How long before the irresistible force of demand for new higher spec rigs meets the immovable object of lower commodity prices?

Evidence of an impending collision surfaced in November when Hart Energy surveys of contractors and operators in the Marcellus produced comments that operators were postponing plans to order new rigs, shopping rigs on order to other operators or discussing cancellation of existing orders. The survey moved to the Bakken, where additional order cancellations came to light, including comments from one contractor that a rig manufacturing representative had left his office just 10 minutes before Hart Energy called. The representative was marketing two recently completed rigs following order cancellations.

In all, early reports are small beans—maybe a dozen cancellations overall. In contrast, a survey of domestic rig manufacturers at the end of third-quarter 2014 found 200 rigs under construction, including 175 for the domestic market.

Meanwhile, publicly held drilling companies were reporting recent newbuild contracts during third-quarter earnings calls—enough to offset cancellations in the two markets Hart surveyed.

Defining the future, which really amounts to the first half of 2015, has become difficult since the industry is less than six weeks into the oil price sell off. Operator comments on 2015 plans span the spectrum from bravely drilling through a perceived V-shaped downturn to reducing 2015 capital spending in marginally economic areas.

Early projections among sell-side analysts suggest sustained lower oil prices may idle up to 200 mostly vertical rigs in 2015 based on breakeven economics. Operators at Hart Energy’s Executive Oil Conference in Midland in November reflected prognosticating ambivalence as well, though an emerging consensus indicated a reduction in vertical Wolfberry drilling while moving forward cautiously on horizontal work pending additional market signals.

Such uncertainty complicates the newbuild rig scenario. A stimulating factor in new rig construction involves the move to enhanced completions. Operators are pushing laterals from the standard 1,372 m to 2,286 m (4,500 ft to 7,500 ft) when acreage positions permit. This effort has resulted in full utilization of higher spec 1,500-hp units. With higher spec rig capacity fully subscribed, operators have been signing multiyear-term contracts for new rigs in 2014 to meet the greater demands on rig capability that longer laterals create.

Anecdotally, the demand for higher spec units appears to be intact. One privately held drilling contractor told Hart Energy that his company had just signed contracts with a major for four higher spec 1,500-hp units already in the manufacturing queue.

Meanwhile, the industry as a whole is grappling with the shock of suddenly lower oil prices in a market that had encouraged rapid expansion in expensive tight oil developmental. For what it’s worth, the 30% fall in oil prices from the June 2014 peak is about average for pricing pullbacks over the last decade. Many operators seem to favor the notion that recovery will reflect historical patterns and occur over the next three to six months, certainly by the first half of 2015.

For the time being, it appears that the impressive newbuild effort in 2014 may reflect the near-term peak in land rig manufacturing.

Editor’s note: Scott Weeden is currently on medical leave.