Tight credit markets and natural gas “demand destruction” by the economic slump in the United States are forcing American exploration and production companies to mothball drilling equipment at a faster clip than in previous down cycles. The number of rigs working on gas targets may drop by as much as 65 per cent from last year, energy analysts predict.

In the U.S. the outlook rapidly changed for the worse as full effects of the recession became apparent. In December the energy team at Raymond James & Associates Inc. forecast that the total U.S. count of rigs drilling for both oil and gas would fall by about 40 per cent. Within two months that prediction looked rosy. A revised forecast by Raymond James analysts J. Marshall Adkins and John Fitzgerald projects a 60 per cent activity drop this year, with 1,035 fewer rigs looking for gas than in 2008 and the number working on oil targets down by 1,220.

“Our new estimated bottom for the U.S. rig count should be around 800 rigs with the bottom being early fourth quarter,” the Raymond James duo says in a note to clients. “As far as annual averages are concerned, in 2009 we are now looking for a 45 per cent reduction [in total active U.S. rigs] followed by another 11 per cent reduction in 2010. Too harsh, you say? Our 800-rig bottom is still 60 per cent higher than the 1999 (508 rigs) downturn and 10 per cent above the 2002 (738 rigs) bottom. That means that our new estimates may still be too high considering that the U.S. natural gas oversupply problem will likely not be solved in 2009.”

The rosier outlook in late 2008 used “two very generous assumptions,” say Adkins and Fitzgerald. “These assumptions were: (1) every rig is equally productive; and (2) a rig count decline would occur equally across all regions and drilling types. Obviously that is not going to happen. Producers will stop drilling their least productive, least economic wells first. When we account for the highly productive shale wells and consider that horizontally drilled wells (the most productive) are being dropped from drilling programs at a much slower rate, we find that gas production will probably not fall as fast or as far as the rig count.”

Baker Hughes Inc.’s chief executive, Chad Deaton, says advanced technologies and unconventional gas development caused North American production to exceed demand growth in 2008. Then the recession weakened consumption and dried up credit, forcing energy producers everywhere to rely on reduced cash flows.

“Drilling is already down 25 per cent from peak levels, with the Rockies, southern and central areas of the U.S. being hit hardest,” Deaton reported as heating season wound down. “Vertical drilling is down 33 per cent from peak. In comparison to historic downturns, today we are experiencing a steeper decline in the rig count than we saw in the four prior cycles. The unconventional gas rigs have fared the best so far with horizontal drilling activity falling only 10 per cent.”

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