GLOBAL DRILLING AND PRODUCTION

The hardest-hit areas are mostly where NOCs are not, such as the US and Canada. Many NOCs are cash flush, but some IOCs and independents need credit.

Global oil production was nearly flat in 2008, up just 0.27%. It would have been up considerably more, but the crash in prices, plus OPEC production cuts in the last three months of the year, caused Saudi Arabia, Angola and others to reduce output well below capacity. It was a classic bubble: Sky-high oil prices caused dramatically increased drilling and new projects, which, after delays and high well-construction costs, finally came online just as prices were crashing. This was partly because oil-importing countries were exporting increasing amounts of cash to the exporters. The result was way too much production just as demand was crashing.

Operators are waiting to see whether OPEC solidarity will be successful in cutting production to meet the steep drop in global demand, thus returning prices to $75 levels, which is the goal. However, if OPEC is not careful, too-high prices could easily forestall any fragile economic recovery, assuming one occurs, and that would again decrease demand, re-starting the high price - demand destruction - low price cycle.

World crude/condensate production by countries, 2008 and 2007*

Where there are independents and small operators-actually, any company that isn’t flush with cash from the past four years of boom-the worldwide credit crunch will take its toll in 2009: We expect a 3.9% drop in drilling outside the US. This predicted falloff is much smaller than in the US, due to the power of the NOCs, which are not as dependent on credit as are the international companies, are cash-rich from the last several years, and often explore and drill for nationalistic, strategic and domestic economic reasons rather than purely for profit. The IOCs have enough money to see most of the expensive projects through, but as they are investor driven (i.e., stock price), they can be expected to lay off personnel and cancel some drilling that has not been committed to. Also, the US has a peculiar exposure to natural gas price sensitivity.

North America. Last year, a steep downturn in Canadian drilling led us to predict a 5% drop in drilling outside the United States for 2008. As it turned out, the Canadian drop was significantly softened last year, such that the country drilled “only” about 1,800 fewer wells than in 2007 instead of the predicted 4,664. This better-than-expected performance is partly due to the resurgence of the US dollar relative to the Canadian loonie, which improved the return on oil and gas exports to the US.

Another factor, which is also affecting the US, is falling productivity per gas well, as producers turn increasingly to unconventional gas. It now requires more than three times as many wells to be drilled just to keep gas production flat. Also, gas prices need to stay high-somewhere in the $6 - $8 (wellhead) range to make the unconventional gas drilling profitable. Thus far, domestic gas demand in the US and Canada remains relatively steady, especially for such stalwart industries as electricity production and Canadian bitumen (oil sands) extraction and upgrading.

When included with the rest of the world, Canada’s 2008 performance led to a net increase of about 2,300 wells drilled outside the US compared to 2007.

Canadian governmental agencies and oily organizations expect Canadian activity to be off another 7% in 2009, while we think that US drilling will fall 20% (see page 55).

On the production side, we expect a hefty “cooling off” of the tar sands projects, which has already begun, with many cancellations and delays announced. These require high prices to be economic, especially with thermal recovery operations.

Operator enthusiasm for Mexico’s oil reform passed late last year is somewhat cooled by the government’s failure to make key appointments on deadline, as required by the legislation. At the earliest, the reform will probably increase Mexican drilling activity in 2010. Meanwhile, we forecast Mexico to drill 600 wells in 2009, about 9% down from 660 last year. Production from the giant Cantarell Field fell 32% to 1 million bopd in 2008. Overall output is down about 10%. The government still talks about a $30 billion high-density, multi-lateral drilling campaign to realize the considerable potential of the onshore/shallow-water Chicontepec Basin, which has been drilled since 1926.

On the gas side, Mexico improved its gas production by more than 10% last year, primarily due to Burgos Basin activity.

Cuba sort of nationalized the Canadian firm Pebercan, paying it $140 million, of which $60 million will pass to partner Sherritt International, also a Canadian firm. These companies have been instrumental in improving Cuban oil production in recent years. Sherritt and a few other international players have contracts that so far remain intact. A lack of payments on past and future receivables has Sherritt worried that it could be next.

South America. The growth in activity is not just offshore Brazil, but also just as much on land; at least that is what the government has planned. Reports of a proposal to change the concession model governing the offshore subsalt into profit-sharing contracts could accelerate this interest. For 2009, we predict a 20% increase in wells drilled, to 912. Petrobras plans investments of $28.6 billion this year, and said that it would need another $18 billion to reach its $35 billion 2010 budget. For its 2009−2013 budget, the company raised its capital expenditures to $174.4 billion, according to a report in Upstream.

Venezuela has long been a proponent of high oil prices, and OPEC’s effort to remove more than 4 million barrels a day from global output will find a friend in President Hugo Chavez, who is likely to let drilling slide to raise prices. Furthermore, in November, PDVSA reported that over half the companies invited to bid for licenses in the Orinoco heavy oil belt-the first in a decade-have opted out of the process. Chavez has decided that the Orinoco will take the brunt of the OPEC-mandated cutbacks. We expect the country to drill 1,290 wells in 2009, 60 fewer than last year.

Ecuador plans to reverse its production decline through foreign participation, especially since it needs money to keep up the fight against depletion. The nation recently signed with the Chinese consortium Andes Petroleum and plans to enjoin Repsol YPF and Petrobras soon.

