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
"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
"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
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
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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