Saudi Arabia Carries on Drilling Despite Oil Slump: Kemp

Saudi Arabia is one of the very few countries which has increased its drilling for new oil and gas wells since prices began to slump in the middle of 2014.

The number of rigs drilling for oil and gas around the world has fallen from a peak of 1,382 in July 2014 to just 920 in October 2016.

The international rig count excludes North America, which has also experienced a slump in drilling, as well as onshore China, Russia and the Caspian region.

However, the number of rigs operating in Saudi Arabia has climbed from 105 to 126 over the same period, according to oilfield services company Baker Hughes.

The only other countries to report a significant increase in rig counts were the United Arab Emirates and Kuwait, which produce from the same petroleum basin as Saudi Arabia.

Saudi Arabia has kept the number of rigs targeting oil-bearing formations steady at around 70, which is high by historical standards, while adding an extra 20 rigs targeting gas-rich targets.

Continued drilling is intended to protect the country's crude market share at a time when rivals in Iran, Iraq and Russia are also increasing output.

The drilling programme demonstrates the country's determination to maintain its production capacity despite the slump in prices and natural decline rates at older fields.

The kingdom's reserves and field-by-field production rates remain secret, but the increased number of rigs over the last five years is an indication the country is investing significantly to maintain output.

Saudi Arabia's large onshore fields remain some of the most attractive and lowest cost in the world with superb geology and high flow rates per well.

Most fields have now been producing for several decades and exhibit natural declines in field pressure as well as increased water production.

So significant investment is needed to maintain output from existing wells, open up new sections in existing fields and develop completely new targets.

But most drilling in Saudi Arabia is field development work and extension rather than wildcat exploration, meaning the risks are lower and returns higher, supporting continued expenditure.

And the programme has been supported by a big cut in contract costs for all aspects of drilling and well completion, enabling drilling to continue despite lower oil prices.

As one of the few oil companies around the world maintaining rather than cutting its drilling programme, Saudi Aramco has been able to extract big price reductions from the services companies.

The resilience of drilling programmes in Saudi Arabia, UAE and Kuwait underscores their importance to service providers.

On the gas side, the increased number of rigs operating is consistent with Saudi Arabia's strategy of switching power generation to gas from oil, reserving more valuable crude for refining or exporting.

The strategy helped Saudi Arabia cut its direct combustion of crude in power plants this summer even as temperatures hit record levels across the Arabian peninsula.

Reduced direct burn freed up oil for export, either as crude or refined products, enabling the kingdom to maintain crude exports near record levels this summer, but pressuring prices.

(By John Kemp)