Category description

Drilling Rigs are one of the most important pieces of oilfield equipment and are used during a number of stages throughout the life cycle of oil and gas fields. Land drilling rigs can be of different sizes, power capabilities and used in different applications. 

  • Land Rigs
    • Conventional Derrick
      • Hi-Tech & High HP
      • Standard
    • Mobile
      • Portable Mast (smaller)
      • Jacknife (Deeper drilling)

Each rig type serves a different purpose and is best suited to a particular drilling environment. Key differentiation factors in drilling rigs are:

  • Lifting capacity
  • Horse power
  • Number of mud pumps and its power and ability to circulate drilling fluid
  • Size 

While mobile rigs have a limited use, light conventional rigs are the most widely used. However, with shale drilling, multilaterals, directional wells, HP/HT and sour wells, the use of hi-tech and high horse power rigs has been gaining momentum and the demand for these heavy rigs have been increasing. In addition, ambient temperatures (e.g. deserts) can place more pressure on land drilling rig efficiency.  

Below is summary of how land rigs are used throughout the life cycle of oil and gas fields.

  • During the exploration stage. Rigs are used to drill exploration wells and 'wildcat' wells in locations with the potential for hydrocarbon-bearing geological structures, after being identified from analysing the results from various geological studies and the seismic survey. Most of the time, vertical wells are drilled to ensure safety and well stability, and to acquire quality and sufficient subsurface data/knowledge.
  • During the appraisal stage. Rigs are used to drill several wells to understand flow rates, the reservoir dynamics and the size and limits of the reservoir in order to confirm the assumption that hydrocarbons can be economically produced.
  • During the development stage. Rigs are used to drill wells (at a much higher level of activity) to the depth of a productive zone of the reservoir. Wells in this point could be vertical, horizontal or deviated, and could be drilled on a grid or on a pad.
  • During the production stage. Rigs are used to drill more wells, also known as infield drilling or repair/work over existing wells. Depending on the complexity, a smaller work-over rig may be used for a work-over programme and well repair or production enhancements or for other well treatments.  

There is a fundamental shift in the types of land rigs being used today and more advanced and powerful rigs are replacing the old fleet. More challenges are now put onto the rigs, such as drilling multiple wells from a single location, in order to avoid rig moves.  Higher drilling speed and longer laterals drilled are also the norm when wells are drilled from a single location. Standard rigs are usually not equipped to provide the capabilities to meet these challenges as they were designed to drill-move-drill one well at a time. Hence, the industry is experiencing a significant and fundamental change in the land rig fleet.


Generally, the cost of rig services is less than 10% of the overall well cost. However, the performance of the drill rigs is vital to the drilling of a successful well. 

Risks & Opportunities

  • Diesel and LNG-driven land rigs have improved efficiency and can result in 10-20% cost saving when compared with conventional rigs.
  • In the years to come, there will be a large number of rigs coming off the market in the USA, especially less advanced units. This in turn, will result in extra capacity and an oversupply of rigs available for sale. Coupled with the land rig segment structure in Middle East , this creates an opportunity to fill in certain rig segments in the region with competitively priced rigs. 

Supply & Demand Dynamics

Demand 

Demand for Land Drilling Rigs is directly influenced by the demand growth for fossil fuels and global onshore exploration and production activities; while well intervention and work-over activities have less effect on the demand for drilling rigs, due to there being other well intervention methods and technologies available. However, more wells does not necessarily mean more rigs. Newer rigs are more efficient and with pad drilling, fewer rigs are required to deliver the same or higher number of wells. 

Oil price volatility hugely affects the demand for land rigs, as fewer wells are drilled during the industry downturn. Historically, apart from Russia and the CIS, North America has held the largest share of demand, followed by the Middle East and Latin America.  In the Middle East, Oman, Saudi Arabia and Kuwait are the biggest areas for land rigs. The land rigs segment in the Middle East has exhibited one of the highest growth rates in the world over the last 20 years.

The demand patterns between the regions are slightly different, whereas most of the growth in North America is for hi-spec rigs (1,500/2,000 hp) used in horizontal drilling, historically Middle East and Russia have used lower specs rigs, with more demand for 2,000 hp rigs starting to build up only recently.

Saudi Arabia, Kuwait and Iraq are the key demand drivers in the Middle East. In addition, there is stronger demand in the region for more powerful rigs, hence 2,000 hp rigs are more in demand, in particular to drill deeper, HP/HT and deviated wells. 

