Equipment Shortage Hampers U.S. Oil Drilling

High demand on gas and oil supplies has revived domestic oil exploration in the United States — but it has also caused a shortage of oil rigs and other drilling equipment. Janet Heimlich visits an oil producer and a rig refurbishing business in Texas to highlight what firms are doing to deal with a limited supply of vital parts.

ALEX CHADWICK, host:

This is DAY TO DAY from NPR News. Oil and energy for the next few moments. I'm Alex Chadwick.

MADELEINE BRAND, host:

And I'm Madeleine Brand. Even though oil and natural gas are more expensive now, many domestic energy companies are having trouble turning those high prices into higher profits. That's because there is also a shortage of rigs for drilling. Janet Heimlich reports from west Texas.

JANET HEIMLICH reporting:

Terry Duffy owns a twenty-well oil company in Midland, Texas called Everquest Energy. Small companies like Duffy's make up a majority of the industry. He also owns a couple square miles of untapped property. The trouble is, he can't figure out just how much oil and gas is underneath it, because he can't find a drilling rig.

Mr. TERRY DUFFY (Owner, Everquest Energy): So now, I'm having to fight for rigs and equipment. You know, if I want to take advantage of these higher oil and gas prices, I've got to fight the fight of getting the equipment.

HEIMLICH: That means calling all the drilling contractors in the area and getting on waiting lists. These companies rent rigs to energy companies. Duffy is even willing to pay the high rates they're charging. He says drilling rigs in west Texas are renting for $18,000 a day, double what they cost a few years ago.

Mr. DUFFY: If you want the drilling rig, you're going to have to play by their rules.

HEIMLICH: But even then, Duffy says he's still getting nosed out. He says large energy companies are negotiating longterm contracts with rig suppliers, leaving few for the little guys.

Richard Mason publishes The Land Rig Newsletter in Lubbock. He says these perfect storm conditions, where high demand is met with low supply, happen only once a generation.

Mr. RICHARD MASON (Publisher, The Land Rig Newsletter): If you're not early in the line, you may find that, instead of getting a rid within a week or two weeks, you're suddenly waiting six months to a year, or even longer.

HEIMLICH: Today, there are fewer than 5,000 active drilling and service rigs in the U.S., half of those available during the boom of the early 1980s. Since then, Mason says, the oil and gas industry has spent much of its time wallowing in a low price market.

Mr. MASON: And that caused the infrastructure to deteriorate, and as a result, a lot of what was present and available to work, to meet a boom time scenario, has since been exported or sold for scrap.

HEIMLICH: But there are still a bunch of rigs left over from the old days. Many haven't been used in a while and are in disrepair, but add a little TLC, and they're back in business.

Here at this repair center in Odessa, crews are refurbishing old rusty service rigs. They look like drilling rigs, but are designed to repair wells. The shop is run by Houston-based Key Energy Services, the nation's largest supplier of service rigs. Rio Brownley(ph) is Key Energy's division manager for west Texas.

Mr. RIO BROWNLEY (Division Manager, Key Energy Services): Some of these mains on these older rigs are cracked, and they've got problems. So that's why we've determined the best process is going here and completely redo all of this, so that it is like a new rig coming out.

HEIMLICH: Key Energy says it plans to turn out about 60 refurbished rigs this year. Company officials say they have to charge the high rental rates. It costs about $500,000 to refurbish a rig, about twice what it cost just a few years ago. Rio Brownley says the company is also building 30 more new rigs in China.

Mr. BROWNLEY: Right now, the manufacturing centers in the United States are two and three years out.

HEIMLICH: But some energy companies have had it with the high rates, and are taking an unusual step. They're contracting directly with manufacturers to build new rigs. Today, Mike Cowan walks around his 25-acre yard. His small company, M.D. Cowan, builds drilling rigs from scratch. Here crews are welding parts and inspecting completed rigs. Cowan says he'll build about 20 rigs this year.

Mr. MIKE COWAN (Owner, M.D. Cowan, Inc.): We've had some delays. This rig is late. I'm late on the rig on the corner. I sold it. It goes to a company in Midland that's run by a friend of mine, thank goodness.

HEIMLICH: But he says most of his orders will ship on time, thanks to a lot of preplanning.

Mr. COWAN: We order in advance. We've got engines bought for next year. We've got swivels for this rig bought for next year.

HEIMLICH: Cowan says he used to sell to drilling contractors, but now nearly all his customers are oil and gas companies.

Mr. COWAN: And if they can't get rigs, or make a favorable with a drilling contractor, they're going to come to me, and I'm going to build them some drilling rigs. And they're going to staff them, and they're going to go do it themselves.

HEIMLICH: Cowan says his customers are willing to pay from seven to 11 million dollars for a drilling rig. Analysts say the rig shortage will probably continue for about a year, at which time the supply should finally meet up with demand. For NPR News, I'm Janet Heimlich.

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