London, 13 February 2010

Viewpoint: Current oil and gas prices should be sufficient to ensure ample supplies for the next few years. After falling sharply in response to the financial crisis, exploration and production (E&P) activity is almost back to pre-crisis levels everywhere except the United States. The rebound's strength is evident in rig counts published by M-I SWACO, a joint venture between Smith International and Schlumberger, and the world's leading provider of drilling fluid systems.

M-I SWACO counts rigs directly employed in drilling and related activities. Rigs are included if they are used for drilling, logging, cementing, corning, and well-testing, or are waiting on the weather, as well as running casing and blowout preventer (BOP) testing, but not generally if they are only being used for workovers and completion activities.

The count includes rigs in actual operation, in transit for an immediate start, or that have worked for at least 15 days in the month. Monthly totals are released with minimal delay.

The M-I SWACO rig count is therefore the most-timely indicator of global E&P activity.

The number of rigs in use has risen for eight months running from a post-crisis low of 3,805 in May 2009 to hit 4,518 in January. While the count is still down 18 percent from its peak in October 2008 (5,511) the industry has seen a marked recovery from the previous slump.

The rebound is even stronger than the raw figures suggest. Its full strength is masked by the continuing slump in North America, where the largest number of rigs is found. The rig count in the United States (1,399) is still down almost 40 percent from October 2008 (2,238). But in the rest of the world, the number of operating rigs (3,119) is just 5 percent below the pre-crisis level (3,273).

Drilling activity has exceeded its pre-crisis peak in Asia Pacific (9 percent higher) and Latin America (4 percent higher). Other regions such as the Middle East (down 6 percent), Africa (down 13 percent), and Russia and the Caspian (down 11 percent) show almost as much strength.

Only Europe is still muted (down 20 percent). BP Chief Executive Jeremy Hayward has confirmed that current prices around $75 are "very comfortable" for the company.

At these levels, cash flows are more than enough for the major producers to fund ambitious exploration and production programmes -- even for unconventional forms of oil in tough geographical locations, such as deep water offshore, or in politically unstable countries.

Finding and development costs have remained stubbornly high despite the downturn. The industry has suffered a structural break in its cost structure as companies are pushed into tougher environments in the search for new resources, extract oil from deeper below the surface, and have to pay more for steel as well as scarce talent and seismic technology.

Meanwhile oil and gas prices have halved compared with July 2008. But the resumption of widespread drilling for both exploration and field development suggests prices and cash flows are high enough to replace production lost from depleting fields and bring on new resources to meet growing demand.

With this much activity, current prices should be high enough to meet medium term needs during 2010 and 2011. Unless demand surges, there is no reason to anticipate a return to the very high levels experienced in H1 2008.

Ends --

By John Kemp, Reuters columnist. The views expressed are his own.