Hunker Down: Bakken Drillers Shut In Operations As Demand Vanishes

Synopsis

Hunker down indeed: This edition of Hart Energy’s Heard in the Field found multiple Bakken Shale drilling contractors shutting in operations due to lack of demand.

The companies remain in business, but activity levels are essentially frozen with rigs stacked out, crews let go and a handful of salaried people anxiously awaiting summer and an improved commodity price before moving forward.

The report found three of eight drilling contractors at zero activity levels while the remainder was doing what they could to hang on awhile longer in a low demand environment.

Comments from survey responders echo the 16-unit drop in horizointal rig count since the end of 2015, or roughly 30%, to less than 40 rigs active. The Bakken leads all regions in terms of rig count decline at 82% vs. peak.

Bakken production still remains sticky as of December 2015 and experienced a modest monthly decline of just 30,000 barrels of oil equivalent per day on 1.1 million barrels per day of oil in production.

Contractors say oil needs to get above $50 on a sustained basis before recovery begins. Several contractors will await the arrival of summer to re-assess the situation at a time when demand for drilling services normally improves.

Rig pricing has stabilized, but has fallen below $16,000 per day on average for the benchmark Tier I AC-VFD 1,500 horsepower (hp) unit. That price includes rigs still on contract, indicating the spot market rate for rigs is lower still.

However, with very weak demand for drilling services, the price to obtain a rig is moot at this point. Otherwise, it’s survival mode for drilling contractors in the Bakken Shale.

Watch for the next Heard In The Field report on the Bakken land drilling market in May 2016.

Part I. – Survey Findings

Among Survey Participants:

• 2016 Mentality: Hunker Down
  [See Question 1 on Statistical Review]
  ​Although no respondent said that demand had grown worse in the last three months, all agreed that it had not gotten better. Three respondents said that they have shut down operations until oil prices reach at least $45 per barrel. Five of the eight said that they are operating at a diminished capacity and are hoping to hang onto what work they have now.
  • Top-Tier Drilling Manager: “We’re the worst we have ever been since we began operating here 10 years ago. We have a third of our rigs running vs. what was running six months ago and they are still stacking. This $27 oil is killing us and everyone else in the Bakken.”

• Oil Prices Need To Average $55 Per Barrel
  [See Question 2 on Statistical Review]
  ​Respondents said that the price of oil had to climb to an average $55 per barrel. While one said $45 oil would help rig demand improve, another four said the price would need to stabilize between $50 and $65 to help rig demand. Three said they did not know what the trigger price would be to get work since prices have been down so long.
  • Mid-Tier Operator: “I don’t know what prices would have to be. We have our management team sitting down next week to look at where we are and what our plan is for the year. We might make some decisions here in the next week.”

• Low Gas Prices Have Little Impact
  [See Question 3 on Statistical Review]
  ​All respondents said that natural gas prices would have little influence on drilling in the Bakken. However, some of the respondents mentioned natural gas prices ranging from $3.40 to $3.60 might help rig demand improve somewhat. Even with higher gas prices, horizontal drilling in the Bakken would not resume with higher gas, according to respondents.
  • Top-Tier Drilling Manager: “We are on a sinking ship. If oil keeps going down and gets to $20 per barrel—there won’t be anything in the Bakken. It won’t matter what gas prices are.”

• Day Rates Lower For High hp Rigs
  [See Question 4 on Statistical Review]
  ​Day rates in the Bakken Shale for a 1500 hp AC-VFD rig average between $15,000 to $18,000. Rig rate averages given by survey participants can be seen in Table I below.
  • Large, Independent Operator: “Most of our rigs are locked into long-term contracts. We are not interested in selling product at low prices, so we might hold off on completions.”

• Day Rates Stabilize At Low Level
  [See Question 5 on Statistical Review]
  ​Low day rates for drilling rigs are not enticing many major operators to drill. Respondents said that most are shutting in operations to wait until prices improve or until summer when they might review their strategy for the year. Rates have not gone lower, but they are down considerably from 2015, and are not expected to improve during the next three months.
  • Mid-Tier Drilling Manager: “There are a few operators that are working. I had breakfast with several service companies this morning and they said some of the small operators that have some cash available are drilling now because the rigs are so much cheaper. They plan to drill and not complete.”

• Low Activity For Drillers In The Bakken
  [See Question 6 on Statistical Review]
  There is very little drilling in the Bakken and most expect that this will not change this year. Most respondents said their plan is to shut down or continue working at a much reduced capacity for the remainder of the year.
  • Mid-Tier Drilling Manager: “We’re completely shut down and have laid off everyone except salaried people. Now we are just waiting until oil prices change or the middle of the summer.”

• Companies Are Tightening Up But Not Exiting
  [See Question 7 on Statistical Review]
  ​Six of the eight respondents said that no company had decided to leave the Bakken area yet, though many have shut-in operations. The other two were unsure of which companies have left the area. One said that it is too early to tell which companies would remain or exit and the other said that small drillers had begun to leave the area, but major drillers were sticking it out at a much reduced capacity.
  • Top-Tier Drilling Manager: “We are all in the same boat. Some companies have closed the doors and moved on with no activity.”

• No Bankruptcies Among Drillers Reported Yet
  [See Question 8 on Statistical Review]
  ​Respondents said they do not know of any companies going bankrupt yet, but suspect there could be some go out of business in the future. Respondents agreed it is still too early to tell who will survive and who will not.
  • Mid-Tier Drilling Manager: “A lot of service companies have shut their doors and everyone has downsized.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with eight industry participants in the land drilling segment in the Bakken Shale. Participants included three oil and gas operators and five managers with drilling companies. Interviews were conducted in February 2016.

Part II. – Statistical Review

U.S. Land Drilling

[Bakken Shale]

Total Respondents = 8

[Oil and gas operators = 3, Drilling companies = 5]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in first-quarter 2016 compared to the fourth quarter of 2015?

2. What would oil prices have to be for demand for drilling rigs to improve?

3. What would gas prices have to be for demand for drilling rigs to improve?

4. What are the average rig day rates in your area? Is this rate for an AC power, diesel-SCR, or conventional mechanical type of rig?

5. Do you expect rig day rates to increase, remain the same or decrease over the next three months? By what percent?

6. Which drilling companies are the most active in your area during the downturn?

7. Are there any drillers that have left your area?

8. Are there any drillers that have gone out of business in your area?

End Statistical Survey