Market Conditions Are Improving for Drilling and Well Services

The rebound in global oil and gas demand this year makes the industry and its supply chain cautiously optimistic that the drilling and well services segment is recovering from the 2020 slump caused by COVID and will see growth in coming years as drilling activity picks up.

Both offshore and onshore drilling and well services activities have rebounded from the lows seen in 2020, and industry associations, drillers, and analysts expect the recovery to continue into 2022 and beyond.

Onshore drilling services set to rebound from 2020 lows

Onshore, directional drilling services expenditure is set to total US$34 billion over the period 2021 to 2025, led by drilling in China and horizontal drilling in the United States, Westwood Global Energy Group said in a report in May.

China will lead expenditure, driven by a government push to increase production capacity, especially at unconventional plays, said Jack Baxter, Analyst, Onshore, at Westwood. Spending on land directional drilling services in China is set to exceed U$10 billion through 2025, followed by an estimated US$9.2 billion expenditure in the United States, and $7.5 billion spending on land drilling services in Russia, according to Westwood’s estimates.  

The US and Russia are projected to account for 50% of total forecast expenditure by 2025. Every year through the middle of the century will see year-on-year growth, as the number of wells drilled recovers from the nadir of 2020, Westwood said.    

“Further upside comes as operators continuing to develop more complex and challenging reserves, requiring directional drilling as conventional plays mature,” the energy market research company said.

By the third quarter of 2021, onshore drilling activity had increased somewhat, supported by strong demand for oil and gas, Todd Jensen, Research Analyst, Onshore Energy Services, wrote in Westwood’s inaugural quarterly Land Rig newsletter for Q3 in September.  

Operators, however, remain cautious and highly selective with the drilling campaigns that they progress.

“The onshore oil and gas industry is regrouping and getting back on track with rig rates across the globe increasing. With drilling programs back underway we expect to see rig utilisation increase, all be it moderately, over the next five years,” Jensen noted.
Despite this, the global onshore drilling rig fleet will remain significantly underutilised with only around 50% of rigs forecast to be contracted by 2025, he added.

Demand for Land Rigs is set to grow over the next few years and is expected to be around 30% higher in 2025 compared to the lows of 2020, driven primarily by China, Middle Eastern producing countries, and Russia, Westwood said in a September report. 

Strong drilling activity is expected in NOC dominated countries such as Russia, China, and the countries in the Middle East, according to Westwood. Utilisation levels in those countries is set to be around 75% by 2025, which would be some 25% age points higher than the global average.

Offshore drilling is also on the rise

Both onshore and offshore drilling activity is on the rise and bound to post two consecutive years of growth in 2021 and 2022, although activity will still lag pre-pandemic levels, Rystad Energy said early this year.

In 2021, the recovery in oil and gas demand is good news for drilling activity, with around 54,000 wells expected to be drilled worldwide this year, a 12% increase from 2020 levels. In 2022 drilling is set to increase further, by another 19% year over year to about 64,500 wells, although activity will still fall short of the 73,000 wells drilled in 2019, Rystad Energy said.

Onshore drilling activity is set to rise by 12% from the 46,000 wells drilled in 2020 to about 51,700 wells in 2021, before climbing by another 19% in 2022 to reach around 61,700 wells.

Offshore, drilling activity is expected to rise by around 10% annually in both 2021 and 2022. This will bring the number of offshore wells drilled to nearly 2,500 in 2021, from fewer than 2,300 in 2020, and Rystad Energy forecasts that the number will surpass 2,700 in 2022.

“Such a healthy recovery is in fact poised to propel offshore drilling activity beyond pre-pandemic levels during the next two years, as the number of offshore wells drilled globally in 2019 was just shy of 2,500. This means the recovery of offshore drilling will already happen in 2021, with 2022 being a year of further growth,” Rystad Energy said.

“In contrast to previous years, when the North American shale sector led production growth, we expect the onshore and offshore shelf in the Middle East and the deepwater market in South America to be the main drivers of growth going forward. To recover production levels, operators will have to launch new drilling plans in tandem with maintenance and enhancement programs for existing wells, opening significant opportunities for well service suppliers in the years ahead,” said Daniel Holmedal, energy research analyst at Rystad Energy.

Most of the deepwater growth is set to come from North and South America, where Brazil, Guyana, and Mexico will be the most prominent drivers of the upswing.

On the well intervention side, West Africa and the Middle East could provide a strong market in the coming years with a total of around 10,000 active offshore wells on oil fields, with an average well age of 16 and 21 years, respectively. In comparison, most other regions have an average well age of between 10 and 15 years, Rystad Energy noted.

In the supply chain for offshore drilling, the drillship markets, harsh markets, and jackups are set to see utilisation growing in the coming years, followed by an increase in rig rates.

“Consolidation within the floaters and jackups landscape is part of the strategy drillers are implementing to position themselves for the future and to remain competitive as new projects are sanctioned by E&Ps,” Oddmund Føre, Senior Vice President, Energy Service Research at Rystad Energy, said in November.

In terms of offshore sanctioning activity, Rystad Energy expects 2021 to be on par with 2020 and just over 50 projects sanctioned. After two slow years, this number is expected to more than double the next couple of years with around 120 projects to be sanctioned in 2024.

“With a more optimistic sentiment and a portfolio of economically robust projects the EP companies are moving forward with new projects and fresh capital as part of a new investment spree,” Føre said, noting that a lot of work is expected to be handed out to the services sector through 2030.

UK drilling and wells activity

In the UK Continental Shelf (UKCS), a total of 71 wells began drilling on the in 2020, half the levels from 2019, as companies deferred and cancelled activities to preserve cash and reduce operational risk, the offshore oil and gas industry’s body OGUK said in its Business Outlook 2021 early this year.

Earlier in 2021, OGUK expected to see a modest increase in activity in 2021, with a further potential pick up in 2022. This would include expectations of 70–80 development wells, 10–12 exploration wells, and 3-5 appraisal wells in 2021. These levels would be similar to levels seen in 2016–2018.  

“Continued high-quality exploration activity is crucial, particularly in providing new resource progression opportunities to support security of supply and providing new throughput to sustain the viability of infrastructure that may be required as part of future net-zero developments,” OGUK said.

In early December, the UK’s Oil and Gas Authority (OGA) said in its Wells Insight Report that “there is a forecast rebound in drilling activity with Central North Sea and Northern North Sea leading the way in the years following 2021.”

The number of Exploration and Appraisal wellbores spudded has declined steadily – to nine in 2020, down from 29 in 2019, but success rates have improved, and operators have discovered over half a billion barrels of oil equivalent in the past three years, OGA said.

“The pandemic clearly affected industry’s activity in 2020, but there are significant opportunities available to Operators to improve production performance through more well interventions,” said Carlo Procaccini, OGA Head of Technology.

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