Saudi Arabia Steps Up Drilling Despite Downturn

Apr 14, 2016

Oil prices surged this week on the back of falling U.S. oil production and the growing rumors that the Doha summit between OPEC and Russia could end up with a successful deal.

According to Russia’s Interfax news agency, on April 12 Russia and OPEC reached a consensus on the oil production freeze, ahead of the April 17 meeting in Doha. Oil prices surged more than 3 percent on the news on Tuesday, standing just shy of their highest levels for the year, although prices fell back on Wednesday.

Some sort of Doha agreement looks likely, but the actual effect of the deal on global supplies remains questionable.

Meanwhile, several of the key participants are not necessarily reining in their ambitions. Saudi Arabia has ramped up its rig count since 2014 in an effort to develop new oil fields. The number of oil rigs has jumped from 58 to 67 since 2014, and gas rigs have climbed from 35 to 60 over the same time period. Saudi Arabia is deploying more rigs in an effort to develop new fields or expand existing ones.

Bloomberg reports that Saudi Arabia is moving forward with an expansion of its Khurais oil field, expected to be completed in 2018 and could add another 300,000 barrels per day in output. Low oil prices have not put a dent in Saudi Arabia’s determination. “Until now all of our downstream and upstream projects are continuous,” Saudi Aramco’s Amin Nasser said. “No project in our programs got canceled.”

Production could also increase this year. Saudi Arabia could see output from its Shaybah field rise by 250,000 barrels per day in June of this year.

Although separate from any negotiation with OPEC and Russia, Aramco is looking to develop the country’s shale gas resources, hoping to double natural gas production to 23 billion cubic feet per day within ten years.

Kuwait is also working to increase oil and gas production. Kuwait is set to offer contracts to offshore rigs so that it can drill in the Persian Gulf, eyeing six offshore projects. The OPEC member is hoping to boost production from 3 mb/d to 3.165 mb/d. By the end of the decade, Kuwait is targeting 4 mb/d. The UAE, another OPEC member, is planning on boosting production from 3 mb/d to 3.5 mb/d by 2017.

This raises questions about how these countries can agree to a production freeze on the one hand, while ratcheting up their drilling efforts on the other.

The stepped up drilling efforts from the OPEC members could be less about short-term thinking and more about the long game. Steve LeVine wrote in Quartz that Saudi Arabia is intensifying its drilling campaign in order to boost oil production capacity so as it hold onto its market share amid growing demand.

Saudi Arabia has typically accounted for about 12 to 13 percent of the market. With total oil demand at around 93 million barrels per day (mb/d) in 2016, that share mirror’s Saudi Arabia’s 10 mb/d in production plus around 2.5 mb/d in spare capacity, LeVine argues. As demand is expected to rise to 100 mb/d by the end of the decade, Saudi Arabia will need to grow capacity to about 12 to 13 mb/d plus 2 mb/d in spare capacity if it is to hold onto the same slice of the pie. “I think that is what is really happening here,” Neil Beveridge with Sanford Bernstein told Quartz. “I don’t think this is to grow share but to defend it and meet a market where demand is growing fairly strongly.”

Another way of looking at the strategy is that Saudi Arabia and other Gulf States are hoping to hold onto market share by pushing out higher-cost production. That is not breaking news, but with non-OPEC production falling – particularly in the United States – and demand set to rise, Saudi Arabia and its peers will need to step up production if the world is to have enough supply several years from now. An estimate from Wood Mackenzie from earlier this year found that around $380 billion worth of major oil and gas projects have been scrapped because of low prices, which could result in nearly 3 mb/d of new supply that won’t come online. Somehow that deficit will need to be made up if the world will continue to see demand grow at more than 1 mb/d each year for the rest of the decade.

By drilling today, Saudi Arabia could be positioning itself to meet demand 3 to 5 years down the road.

 

Source: OilPrice.com