According to Douglas-Westwood, the number of active land rigs with over 1,200 hp capacities increased globally by 33% between 2010 and 2014. In addition, according to Raymond James, the additional land rig supply till 2017 will be driven by hi-tech horizontal rigs, accounting for 92% of the total rig capacity addition. 

Following a significant decline in demand in 2015 and 2016, the global  demand for onshore rigs is expected to grow 11% CAGR between 2016  and 2020 for high performing rigs- above 1,250HP ((Douglas-Westwood).   Shale gas exploration activities in Saudi Arabia, EOR projects in Oman and heavy oil projects in Kuwait are the primary drivers of future rig activity in the region, in in addition to non-conventional boom in China and significant increase in horizontal drilling  in Russia.


Supply 

Outside of Russia and the CIS, North America has been historically the largest market for land rigs of any type, followed by the Middle East. Regionally, around 75 % of the units are drilling rigs, with the rest being work-over units.

Latest global active land rig count (Source: Baker Hughes, various estimates for Russia and CIS)




Latest active land rigs working in Middle East ( Source: Baker Hughes) 


The rig fleet has been growing significantly over last several years, reaching close to 370, with major purchases in UAE, KSA and Oman.



Land rigs have different power supply mechanisms, i.e. SCR or AC. SCR is an old technology, whereas AC-powered (with variable speed) rigs allows adjusting the load and torque as required. This not only provides drilling efficiency and control, but consumes less fuel and reduces wear and tear. The majority of new land rigs globally are equipped with the AC power system. However, in the Middle East, the majority or land rigs are equipped with the SCR system. In the USA, around 55% of the land rigs are AC powered. It is expected that AC powered land rigs will dominate the increase in rig supply capacity.

Providers of land rigs are divided into rig manufacturers and the providers of land drilling services, including the rig crew and other drilling equipment. The latter tend to be provided by regional/local companies, with very little global or diversified service providers. 


The Middle East market comprises national/domestic rig companies as well as international players, with the domestic companies prevailing and controlling more than 70% of the rig fleet (including work-over rigs), with most of the domestic players concentrated in Oman. Below is an approximate distribution if local / domestic  rig operators. 


External Scanning

Land rig market is very competitive, follows cyclical pattern and highly sensitive to oil prices. Although high capacity utilization may suggest that suppliers are more powerful, NOCs successful attempts to develop local segment for land drilling services moved away this market power towards the buyers.




 
New entrants Medium
  • Medium CAPEX required
  • Many Players
  • Battle for market share
  • Strong demand
 
Supplier power is low
  • Many providers
  • Some Product differentiation
  • Domestic Service providers
Competitive Rivalry
  • A competitive environment
  • Battle for market share
  • Some products differentiation
  • Government support of local providers
Buyer Power is High
  • Many providers
  • Spend is high
  • Switching costs are small
 
Substitution
  • Does not exist


 

Portfolio Positioning

  • LEVERAGE 



High
Low
High


Cost & Price Analysis

Price Analysis 

Operating rates for land rigs have always been driven by supply and demand and been highly sensitive to the oil price and rig utilization.  Land rig operating rates vary between $9k/day to $28 k/day, largely depending on the region and rig type. 


The North American market is the most important indicator of land rig rates.  According to RigData, in the USA, the average day rate, aggregating all land rig types, declined by 12% from Q4 2014 levels. Moreover, there are other sources that provide a higher price decline in particular segments, reaching up to 25%.  However, recently there have been some indications of the rates going up slightly. 

Approximate hire rates for land rigs as of Q2 2017 are shown below. 


North America

  • 2,000hp - $16k-$19k per day
  • 1,500hp - $14k-$16k per day
  • 1,000hp - $8k-$11k per day
  • <1,000hp - < $8k per day

Middle East

  • 2,000hp - $22k-$28k per day
  • 1,500hp - $19k-$24k per day
  • 1,000hp - $14k-$18k per day
  • <1,000hp - < $15k per day


Operating costs - Below are major cost elements to operate an onshore drilling rig. 