Forecast of 2009 drilling worldwide*

Europe. Unlike some NOC-dominated regions, North Sea projects rely heavily on cash flow, especially given their high capital expenses. Thus, this segment is expected to fall harder than the global average, about 6%. This also holds for Eastern Europe, which also doesn’t have traditional NOCs; that region will see a drop of about 13% in activity, to 334 wells. UK production seems to be steepening, down 8.3%, while Norway, with record completions in the midst of a large offshore EOR project to stem the decline in its fields, lost another 4.6% to depletion.

Russia/FSU. The Russian Federation slashed its oil export duty starting this month, in an effort to keep development profitable in the face of the global downturn. While it will remain one of the top drillers in 2009, we expect activity to be down just under 5% in 2009, with about 4,900 wells drilled. Production will likely continue to fall off, since output at Sakhalin-1 and -2, Kharyaga Field and other fields has fallen, resulting in a 1% decline for the year. Sakhalin-1 peaked at 242,000 bopd and is expected to hit 160,000 bopd this year. The “peak community” has already declared that Russian production has peaked and will now head permanently lower.

The country plans to improve production by making changes in taxation that will be favorable to exploration and production. The changes will be announced this winter.

In terms of reputation, Russia’s continual disputes with pipeline-transit country Ukraine anger European customers. The pipeline is once again shut down, this time in a dispute over what to charge, if anything, for gas that is needed to operate the pipeline. Ukraine says it needs 700 MMcfd (20 MMcmd).

A bright spot in the FSU was Kazakhstan, with at least a 5% increase in production. Startup of the long-delayed giant Kashagan Field is still, incredibly, at least four years away.

Africa. This underexplored continent should maintain its level of activity, led by Egyptwith 580 wells expected in 2009. Discoveries on the continent’s west coast continue to be made, while offshore Equatorial Guinea generating interest due to the discovery of Jubilee Field, a more-than-a-billion-barrel find.

Meanwhile, Tanzania and Uganda are becoming inland exploration success stories.Sudan continues to drill aggressively despite ongoing war and international sanctions, and is actually forecast to increase drilling slightly in 2009. The same cannot be said forNigeria, where ongoing violence has kept some drilling and especially production in an “on/off” mode despite the government’s efforts.

Angola, now an OPEC member, has apparently cut its production by about 100,000 bopd to comply with its quota. While attrition could easily make the cutbacks unnecessary, the country still says that it plans to drill more than 100 wells a year for the next decade. Angola has enough projects underway or planned that, if realized, it would have to make a decision between OPEC compliance and producing well over 2 million bopd. International operators were reportedly instructed by state company Sonangol to curb production starting Jan. 1, but that remains to be seen.

Middle East. The region as a whole will see a small reduction in drilling, in large part due to OPEC quotas, which are best met by allowing natural decline to set in rather than actually shutting in wells. Saudi Arabia will lead the way with a 6% drop. The kingdom has recently completed projects that resulted in production gains, such as startup of the Khursaniyah facilities within the AFK complex-hence the 6% increase last year. Thus, actual shut-ins will need to occur to achieve the desired OPEC production cuts.

Qatar has been raising al-Shaheen Field output, among others, resulting in a 2.2% increase. Meanwhile, Iraq is back up to its former glory, resulting in 2.45 million bopd, a 12.5% boost in production. Much of the increase came from the north. Platt’s Oilgramsays that about 100,000 bopd is “missing” and is valued at $3 billion. This is up from last year’s 59,000 bopd. The newsletter said that it arrived at the missing oil figures after doing material balances of production/supply vs. exports. New oil laws and near-term tenders should see robust drilling in the country within the next year or two. Some of these will be Western-style IOCs. Hopefully, we will get some rig and drilling data by then.

Far East. Now that global demand for China’s factory goods has plummeted, the country plans to spend to sustain growth. It must do this, since, once an agrarian society has become accustomed to work in factories and life in the city, there is simply no turning back. To avoid the unemployment of tens of millions and the threat of riots, China will use its ample cash reserves, much of which is from the US, to sustain its economy at what the government hopes will be a 6% growth rate. This spending will keep drilling and production relatively flat-which is actually a drop from previous years of relentless increases.

Despite the problems of the global recession, the country should maintain 19,730 wells to be drilled in 2009. According to the International Energy Agency, China’s petroleum demand fell 2% last year. Demand is expected to rise this year, but only by 1.1%, down from the 4.2% forecast by IEA six months ago.

Despite the country’s decision to leave OPEC due to the fact that it is no longer a net exporter of oil, Indonesia continues to fight the decline curve, with oil and gas revenues up over 60% in 2008 from the previous year. The country should drill 1,040 wells in 2009, 5.5% down from last year.

India seems almost immune to the global economic woes. ONGC is still drilling as many wells as it has for the last 18 months, as rig counts are steady. One way the nation is trying to keep its economy on track is to keep domestic fuel prices low, even if by decree.

Offshore. We expect offshore drilling to be off only 3.6% outside the US this year. This assumes that OPEC is successful at quota compliance levels of about 50%, and a global Great Depression Part II does not ensue. South America will fare the best-actually up-due to Brazil’s commitment to its offshore fields and new subsalt plays, while the US Gulf of Mexico will see only a modest falloff, largely due to deepwater commitments. We expect jackup day rates to crash in the first half of the year, leading operators to reevaluate the economics again in the second half, putting some back to work.