Oil Drillers Hit a Profit Gusher

Demand for drilling rigs has led to record-setting day rates — and they’re still on the rise

With oil prices hitting new highs and natural-gas prices staying at historically lofty levels, oil and gas producers, faced with declining output from mature fields, are ramping up capital spending to replace reserves.

On Apr. 20, crude oil delivery for May fell 22 cents, to $71.95 a barrel, on the New York Mercantile Exchange after reaching a new record closing high of $72.17 on the previous day. Natural gas traded at about $8.06 per million British thermal units (MMBtu) — a bit below the $8.65 average for 2005, but significantly higher than the $4.27 level achieved in the last cycle peak in 2001.

In order to produce oil and gas, the companies need drilling rigs. Oil and gas producers don’t own them, so they contract with the companies that do. And with so many producers interested in drilling right now, there’s a scarcity of equipment. That has led to record-setting increases in the rates the offshore drillers, such as ENSCO International, GlobalSantaFe, Noble Corp., and Transocean, can charge each day.

RIG SHORTAGE. Oil and gas producers “are facing production declines from their existing wells and need to increase production to meet global demand,” says Stewart Glickman, senior industry analyst at Standard & Poor’s Equity Research. “One way of increasing production is to construct new wells in reservoirs believed to contain crude oil and natural gas, which is where the offshore drillers come in.”

Business Week