Saudi Arabia: A Whole New Drill

Anticipating a rise in long-term demand, the kingdom is ramping up production

Saudi Arabia's image as master of the oil patch has been taking a beating of late. For months global markets have fretted that the Saudis can't or won't produce enough oil to keep a lid on soaring prices. Politicians around the world are blasting the kingdom for failing to open the taps more. And Houston investment banker Matthew R. Simmons has captured headlines with his book Twilight in the Desert, which says that Saudi production may be peaking and an oil shock bigger than the current one is on the way.

Yet, little noticed by the outside world, the Saudis are making some bold moves. In recent months, Saudi Aramco, the national oil company, has been rapidly inking deals with drilling rig operators and oil field contractors. Some 70 drilling rigs are now operating in the kingdom, up from 55 in 2004 and about 20 in the mid-1990s. By next year Aramco aims to have 110 rigs drilling, although that may be unreachable because of fierce competition for equipment.

It's all part of a massive effort to add some 3 million barrels per day of production capacity -- comparable to a large producer such as Kuwait or Venezuela. That would be a more than 30% leap over the roughly 9.5 million bbl. per day Saudi Arabia is now producing, although in a pinch it claims that it could get output up to 11 million bbl. The cost of hundreds of new wells and related infrastructure could exceed $14 billion. A spokesman for Saudi Aramco says the national oil company is even looking at "scenarios to bolster [production] to even 15 million barrels per day" if demand warrants.

If the Saudis succeed, the tightness that has plagued the world's oil markets may ease for the medium term, relieving prices. New Saudi oil would join increases from West Africa, Brazil, Central Asia, and the Gulf of Mexico. "This is very important," says Jamal Qureshi, an analyst at consultants PFC Energy in Washington. Saudi production combined with the others could lead to "a pretty good supply bulge" over the next few years, he says. But unlike a non-OPEC country such as Russia, which is likely to produce close to flat out, the Saudis may dial back on both production and expansion plans if they think a glut is developing.

What has kicked the Saudis into gear? The surge in demand from the U.S., China, and elsewhere seems to have convinced them that it is worth pouring money into expanding production. The Saudis also want to regain lost clout in the market. While they aren't sorry to be earning $145 billion or so from oil this year, the Saudis don't like their lack of power over prices. The only way to regain it is by having barrels to add or subtract from the market. "They want to maintain a certain spare capacity cushion. The price runups we saw in the last few years have spooked them, too," notes Qureshi.

The Saudis are also well aware that the spare capacity they do have is the wrong stuff. Their clients want light crude, best suited for converting into gasoline. The heavy crude that forms most Saudi spare capacity sells at a discount, if at all. Much of the new oil will come from expansion of fields such as Qatif and Khursaniya that were mothballed in the 1980s, when production fell and the Saudis decided not to juice it up again. They'll also make big additions to the newer Shaybah field, which produces some 500,000 bbl. per day of light crude from below the red sand dunes of the Empty Quarter.


Of course a massive expansion of oil production won't be easy for the Saudis, who have coasted, with a few exceptions, for 20-plus years. Aramco engineers are proud of the job they did in the 1990s developing Shaybah, which was brought onstream ahead of schedule and uses high-tech multi-branched wells. But their new undertakings are on a far grander scale. They will need to manage large numbers of foreign contractors on several different sites -- no easy task. They will also need to pay top dollar in an overheated market.

The Saudis are already vying for a limited number of rigs. Aramco will be paying Houston-based Rowan Cos. (RDC ) $100,000 to $105,000 per day for each of four large offshore rigs slated to begin exploring for oil and reworking wells in the Arabian Gulf for a three-year period beginning in early 2006. The Saudis originally contracted for five Rowan rigs but one is missing following Hurricane Rita. Rowan hasn't found work in the kingdom since 1981. "It's a nice way to go back," says William C. Provine, an investor relations vice-president. Another participant is Bermuda's Nabors Industries Ltd. (NBR ), which has 10 rigs in the kingdom.

The Saudis also face technical challenges. Oil projects are complex and expensive. It is not just a question of drilling. Massive infrastructure needs to be built for separating the oil from the gas, for injecting water into the fields to maintain pressure, and for piping the oil to refineries. According to one industry source in the region, the Khurays field, the largest expansion planned, will need an estimated 400 wells drilled to produce the target of 1.2 million bbl. If each rig drills six to seven wells per year, that would require some 20 rigs at the site for three years. The field will also need 2 million bbl. per day of water injection, facilities to process the water, and pipelines.

Given all that, getting production up even to 12.5 million bbl. per day seems a tall order, especially considering the Saudis need to add enough capacity to offset declines of 400,000 to 500,000 bbl. per year in existing fields. "Clearly Aramco has allocated the funds and set up the contracts for the expansion. The challenge will be for the contractors to mobilize the materials, drilling equipment, and human resources to meet the kingdom's very tight schedules," says Sadad Husseini, a former Aramco executive vice-president for exploration and production.

Then there is the question of whether the Saudis have the oil. As Simmons points out in Twilight in the Desert, the Saudis have few alternatives but to look for gains from fields that had serious problems in the past. But analysts such as Qureshi, who closely watch the kingdom, think the Saudis will at least come close to meeting their goals -- as long as world demand holds up. If the Saudis see demand leveling off, they will likely delay. So the key to future markets and to how fast the Saudis add production is how fast demand grows -- something no one has proved very good at forecasting so far.

By Stanley Reed in London

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