodities.
The majority of worldwide drilling activity, as measured by rig counts, has historically been concentrated in North America. Over time, activity in North America has become increasingly driven by natural gas consumption on the continent, particularly in the U.S. The percentage of the U.S. rig count dedicated to natural gas drilling has increased from approximately 50% in the early 1990’s to more than 86% in late 2004. A primary reason for the increasing emphasis on natural gas drilling is that North American gas wells have very high production decline rates, so that significant numbers of new wells need to be drilled over time to maintain ongoing natural gas production at desirable levels. Changes in the balance of energy demand and the supply of natural gas affect natural gas storage levels, commodity prices and the volatility of North American drilling activity. In 2004, the North American rig count reached a new recent high, averaging 1,557 for the year, 4% above the previous high in 2001 and 91% above the lowest annual average of the last 15 years, 816, which occurred in 1992.
Over the last decade, drilling and completion activity has grown faster in international markets than in North America. According to Spears & Associates in 2004 approximately 50% of the worldwide drilling and completion expenditures occurred in international markets (excluding Russia and China). Drilling activity outside North America tends to be less volatile than the North American market. Most contracts span two to three years due to the significant investment and complexity surrounding international projects. Drilling decisions relating to such projects therefore tend to be evaluated and monitored with a longer-term perspective in regard to oil and natural gas pricing. Additionally, the international market is dominated by major oil companies and national oil companies, which tend to have longer-term objectives than the typical independent producer in North America. In the last 15 years, the non-North American average annual rig count has cycled between a high of 915 in 1991 and a low of 588 in 1999. In 2004, the annual international rig count averaged 836. Since 1999, the international market has recovered slowly; however, we believe the geological future of the industry is in both international markets and deepwater because of the maturity and declining production of North American fields.