Last week, OPEC did nothing to alleviate the oil glut. The lack of action will prolong the downturn. About one year into the downcycle, the O&G industry is now littered with half-dead rigs, boats, and frac spreads.
Here is a quick round-up* of the rigs and oilfield equipment that have gone from being actively utilized to the sidelines during the downturn so far:
1,150 US land rigs,
Half of US frac fleet,
250 Canada land rigs,
200 international land rigs,
69 offshore floating drilling rigs,
80 jackup drilling rigs,
230 offshore support vessels.
*Snapshot 1 year into downturn, figures approximate
If you work on the manufacturing, oil service or drilling side of upstream, this excess capacity should concern you more than the oil glut itself. The vast army of silent iron, mothballed and waiting for work, will keep the kind of healthy growth that accompanies near full utilization rates at bay for the foreseeable future.
To be sure, the industry is wiping out portions of this zombie fleet. An important first step towards recovery is rationalizing capacity. About 42 floaters have been scrapped. Halliburton thinks a quarter of the US frac fleet could be retired during 2016. And the longer the downturn goes on, the more zombie rigs will be cannibalized to feed parts into sister units still working.
But the excess capacity that remains work-ready (what we call zombie rigs) will stalk utilization for years. Much of it will have to be re-absorbed or eliminated before orderbooks refill at manufacturers and shipyards. For the drillers and service firms to return to healthy growth levels, dayrates and pricing need to recover. With this kind of capacity on the sidelines desperate for work, it is hard to imagine dayrates increasing for the next several years in any oilfield service / drilling category even if oil prices do recover a bit.
In short, the industry is significantly overbuilt and likely to remain so for the foreseeable future. A fleet scaled for $100 oil is now facing a likely prolonged period of sub-$50 oil demand levels. Asset write-offs and widespread scrapping will be themes to watch in 2016.
Weekly North American Rig Count Statistics
The North America rig count fell 14 units last week, with the biggest declines coming in US oil drilling and Canadian drilling. With the OPEC abandoning production quotas last week, WTI appears poised to move into the $30s just as budget season begins in earnest. We believe this skews rig count direction lower in the weeks and months ahead.
As 2015 budget dollars begin to run out in 4Q, drilling activity is stalling as 2015 draws to a close. If our estimate of a 20%+ drop in 2016 NAM E&P spending proves correct, rigs will continue to trickle into yards during 1H16.
While the weekly figures will ebb and flow, the recent leg down in oil prices jeopardizes stability, and the 700 rig count level for US land will be broken over the next few weeks.
In Canada, the rig count fell 7 rigs to 177 for the week. This seasonally strong period is tracking well below recent years.
A regional summary of rig counts by key basins is below. With 217 rigs working, the Permian is still the most active basin, and it was down 4 rigs on the week. The Eagle Ford, with 73 rigs running, is the second most active basin, and it was flat last week. With 60 rigs running, activity in the Bakken was down 2 last week.