Saudi Arabia calls for 28% increase in oil rigs in kingdom

Top oil exporter Saudi Arabia has unexpectedly called on oilfield service firms to expand the kingdom's oil rig count by nearly 30 percent, according to Simmons & Co, to ensure spare production capacity remains ample as supply uncertainty grows.

Saudi state-run oil giant Saudi Aramco met with leading oil service companies including Halliburton over the weekend, unveiling plans to boost the country's rig count this year and next to 118, from around 92 now, Simmons & Co analyst Bill Herbert said on Monday.

"Saudi Arabia has been expected to tread water on its production capacity, so this is unexpected," Herbert said from Houston in a phone interview.

"The risk premium in the Middle East has risen. Also, with Libyan production falling, Saudi Arabia may feel it has to be ready for higher production capacity."

Plans to boost the rig count constitute the most overt evidence that Saudi Arabia, holder of the world's biggest oil reserves, is stepping up investment in the face of crude prices of over $100 a barrel, though it is unclear whether this will expand the kingdom's spare capacity beyond the current total of as much as 3.5 million bpd, or merely prevent it from falling.

"It's definitely not for expanding capacity," said Siamak Adibi, senior consultant at FACTS Global Energy in Singapore.

"For this year, the majority of new wells to be drilled is just for maintaining existing capacity" of 12.5 million barrels per day, Adibi added, including the neutral zone.

Saudi oil-minister Ali al-Naimi has outlined plans to boost the kingdom's crude oil production capacity to 15 million bpd, including mention of specific fields, saying such an expansion would only proceed if warranted by demand.

But Simmons & Co founder Matthew R. Simmons, until his death in August 2010, repeatedly questioned the kingdom's ability to boost and sustain production at high levels in the long term, citing geological constraints.

More than any other country, Saudi Arabia defines its international role by the ability to rapidly increase oil production to meet growing demand or cover disruptions elsewhere, such as the recent collapse in shipments from war-torn Libya. The kingdom has responded by pumping 500,000 to 750,000 barrels a day more in recent weeks, analysts said.

"This is Saudi Arabia's raison d'etre. It must ensure that spare capacity is sufficient or else its importance in the world will be diminished," said oil analyst Peter Beutel of Cameron Hanover in Connecticut.

Analysts said a recent Saudi output boost to around nine million barrels a day may have made Aramco apprehensive about its ability to prime the pumps further if the world calls for much greater volumes.

"At the start of the year they were producing around 8.5 mln bpd of oil and were sitting on around 3.5 mln bpd of spare capacity. They've had to increase production by between 500,000 and 750,000 bpd after Libya went out of the market so their spare capacity is already way down," said Roger Read, managing director at Morgan Keegan in Houston.

A New York-based oil analyst, who tracks Saudi production and requested anonymity, said: "You could see this in one of two ways. Either they realize that 3 million barrels of spare capacity isn't enough, or they realize their capacity isn't actually that high."

Saudi Arabia hasn't publicly discussed plans to expand its overall crude capacity since completing a $100bn project to raise it by three million bpd to a "sustainable" 12 million bpd last year, excluding the neutral zone, leading some analysts to conclude that the increase in rig counts responds to decline at older fields.

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