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COLUMN-Drilling boom heralds big oil output rise: John Kemp
October 31, 2011 / 4:36 PM / in 6 years

COLUMN-Drilling boom heralds big oil output rise: John Kemp

(John Kemp is a Reuters market analyst. The views expressed are his own)

By John Kemp

LONDON, Oct 31 (Reuters) - Soaring oil prices have spurred a worldwide drilling boom that should result in much-faster growth in oil production over the next 2-3 years, helping meet strong growth in consumption, and tempering upward pressure on prices.

The number of rotary rigs drilling for oil and gas stands at the highest level for over two decades, according to oilfield services company Baker Hughes.

In the United States, 1,080 rigs were drilling for oil at the end of October, up from 696 at the same point last year, and easily surpassing the previous peak of 740 set back in 1987 (Chart 1). Canada has seen a similar upsurge.

Outside North America, 903 rigs were drilling for oil, beating the previous peak of 832 in 2008, and the highest number since the late 1980s according to Baker Hughes data (Charts 2-3).

Intensive activity is needed just to offset natural output declines from older fields. Nonetheless the upsurge signifies a large increase in exploration and production (E&P) operations that should filter through into greater output and more spare capacity in the short to medium term.

TIME CHANGES EVERYTHING

While it is safe to assume supply and demand trends are relatively fixed over short periods of up to 2-3 years, beyond that horizon most elements of both production and consumption become increasingly flexible and respond strongly to price signals.

Bullish analysts point to low investment and E&P activity during the extended period of low prices in the 1980s and 1990s as laying the ground for the subsequent supply constraints and surge in prices once emerging market oil consumption began to grow strongly from the late 1990s and especially in the 2000s.

But prices have now been exceptionally high for most of the last five years. The industry has responded strongly with a big increase in drilling, and attracted more resources -- everything from skilled engineers to new rigs and innovation in surveying and drilling technology.

As a result, not only is there more E&P activity in the short term, but the industry’s E&P capacity continues to expand.

None of this rules out another price spike if demand again starts growing too quickly for supply to keep up, or if there are more unexpected disruptions like the loss of Libyan exports. But the supply side of the industry has already begun to adapt to meet strong emerging market demand. High prices may already contain the seeds of their own destruction.

IMPROVING PRODUCTION OUTLOOK

Certainly Saudi Arabia sees no shortfall in medium-term oil supply or need to boost its peak capacity. State-owned Saudi Aramco has decided against another major expansion in capacity from the current 12.5 million barrels per day because other nations are already boosting output, according to news reports.

“There is no reason for Saudi Aramco to pursue 15 million barrels (of output capacity)” Aramco Chief Executive Khalid Al Falih was reported as saying in the Wall Street Journal in early October .

“It is difficult to see (an increase in capacity) because there are too many variables happening. You’ve got too many announcements about massive capacity expansions coming out of countries like Brazil, coming out of countries like Iraq. The market demand is addressed by others” said Falih.

Increased output does not hang on expectations from Brazil and Iraq alone. The upsurge in E&P activity is global and should contribute to faster growth in non-OPEC supply in the years ahead.

Too many analyses concentrate on near-term disappointments in non-OPEC output (for example production problems in the North Sea and Azerbaijan) and project them forward uncritically. The broader context is more positive, with more intensive E&P activity than at any time since the 1980s.

Even making adjustments for interruptions, declining output from old fields and the need to drill more metres for every barrel extracted, increased E&P will start to reverse decades of under-investment and improve the supply picture substantially in coming years.

The market has already begun to price in improvements on the supply side. Prospective output increases are one reason why forward prices for Brent and other benchmarks in 2013 and beyond remain under $100 per barrel, less than two-thirds of their peak in 2008. (Editing by Anthony Barker)

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