DRILLING OUTLOOK
Analysts maintain optimistic
outlook for onshore drilling
market, but uncertainties remain
Rig counts and wells drilled are expected
to increase in 2023, but market still remains
in flux due to supply chain, geopolitical factors
BY STEPHEN WHITFIELD, ASSOCIATE EDITOR
In the face of a potential global recession
in the coming year, coupled with con-
tinuing supply chain pressures, outlook
for the global onshore drilling industry
remains murky – but mostly favorable.
The good news is that outlook for oil prices
remains strong. Even though WTI prices
have settled down from an average of $127
in March 2022 to $89 as of 14 October, it
is still expected to remain in that range
over the coming year, supported by strong
energy demand as more countries open up
post-pandemic and with Russia’s produc-
tion under question due to the continuing
conflict with Ukraine.
Between Q3 2022 and Q3 2023, WTI will
likely trade at between $75 and $110, accord-
ing to John Spears, President of Spears and
Associates. He expects the Henry Hub gas
price to decrease from $7.50/mmBtu to
$6.30/mmBtu in the same time span. “We’re
assuming that there’s going to be a recession
and, more importantly, we’re assuming that
any economic recession is going to result in
a reduction in oil demand,” Mr Spears said.
“But that’s not nearly as straightforward
as you might imagine because more than
half of global oil consumption now comes
from emerging markets. Their demand is
not tied so much to economic cycles as it
is to urbanization and industrialization. So,
there’s a possibility that oil demand might
go up anyway. If that’s the case, that could
push prices higher.”
The global onshore rig count is expected
to average 4,070 by the end of this year,
which would already represent an 18%
increase from the 2021 average of 3,450,
according to Westwood Global Energy
Group. By the end of Westwood’s forecast
period in 2026, that rig count is expected
to increase by an additional 24% to 5,050
rigs. Total wells drilled are also expected
to rise from 49,600 in 2022 to 60,000 in
2026. “If you’re a drilling contractor and you’re
hearing about the operators and their free
cash flows, that’s certainly good news.
Maybe there’s some ability to add on addi-
tional services,” said Luke Smith, Analyst
at Westwood.
North America onshore
outlook Mr Spears projects US onshore rig count
will average 705 in 2022 – up from 460 in
2021 – and go up to 770 next year. Wells
drilled is expected to average 19,500 in
2022 and go up to 21,400 in 2023. Lower 48
onshore dry gas production could increase
from 94.3 billion cu ft/day in 2022 to 97.6
billion cu ft/day in 2023. This would essen-
tially bring drilling activity back to the
level he originally projected the US mar-
ket to reach in 2020, prior to the down-
turn. However, the industry that’s emerged
from the downturn is not the same as
what existed before. Operators are focus-
ing more on returning free cash flow to
shareholders instead of chasing additional
growth. Global oil demand is expected to go up from 99.4 million bbl/day in 2022
to 101.5 million bbl/day in 2023, a 2.1% increase, according to Spears and
Associates. This uptick in demand should trickle down to the North
American onshore drilling market, as rig counts, crude production and
wells drilled are all projected to increase in 2023.
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DRILLING OUTLOOK
This focus on capital discipline will
likely have a trickle-down impact on the
rig market. Average asset utilization for US
onshore will likely end up falling between
80-85% this year, and Mr Spears said he
does not expect any significant change in
2023. For drilling contractors, their contin-
ued focus on capital discipline means they
are unlikely to bring newbuild rigs into the
market to meet demand.
“The operators and service companies
have been restructuring their balance
sheets so that they’re less burdened by
debt. Because of that, they’re going to be
less volatile, which means growth is prob-
ably not going to be as high as it might
have been before the last downturn,” Mr
Spears said.
In Q3 2022, leading-edge dayrates were
approaching the low-$30,000 range , a 25%
increase from Q3 2021. However, Mr Spears
said he does not expect that number to
increase significantly in the next year.
At most, he anticipates average dayrates
for US onshore to reach $32,000 in 2023 –
primarily because drilling activity is not
expected to grow at the same rate as it did
in 2022. “If things flatten out on the activ-
ity side like we think they’re going to do,
I don’t see how we get a lot of movement
on dayrates. The upward movement in
dayrates has been all about rising asset
utilization, but now most of the high-spec
rigs are under contract.”
As usual, the Permian Basin remains
the primary driver in US onshore activity,
and that is expected to continue into 2023.
Mr Spears estimated a 10% increase in the
basin’s rig count over the course of the
year, from 342 in 2022 to 376 in 2023, while
wells drilled will also see a 10% increase,
from 8,150 in 2022 to 9,000 in 2023.
Permian activity could see a boost due
to the planned addition of five natural gas
pipeline projects. If completed as planned,
they will increase the Permian’s takeaway
capacity by a total 4.18 billion cu ft/day
over the next two years, according to the
US Energy Information Administration
(EIA). Three of these pipeline projects
– Kinder Morgan’s Gulf Coast Express
Pipeline Expansion and Permian Highway
Pipeline, and Whistler Pipeline Capacity
Expansion led by Whitewater and the
MPLX joint venture, are expected to come
on stream in 2023.
Top: US onshore crude oil production is expected to rise from 11.9 million bbl/day in
2022 to 12.75 million bbl/day in 2023, a 7% increase, according to Spears and As-
sociates. Middle: Spears and Associates projects a 3.5% increase in US natural gas
production from 2022 to 2023, aided by the addition of several new pipeline proj-
ects under way. Bottom: US onshore rig count increased by 53% from 2021 to 2022,
as activity rebounded from the post-COVID oil price downturn. Spears and Associ-
ates anticipates a more modest 9.2% increase in rig count for 202 3 because most
of the high-spec rigs are already under contract. This means there will also be less
upward movement in dayrates next year.
Any delays in the construction or per-
mitting for these pipelines could negative-
ly impact the forecasted drilling activity
growth, Mr Spears said. “It takes a long
time to get a pipeline built, even in the
state of Texas, so that’s a bit of a wildcard:
How soon can we get to full utilization on
the pipeline side out of the Permian?”
DRILLING CONTRACTOR • NOVEMBER/DECEMBER 2022
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