Saudi Arabia to Cut Drilling Rigs Amid Lower Oil Demand

DUBAI (Dow Jones Newswires), Mar. 2, 2009

Saudi Arabia, the world's largest oil exporter, is expected to cut the number of oil rigs by as much as 20% until year-end amid lower crude output, people familiar with the situation said.

Last year, Saudi Arabian Oil Co., or Saudi Aramco, the state-run oil company, had about 130 offshore and onshore rigs in operation at peak times, a number that is set to fall by up to a fifth throughout 2009, the people said.

"They haven't announced any specifics but they are saying there will be a reduction in the number of rigs by 20%," one Gulf-based oil industry official told Zawya Dow Jones.

Aramco has been expanding its drilling rig fleet in the past few years as part of plans to boost its oil production capacity amid rising energy demand. However, the global economic crisis has led to falling rig requirements as global oil demand has weakened and major oil expansion projects are being completed.

"Given the slowdown in oil production this year and the completion of major oil expansion projects, it is not surprising to see an easing of drilling activity," said Raja Kiwan, an analyst at PFC Energy.

"But this will be temporary before work begins on the next slate of oil and gas projects," Kiwan said.

According to the International Energy Agency, global oil demand is expected to drop by 1.2% this year, the biggest annual drop in 27 years, as the world's major consuming nations have fallen into recession and growth in Asia, notably in China, has weakened.

REDUCED ACTIVITY

The Organization of Petroleum Exporting Countries, led by Saudi Arabia, has announced three production cuts since September to remove a total 4.2 million barrels a day of crude from the market in a bid to boost oil prices, which have slumped to below $40 a barrel, from a record $147 a barrel in July, due to deteriorating demand.

Saudi Arabia has lowered its crude output from more than 9 million barrels a day in October to a daily rate of less than 8 million barrels in February, in turn leading to reduced rig requirements.

"By the end of the first quarter, the number of rigs will drop to 118 and it will go down further to 101 by the end of this year," another Gulf-based oil official, who spoke on condition of anonymity, said.

Saudi Aramco declined to comment on the number of rigs in operation in an emailed response to questions.

"When a rig contract expires, they (Aramco) are not renewing it as there's no need for drilling," the official said, adding that Aramco isn't renewing rig contracts with high daily rental rates. "What they might do is either cancel or renegotiate the contract to secure a better daily rate."

Falling energy demand has also led to Aramco adjusting the schedule of projects such as the 1.2 million barrel a day Manifa offshore heavy oil field development, for which the oil company had planned to have 16 onshore and 12 offshore rigs up and running before the end of 2009, the official said.

"I think the project is being delayed as there's no urgency to drill and produce these wells," the official added. "Manifa is extended reach well drilling so it's more costly than the standard horizontal wells ... they are taking another look to see if they need to be pushing this 1.2 million barrels increment at this stage."

Aramco awarded the contract to develop the Manifa field in July to Saipem SpA, Europe's biggest oil services company by market value.

Saipem's Chief Executive Pietro Franco Tali earlier this month said Aramco was expected to decide in March or April on how it wants to proceed with the project.

Tali said there's the possibility of extending the project by 18 months so as to be as "cost effective as possible."  

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