Top oil exporter Saudi Arabia has unexpectedly called on oilfield service companies to expand its oil rig count by nearly 30% to boost output capacity, according an analyst.
Saudi state-run oil giant 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 wrote in a research note.
"Saudi Arabia has been expected to tread water on its production capacity, so this is unexpected," Herbert said from Houston in a phone interview with Reuters.
"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."
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.
Cameron Hanover oil analyst Peter Beutel said this was crucial for Saudi Arabia.
“It must ensure that spare capacity is sufficient or else its importance in the world will be diminished," he said.
What isn’t clear yet is whether the Kingdom seeks to increase spare production capacity beyond an estimated 3 million barrels per day – the level that Aramco is said to possess.
Analysts said a recent Saudi output boost to around 9 million barrels per day (bpd) may have made Aramco apprehensive about its ability to prime the pumps further if the world calls for much greater volumes.
Morgan Keegan managing director Roger Read said the nation was producing around 8.5 million bpd of oil and had around 3.5 million 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," he said.
A New York-based oil analyst, who tracks Saudi production and requested anonymity, told Reuters: "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 $100 billion project to raise it by 3 million bpd to a "sustainable" 12 million bpd last year.
Saudi Arabia wants the rig count to rise quickly in the second half of 2011 and the first half of next year, and is "dusting off" a slow-going, $16 billion, 900,000-bpd oil project known as Manifa, Herbert said.
The plans are "manifestly positive" for oil service companies, he added. Their shares soared.
Halliburton rose 4% to $47.90 on the New York Stock Exchange after touching a 52-week high. Shares in Schlumberger also rose more than 4%, while Baker Hughes rose 3.8%.
Halliburton said that it would accelerate activity at Manifa, 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 Manifa wells off northeast Saudi Arabia.
Schlumberger chief executive Andrew Gould privately told analysts yesterday 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 told Reuters. Crimped oil activity elsewhere in the Middle East and Africa is likely to hit Schlumberger’s first-quarter earnings, Gould said separately.
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 neighboring Gulf countries Yemen and Bahrain.
Saudi Arabia is Opec’s top producer and controls more than a fifth of world oil reserves.