Energy

Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

There's an oil supply crunch looming and Saudi Arabia and its local allies are positioning themselves to take advantage.

In what would be the second phase of the kingdom's strategy to defend its market share against rival producers (most visibly U.S. shale), Gulf states are planning to raise output capacity to fill the hole left by the lack of investment in new projects elsewhere.

It may seem odd talking about an oil shortage when the world seems awash with the stuff and storage tanks are brimming, but listed oil companies are slashing spending for the second year running, leading the International Energy Agency's Neil Atkinson to warn of possible oil-security surprises in the “not too distant” future.

There are too few new projects being sanctioned by non-state oil companies to offset the inevitable decline in output from existing fields and to meet additional demand. This is expected to increase by 1.2 million barrels a day each year for the rest of the decade. New fields due to start producing this year and next are the result of investment decisions taken when oil was about $100 and expected to stay there.

The collapse in company spending is illustrated perfectly by the level of drilling activity. After all, if you don't drill, you can't get the oil out of the ground.

Drilling Collapse
In March, the worldwide rig count hit its lowest level since September 1999
Source: Baker Hughes
Data exclude Russia and China throughout, Iran from 2006 onwards and Iraq before June 2012

Baker Hughes updated its monthly international drilling statistics last week. Unsurprisingly, they showed another steep drop in rigs drilling for oil, a 12 percent decline between February and March. There were 1,551 rigs active last month in the countries covered by Baker Hughes, the least since September 1999 and down nearly 60 percent in little more than a year.

But one part of the world is bucking the trend and drilling furiously to add the capacity needed when demand once again exceeds supply. Three countries on the Arabian Peninsula -- Saudi Arabia, Kuwait and the United Arab Emirates -- are seeing near-record drilling rates.

Arabian Surge
The number of rigs drilling for oil in three Arab countries has more than doubled since 2010
Source: Baker Hughes

All three saw drilling reach at least 20-year records in 2015 and activity remains close to that peak. An expansion at Saudi Arabia's Shaybah field should add 250,000 barrels a day as early as June, while the Khurais field could contribute another 300,000 barrels by the end of 2017. State-owned Saudi Aramco says this will let it ease pumping from older fields yet maintain a production capacity of more than 12 million barrels per day, 2 million barrels above its current rate.

For Kuwait and the U.A.E., the goals are even higher. Kuwait plans to raise production capacity by 5 percent from 3 million barrels a day by the third quarter, and to reach 4 million barrels by 2020. Abu Dhabi means to lift production capacity to 3.5 million barrels a day by 2017 from about 3 million.

For Saudi Arabia the expansion is as much about gas as oil. The number of rigs drilling for gas there has jumped from about 20 in early 2013 to 60 last month, as the country tries to develop its own resources to support a growing petrochemicals industry and free up oil for export.

The first part of Saudi Arabia's "market share" strategy saw it refuse to continue cutting output to prop up high-cost producers elsewhere. As a result, U.S. production has fallen by about 600,000 barrels a day from its recent peak and other high-cost areas are following.

The Saudis may not have announced part two of the strategy yet, but it's well underway.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Julian Lee in London at jlee1627@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net