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

Top OPEC producer to ramp up capacity as oil supply uncertainty grows on Arab unrest
Top oil exporter Saudi Arabia has unexpectedly called on oilfield service firms to expand the kingdoms oil rig count by nearly 30 percent,
By Reuters
Tue 29 Mar 2011 10:56 AM

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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"The decline rate in some large OPEC producers like
Iran and Saudi Arabia is not new. It's a challenging issue for these countries,
so they just want to drill more wells to keep the same production
capacity," Adibi said.

Saudi Arabia wants the rig count to rise quickly in the
second half of 2011 and the first half of next year, and may use some of them
for a $16bn Moneefa project, Herbert said.

Aramco is undertaking the Moneefa project to compensate for
declines at other fields rather than to boost capacity, with a planned start-up
by June 2013 at 500,000 bpd and a ramp-up to 900,000 bpd by 2024.

"There will be some new rigs for Moneefa, but they
won't go ahead to drill all wells in one year," Adibi from FACTS said.

"It will gradually increase production over ten years
and it will be offsetting decline from other fields. It's not additional
capacity."

Halliburton said late on Monday that it would accelerate
activity at Moneefa, a project to tap massive offshore heavy crude reserves,
following recent discussions with Saudi Arabia. In 2008, the company was
awarded a contract to provide drilling and associated work at 93 Moneefa wells
off northeast Saudi Arabia.

The plans are "manifestly positive" for oil
service companies, Herbert said.

Schlumberger Chief Executive Andrew Gould privately told
analysts on Monday he was encouraged by Saudi Arabia's commitment to expand
spare capacity regardless of any pullback in oil prices, an analyst at the
Howard Weil oil conference in New Orleans said. Crimped oil activity elsewhere
in the Middle East and Africa is likely to hit Schlumberger's first-quarter
earnings, Gould said separately.

US oil futures fell 14 cents to $103.84 a barrel early on
Tuesday, down from a 30-month high near $107 last week.

Since January, political unrest in North Africa and the
Middle East has helped to lift prices. So far, the kingdom has avoided major
domestic unrest, although the upheaval has been threatening the regimes of
neighbouring Yemen and Bahrain.

"If we did see a significant oil supply shock and Saudi
Arabia came out to produce more, that would be the telling factor that they are
willing to supply the market in difficult times," said Ben Westmore, a
commodities analyst at National Australia Bank, adding that "more
exploration goes somewhere at communicating that sort of sentiment."

Saudi Arabia is OPEC's top producer and controls more than a
fifth of world oil reserves.

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