  • Interest charges ( financing). Depending on the funding of the Initial Purchase (i.e. Debt to equity split) and the interest rates available in the financial market, interest charges can represent a significant contribution to the hire rate. 
  • Depreciation. The rig will be depreciated over a period of time, typically 15-30 years. The depreciation cost will contribute to the hire rate.
  • Personnel and Equipment. Land rigs operate with as many as 50 crew . As such personnel represent a significant portion of the rig cost. Personnel costs are inclusive of the salaries as well as all other incidentals such as accommodation, mobilizations, and training etc.  Depending on the supply and demand characteristics in the market personnel and equipment rates can vary as crew and equipment are limited in availability.
  • Inspection and Maintenance. Land rigs require regular maintenance to sustain the operation of the various pieces of equipment on-board. This may include specialist technical support as well as spare parts and consumables to required. In addition, depending on the inspection requirements that are highly regulated by various industry bodies. This cost (including the lost hire) will be amortized over the inspection period and added into the hire rate of the rig. 


Average breakdown of operating costs as a percentage of operating rate:


Value Chain Analysis

Land rigs are build by rig manufactures, with component providers of various tiers.  Top drive, control system and mud pump are the key components that manufactured by 2nd tier suppliers. There is a significant number of manufacturers globally, who specialize in land rigs. The majority of units are build outside of the Middle East. Major rig builders are:

  1. KCA Deutag
  2. NOV
  3. RG Petroleum Drilling Rig Group
  4. Lanzhou LS-National Oilwell Petroleum
  5. Lamprell
  6. Bentec 
  7. Veristic
  8. Bharat Heavy Electricals Ltd.
  9. MD Cowan
  10. IDM Equipment
  11. Baoji Oilfield Machinery Company (BOMCO)
  12. Honghua
  13. Helmerich & Payne 
  14. URALMASHZAVOD (OMZ)
  15. Drillmec 
  16. RG Petro Machinery Group
  17. Honghua Group
  18. Kerui Group


Total Cost of Ownership

Although a turnkey drilling contract is fairly common, the majority of drilling contracts today are based on day work and contain the following units (may not have all of them):

  • Mob /demob fees - lump sum fee to mobilize a drilling rig, fully capable to drill required type of wells, with all required modifications carried out. 
  • Daily operating rate - a hire rate per day to operate a fully manned drilling rig
  • Standby rate - a hire rate per day to operate a fully manned drilling rig and ready to operate, but waiting on instructions from client. 
  • Reduced performance rate - a hire rate per day, when a drilling rig is not capable to drill as per original criteria, but still able to operate, e.g. slower drilling speed as a result of broken pump or lack of sufficient mud tanks. 
  • Repair rate - a hire rate per day, when a drilling rig is undergoing repairs. Generally a cap is imposed and it could be cumulative up to 48 hrs per month. 
  • Remedial ( re-drill) operation rate - a hire rate per day, that is used when a well was lost a result of malfunction of the drilling rig and a new well is drilled to the same depth / condition as the lost well. 
  • Standby unmanned rate - a hire rate per day to keep the rig stacked and fully maintained, without the crew 
  • Moving rate - a hire rate per day to operate a drilling rig fully manned and ready to operate, but moving from one location to another.  
  • Force majour rate - a hire rate per day during a force majour event

While this commercial structure has been effective most of the time, it encourages the wasteful behavior. A compensation mechanism that supports better performance is needed. It could be achieved via bonus structures, or, most recent, footage rates, i.e. paying per foot drilled.  Below a comparison of pricing models in the market and its characteristics:


Points to consider for procurement of land rigs:

  • How fast it can be moved in the desert
  • Handling of hot temperatures
  • Design that allows for fast rig-up/down
  • Transit times between drill sites
  • Ability to drill conventional, horizontal and shale wells
  • A drilling rig that is fit-for-purpose 

Strategy

The key category objective is securing access to capacity, ensuring service quality and maximizing local value generation. In the accomplishment of this objective, it will be critical to understand supply market dynamics and establish strategies that address particular needs and segments.

  • Demand planning - develop a multiyear rig demand based on drilling programmes
  • Own vs. rent - access the right mix of owned vs. contracted rigs, to ensure secure supply and high quality drilling services
  • Continue developing local capabilities in higher-end rig segment 
  • Set up a complete local value chain for rig repairs, maintenance and refurbishment  
  • Long term relationships with key rig builders to help building local capabilities 
  • Closely follow market conditions, capacity utilization, and rig owner's moves in the market (consolidation). Low utilization represent a large opportunity for buyers.  
  • Consider options to reserve this category for local / domestic companies only