With the fall of crude oil prices to below $40 a barrel, the future of the international rig market does not seem bright

According to the November 21, 2008 Baker Hughes rig count report, the Canadian rig count has dropped 18 rigs with a current figure of 400. As for the U.S, while the November 21 report notes no change for the rig market, the prior report had stated a drop of 51 making the current figure at 1,941. From September to October, the international rig count dropped by 12 making the total current figure at 1,096. Thus, currently the count is dropping; however, in comparison to last year’s count these current figures are still part of an overall increase. Since last year, the U.S count is up 168, the Canadian count is up 9 and the international count is up 72.

Baker Hughes Rig Count (available at: http://investor.shareholder.com/bhi/rig_counts/rc_index.cfm)

So, why is the rig count dropping currently, but showing signs of an increase from last year? As previously mentioned, the economy, and specifically the rig market, has a delayed reaction time to current situations and this delayed reaction creates an elasticity, which when met by shocks, can ease into the current circumstances without breaking, or at least, one hopes that this is the case and for the rig market, it would seem far from breaking at the time being. Thus, last year, when oil prices were skyrocketing and hitting new records of costliness, many operators put forth a more aggressive strategy for the following year, more actively exploring in areas deemed too expensive the year before.
This increased exploration created a more lucrative market for contractors, who own a much-demanded commodity. This increased demand for rigs in a market already dealing with a rig shortage, caused rig prices to increase. However, when the cost of oil began to dwindle to the current low of below $40 per barrel, operators began to rethink their aggressive strategies and to cut down on costs, which means forgoing their expensive drilling programs and, unfortunately, even letting go of workers.

Also, According to the International Energy Agency’s Oil Market Report for October 10th, while the international demand for oil is barely increasing, the forecast for 2009 has decreased for the world at large.

IEA MOR 10/10/08 (available at: http://omrpublic.iea.org/currentissues/full.pdf)

For the rig market, this means the extraction of rigs and the lowering of prices in order to cope with the operators’ dwindling budget, which previously relied heavily on borrowing in order to fund drilling programs. This also spells problems for service companies who will undoubtedly be asked to renegotiate the terms of existing contracts in order to adapt to the changing economic environment. However, this forecasted decrease in demand is speculative and does not negate all demand. There will still definitely be a demand and given that there was, is and will, for this year, be a shortage of rigs in the international market, many are hopeful that contractors will not be bearing the grunt of this economic crisis as much as service companies. Furthermore, contractors are immune from short-term fluctuations of the price of oil by the very nature of their contracts, which are long-term and booked for years. Thus, many, if not most, contractors have a backlog of contracts, making for an apt safety net.
In fact, the sore spot for contractors will mainly be offshore drilling rigs, which are currently witnessing erosion in loan availability for their creation amidst the current economic crisis. This presents a double-edged sword for contractors: while on the one hand the rigs that were being built to ease the international rig shortage will keep current operational rigs in demand by being delayed or canceled, on the other hand aspirations of growth are in a state of arrested development.
In conclusion, looking at the future of the Egyptian rig market based on the current performance of the international rig market, it can be stated that on the explorative side of drilling a decrease will undoubtedly be seen. On the development side of drilling, a drop will also occur, but at a much smaller level. The rig market will not be hugely affected by next year, however, its growth might be. The impressive 40% increase from 2007’s 101 rigs, will probably not repeat itself next year. The introduction of new rigs will be minimal and operators will adjust their 2009 strategies to minimize cost, by making do with their current operations and curtailing exploration efforts, not giving much incentive for contractors to fund the building of new rigs and introduce more of their fleet to the Egyptian market.
Offshore exploration will be by far the hardest hit segment of the market. With offshore drilling rigs being halted during construction and what few remaining operational rigs costing so much, it is possible that their extreme pricing might begin to decrease to a more reasonable cost within the coming few years, once current contracts are terminated.
It would seem that 2008 is the year of caution, at times inching towards fear. The exhilaration of rising oil prices in 2007 and augmented trust in lending, led to overly ambitious drilling programs; 2008 seems to have burst this bubble, and now operators are calculating their moves more meticulously bearing a not so fruitful future in mind.  

By Diana El Assy