June 29, 2010

Operators and drillers can expect closer scrutiny and tighter water regs and thus higher costs in the eight–state Ohio River Valley region.

A recent change to Pennsylvania’s water discharge regulations has set the stage for increased disposal costs for drillers in that state and in the wider Ohio River Valley. Water quality in that watershed is governed by ORSANCO, an interstate commission representing Indiana, Illinois, Kentucky, New York, Pennsylvania, Ohio, Virginia, West Virginia, and the federal government. Pennsylvania’s current total dissolved solids (TDS) standard is 2,000 milligrams/liter for industrial wastewater. However, the Pennsylvania Department of Environmental Protection has adopted a new rule that slashes the TDS standard to 500 mg/l for drilling wastewater and grandfathers in existing wastewater sources under the old standard. The state legislature is reviewing the new rule pending final approval.

West Virginia has proposed a 500 mg/l rule for all industrial water discharges, and ORSANCO is considering the same for the entire region.  Now drillers face added costs to control discharges, mainly chlorides and sulfates, from pit water, frac water, and drilling fluids.

June 22, 2010

Onshore drillers won’t escape repercussions from the catastrophic blowout and oil spill in the Gulf of Mexico. Counterintuitively, not all of the repercussions will be negative. But there will be enough “spillover” impacts to give land drillers heartburn for years to come, according to The Land Rig Newsletter.

Anti-drilling sentiment was already on the rise before the gulf catastrophe. NIMBY Syndrome symptoms were proliferating as the shale plays spawned a wave of drilling in new areas. Fracing had already been controversial. But the gulf disaster has spurred state regulators to raise the bar on oversight.

In recent weeks, land drilling moratoriums have popped up or are threatened in the Marcellus play states, central California, and even in the heart of Texas Barnett Shale country. On the other hand, the gulf moratorium is already causing some operators to shift more capital to onshore drilling. Anadarko is shifting some deepwater capex to onshore, liquids-rich drilling. Venoco is diverting offshore capital to onshore Monterey drilling with the offshore moratorium scuttling plans.

June 15, 2010

Texas oil—conventional and unconventional—was the heavy lifter as the state’s oil-directed rig count rose by 17% to 278 for the biweekly period ended June 4 and led the total active rig count above 1,500 for the first time since January 2009, according to The Land Rig Newsletter’s Biweekly Report.

In West Texas, Martin and Upton counties led the charge with 29 and 21 rigs, respectively.  In the “oily” Barnett, Montague County leads with 8 rigs, followed by Cooke County with 4 rigs. In the Eagle Ford, drilling is strongest in Dimmit and De Witt counties with 7 rigs apiece.

The Eagle Ford is the budding rock star, with a rig count that surged 28% and 10 wells spudding in week ended June 4 alone. Petrohawk and Lewis Petro Properties continued to lead in the play with 8 rigs each. Petrohawk is most active in La Salle County, while Lewis Petro is most active in Webb County. Turning to drillers, Pioneer is making great strides in the Eagle Ford with eight new spuds since the last biweekly report.

June 8, 2010

Term contracts are making a comeback for drillers with high-spec rigs. Since the year started, the major drillers have seen operators increasingly use term contracts. As newbuilds roll off original contracts, the 3-year terms that undergirded their creation have been replaced with shorter-term contracts—from as little as 6 months up to 2 years. In an interesting twist, the industry continues to demand new equipment and is willing to support newbuilds with even longer—as much as 5-year—contracts.

Last fall drilling contractors reported that operators were buying out term contracts or delaying their drilling programs by idling newbuilds under tolling clauses. The added cash flow from early termination and tolling fees helped the contractors weather the lean times, and the tolling arrangements kept the rigs under the control of the operators who helped build the rigs.

There were concerns too many rigs would be pushed into the spot market and drive down day rates. But instead demand grew. Now major drillers see busy fleets, and some high-spec rig fleets are booked through the remainder of 2010. 

June 2, 2010

Expect a sharp increase in Michigan Basin drilling in the months to come, courtesy of a promising new shale play dubbed the Collingwood. Adding to the allure is a liquids component—all the rage in unconventional plays these days. Given the lack of big rigs in Michigan, opportunities abound for 1,000 hp and larger rigs suited for drilling long laterals.

EnCana subsidiary Petoskey Exploration opened the new shale play in Michigan with the testing of the State Pioneer 1-3 well in Missaukee County. In the process, it spawned a record lease sale as operators from outside Michigan scrambled to snatch up acreage in the newest example of the ever-proliferating unconventional resource boom that is redefining U.S. drilling.

The sale drew $178.3 million in bids, or just over $1,500/acre, vs. the $26/acre earned at earlier auctions.  Most of the money came from outside Michigan.  Chesapeake took most of the sale’s leases. EnCana had already built a substantial lease position with >250,000 acres. Lease sale results are being finalized and will be made public in early June.