Design-Driven Profits: Fit-For-Purpose Rigs Are Gaining Market Share

By Darrell Stonehouse

Drilling rigs used to come in three basic permutations-singles for shallow wells, triples for deep wells, and doubles for everything in between. No longer. To produce unconventional oil and gas resources efficiently, a business model has emerged that's all about customization, or fit-for-purpose iron. There are now hybrid coiled tubing units for shallow to medium depth wells, slant rigs designed for shallow horizontal heavy oil wells, and huge triples tooled specifically to target shale gas.

Kevin Neveu, CEO for Precision Drilling Trust, says unconventional gas plays are the biggest current factor pushing advances in rig design and construction. To access shale gas and tight gas formations economically, long-section horizontal legs exposing as much of the formation as possible for hydraulic fracturing are needed.

"A greater portion of wells drilled in North America are seeking unconventional oil and natural gas reserves," says Neveu. "The complexity of these wells dictates the use of high-performance rigs with large-capacity mud pumps, advanced drilling control systems, and high-mobility capabilities. These rigs are often called "fit for purpose" as a significant percentage of the existing industry rig fleet does not adequately address the need."

In the third quarter of 2008, Precision reported that approximately 70 per cent of its rigs in Canada and over 80 per cent in the United States were drilling directional/horizontal wells. Industry-wide, around 44 per cent of all wells drilled in Canada and half of all wells drilled in the U.S. had directional/horizontal components in the third quarter, about five per cent more than last year. Driving the demand are the Bakken oil play in North Dakota and southeast Saskatchewan, and even more significant shale and tight gas drilling in northeastern British Columbia and Texas.

Some tools integrated into the new fit-for-purpose rigs include smaller and lighter top drives that offer increased torque and better drilling efficiency, automated pipe handling equipment that speeds operations and improves drilling crew safety, AC drawworks that deliver more horsepower to the drill bit, and rig measurement and control systems that help operators make better drilling decisions.

Neveu points to Precision's Super Single Rigs, which came out of the development of slant drilling rigs for the heavy oil industry, as another example of the specialization trend. Designed as a multi-purpose rig, the Super Single has the latest technology like automated pipe handling, and like its predecessor can operate in both vertical and slant positions.

"The Super Single has a very small footprint, it has advanced drilling capabilities, and is very effective in drilling horizontal and directional wells," says Neveu. "These rigs are being used from west Texas to the Montney play in B.C. These rigs can also be moved exceedingly fast."

Last year, the Calgary-based company also built new Super Triples to drill into the mid to deeper shales in the U.S. and Montney. Altogether, Precision constructed 19 new high-performance rigs to meet market demand in 2008, and it's also upgrading a large number of its traditional rigs to meet fit-for-purpose specifications.

Neveu cites two key market factors for investing in specialized drilling equipment: first, the nature of unconventional gas, and second, the capacity to draw customers away from less efficient rigs in a competitive market. "[Unconventional gas] wells are service intensive and as a result expensive to drill, but strong initial production rates mean early payouts for producers," he explains. "These wells also have a steep rate of production decline in the first year of 50 to 80 per cent, necessitating additional drilling to replace rapidly depleting wells."

"The differentiation between underperforming rigs and high-performing, highly mobile, well-designed rigs with exceptional crews continues to emerge," Neveu notes. As Precision's new rigs prove their mettle, the company frankly hopes to muscle into a higher market share at the expense of drilling contractors with lower-performing technology.

Bruce Jones, president and CEO of Stoneham Drilling Trust, notes that well counts have been declining due to lower gas prices over the last two years. Simultaneously, drilling time per well has increased by 22 per cent increase because wells have become deeper and more complicated. Since 2000, there has been a 150 per cent increase in wells over 3,000 m.

In response, Stoneham has focused its fleet on drilling deeper wells, a demanding environment where the new high-tech rigs really shine. "New equipment really outperforms in times of low activity. Our clients are seeking out and sourcing more efficient, more capable, and better value equipment," Jones says. For their part, drilling contractors protect their investment in those costly high-tech rigs by securing long-term contracts to mitigate risk.

Stoneham has made its mark drilling deep wells for Talisman Energy at Monkman in the foothills of British Columbia. Jones says its big AC triple rigs were designed for depths of up to 5,500 m, and they use variable frequency drives to ensure the rig's power is going where it should. Power is key when drilling deep wells with long horizontal legs. "The secret of a drill rig is how it overcomes torque and drag and how much horsepower you can put at the drill bit," he explains.

Other important efficiency factors include smaller footprints, which can reduce wellsite construction cost, requires less time to rig in and out, and has the ability to shift quickly from wellbore to wellbore during pad drilling operations. Stoneham's 4,500 m super double rigs can be moved in 19 loads plus tubulars where comparable older style triples needed more than 50 loads to get on site. The company's 5,500 m AC Triples can be moved in 34 loads compared with older style triples that often required over 80 loads to move.

Stoneham also holds a patent with EnCana for Quad-Pad, a technology that enables a rig to move from wellbore to wellbore on a pad drilling site with pipe still standing in the derrick. " It takes around 35 to 40 minutes to move from wellbore to wellbore," Jones says.

Mike Graham, president of EnCana's Canadian foothills division in Alberta and B.C., reports, "Essentially all our rigs are fit for purpose. You have to have the lowest supply costs to make it work. We're drilling a lot longer horizontal legs than in the past. We used to get them out to 1,000 metres. Now we're out to 2,000 metres and even to 2,500 metres in our horizontal legs. We're also doing a lot of pad drilling. We're running our fleet essentially 365 days per year, even up in the muskeg areas where it's winter-only. We're still running year-round up there."

EnCana is a dominant force in the Deep Basin straddling the central Alberta/B.C. border. Its Big Horn Resource play is in the deepest area of the Deep Basin, meaning wells with true vertical depths of 4,000 m before horizontal legs begin. "We're using big triples in the Deep Basin," Graham says. "We were leaders in going out and getting rigs built with fit for purpose equipment. We had rigs built specifically for our resource plays. These rigs are quicker than the conventional fleet, 20 to 30 per cent faster. They have big AC Drives or top drives, Iron Roughnecks, big pumps, automated pipe handling systems, and they really are very efficient."

How efficient?

"We're drilling down to 4,000 metres in the Deep Basin in 20 days now. That would have taken a couple of months just a year ago," Graham responds. The time saved has lowered cost dramatically. In 2006, EnCana averaged $4.1 million to drill a well at its Big Horn play, which fell to $3 million in 2007 and $2.2 million last year.

Pad drilling with fit-for-purpose mobile technology played a significant role in that saving. At its Big Horn operations EnCana is drilling four to eight wells per pad. In 2008, the company estimates pad drilling will save it around 15 per cent due to decreased rig downtime and moving costs.

Fit-for-purpose rigs are driving similar savings at Cutbank Ridge, on the western edge of the Deep Basin south of Dawson Creek in British Columbia. In that play, wells are drilled to a vertical depth of 2,500 to 2,800 m, with horizontal legs of 1,000 to 2,000 m. "We're getting wells down from 30 to 40 days to around 20 days," Graham reports.

The next frontier is the Horn River Basin in northern British Columbia, a remote terrain where cost-efficiency will be even more challenging. So far, around 90 wells have been drilled in the shale play near Fort Nelson. EnCana has drilled eight wells in partnership with Apache Corp. Again, its strategy focuses on long horizontal legs and an even more inexpensive application of pad drilling. Graham predicts: "In the Horn River, we may go as high as 20 wells per pad."