The U.S. land rig count surge is starting to flag a bit. While the 4Q to date is the highest quarterly average since 3Q 2008, the early November tallies are down sharply from October’s, according to The Land Rig Newsletter’s Biweekly Report. The average this month (as of November 18) represents a drop of 27 from the October average. Interestingly, the decline happened almost entirely on the oil rig side—counter to the trend seen all year. Leading the slide was Texas, which dropped 10 Traditional (>5,000 ft) oil rigs sequentially from October’s total average. Since the oil-focused unconventional plays have held up well, the likely culprits are small, private operators in conventional Texas plays spending down their budgets before yearend. Further supporting that thesis:  The month-to-month rig count decline for this group was 49, by far the biggest among the categories and more than offsetting gains by other groups, according to the Biweekly Report. Taking a sneak peek at the rig count for the week ended November 25, the total tally fell another 16.

Drilling activity is increasingly concentrated among the larger fleets, according to The Land Rig Newsletter’s latest Biweekly Report. The number of operators running 10 rigs or more is the biggest in recent memory at 42. For the past year or so, that tally has generally been in a range of 32–35. As a group, the ≥10-rig operators are nearing a 60% market share and now stand almost 7 percentage points higher YOY. The average number of rigs run by this group also is higher, at 26, compared with 25 this time a year ago. Bear in mind that certain companies that used to be stalwarts in this category, such as Petrohawk, XTO, and Atlas, no longer exist. This increasing concentration of active rigs in the bigger fleets reflects the relentlessly expanding role of unconventional plays, where the midsize and larger, mostly public, companies focus their efforts. If these plays are also attracting the credit that otherwise still seems tight for small, private operators—which could help account for that group’s dwindling market share.

The October Land Rig Newsletter took note of announcements by three big drillers to retire or sell a combined 157 rigs this year. The LRNL team thinks this is the beginning of a trend among larger drillers to focus almost exclusively on unconventional plays. In the latest issue of companion publication The Unconventional Drilling Report, the LRNL team itemized this trend as of October 28, 2011:  The top 15 drillers, accounting for 71% of the total U.S. rig count, ran 75% of all the rigs in the unconventional plays for the period. And unconventional plays absorbed 85% of their combined overall active fleets.  Generally, among big drillers, those with the lowest ratios of active unconventional rig counts relative to total reported fleet were those reporting major rig retirements. The LRNL team expects more rig retirements to come as larger drillers—especially public ones trying to burnish their unconventional credentials for investors—shed whatever small, mechanical rigs they can and leave conventional drilling increasingly to the smaller drillers.

With the latest flurry of E&P deals (Statoil-Brigham, Kinder Morgan’s impending sale of El Paso E&P)—and still more to come—what might be the impacts of M&A action would be to unconventional drilling? The Unconventional Drilling Report compared rig counts pre- and post-deals for other recent E&P deals focused primarily on unconventional plays and concluded:  Not much. ExxonMobil’s U.S. land rig count has scarcely budged since it acquired XTO, averaging 68 vs. their pre-acquisition tallies of 7 and 64, respectively. Post-acquisition Chevron has averaged 20 rigs since closing on Atlas vs. their respective pre-deal averages of 8 and 7. BHP has averaged 25 after closing on Petrohawk vs. pre-deal average tallies of 2 and 18, respectively. The biggest post-deal traction for bolstering rig counts has come not from outright acquisitions but from joint venture deals, namely Chesapeake’s, whose rig count jumped from a pre-JV 120 to an average 140 since the last JV closed (and recently peaked at 154). It will climb still further after an imminent JV closes on Chesapeake’s Utica Shale acreage. 

You can’t overestimate the importance of unconventional plays not only to U.S. drilling and production but also to America’s energy picture. Even as robust oil prices have buoyed U.S. conventional drilling, unconventional rigs have managed to eke out a small gain in market share to 70.7% in 3Q 2011 to date from 69.5% a year ago, according to The Unconventional Drilling Report. It’s clear that unconventional liquids rigs (+48% YOY) are the main driver of the 20% YOY increase in total rig count. Meanwhile, production gains from unconventional drilling have enabled the U.S. to reverse a long decline in U.S. oil and gas output. U.S. crude oil production fell every year since 1985 until 2009’s uptick of 8%, followed by another 2% in 2010. By 2012, EIA estimates total U.S. petroleum liquids production will have risen by more than 1 million barrels per day from 2009. Even with a steep drop in Gulf of Mexico output, EIA predicts U.S. gas production will grow by 4 Bcfd (6.4%) this year and another 1.1 Bcfd in 2012. 

The surge in oil drilling shows no sign of letting up. For the foreseeable future, there are ample economically viable opportunities for liquids drilling, according to The Land Rig Newsletter’s Biweekly Report. Even as sizzling plays such as the Bakken and Eagle Ford still have a lot of room to run, new liquids plays are emerging. Such new plays can be transformational. For decades North Dakota’s rig count barely registered. Thanks to the Bakken, the state now accounts for almost 10% of the nation’s rig count and has perhaps the strongest economy. The shift from gas to liquids drilling has been just as seismic. Looking at oil rig vs. gas rig data for 3Q 2010 vs. 3Q 2011 (July-August), the exchange of respective market shares is uncannily even. The gas rig share of the total count fell from 56.3% to 43.6%, while the oil rig share of the total count jumped from 43.7% to 56.4%. YOY, unconventional oil rigs have accounted for about 9 of the nearly 13 percentage point gain in the overall oil rig count.