Rig market adjusts to market dynamics

Published in MEED, 15 October 2017

The quantity of oil and gas rigs deployed in the Middle East and North Africa (Mena) region has held steady this year, with the average number of platforms in use over the first nine months of 2017 standing at 422, one more than the average for the whole of 2016.

However, by one measure the region is slipping back. The total number of rigs in service around the world has shot up by 26 per cent over the past year, from 1,593 in 2016 to 2,014 now. As a result, the proportion of rigs that are deployed in the Mena region has fallen from a record level of 26.4 per cent in 2016 to 20.9 per cent today.

The global change is almost entirely down to a surge in drilling activity in North America, where the vibrant non-conventional hydrocarbons sector has led to the number of rigs in Canada expanding by 79 and in the US by 349. The growth in that region eclipses the entire Mena drilling sector, at least in simple numerical terms.

These figures are drawn from data compiled by US oil field services company Baker Hughes. Although the data is extensive, it is not comprehensive, with no figures for Iran included since 2006, for example. Nonetheless, the numbers paint a picture of a Middle East industry that is holding its position despite the threat posed by North American shale as well as oil production cuts agreed by leading Opec members and some non-Opec producers. Although the number of rigs in use is still below the high of 444 platforms that were in service in the region in 2014, it is still the third-highest figure in the past 20 years.

Within the Mena region, North Africa is very much the junior partner in terms of activity, accounting for an average of 80 rigs during the first nine months of 2017, compared with 342 in the Gulf. On an individual country basis, Saudi Arabia continues to dominate the market, with 119 rigs on average this year. Since 2005, it has added more than 80 rigs to its count. Having been at a similar level to Oman and Egypt a decade ago, it is now the clear regional leader, with more than twice as many active rigs as its nearest rival.

The rig industry in the kingdom is in the midst of a significant change, with Saudi Aramco making a concerted effort to develop the domestic manufacturing sector. The key moves to date include joint venture deals Aramco signed in late 2016 with two US drilling services firms – Nabors Industries and Rowan Companies. The agreements form part of a wider localisation drive in the energy sector, known as the In-Kingdom Total Value-Add (IKTVA) programme, and will involve multibillion-dollar investments to buy onshore platforms and offshore jack-up rigs made in the country through other recently established Aramco joint ventures.

The joint venture with Nabors is focused on onshore rigs and will initially own 15 platforms, with five coming from Aramco and 10 from Nabors. It will also manage another 26 Nabors-owned rigs currently in Saudi Arabia. The partners have committed to buying 50 onshore drilling rigs over a 10-year period, which will be manufactured at new facilities in the kingdom.

The deal with Rowan covers offshore activity and will initially own seven jack-up rigs, with two contributed by Aramco and five by Rowan, as well as managing a further four Rowan-owned jack-ups already in the country. The joint venture will also buy and operate new-build jack-ups over the coming decade, again made at facilities in Saudi Arabia.

Around the rest of the region, many of the other countries are quite evenly matched in terms of the number of rigs they have in service. Oman has averaged 55 rigs so far this year, while Kuwait and Algeria have 54 each, the UAE has 51 (of which 49 are in Abu Dhabi) and Iraq has 48. Among the other countries, Egypt has 25 rigs, Qatar 10 and Libya just one.

Some of these figures could change substantially in the not-too-distant future, given recent developments. For example, there is a renewed interest in natural gas production in Egypt following some major finds in recent years, while in Qatar, the decision in April to lift the moratorium on new developments on the giant North Field could lead to a boost in demand for rigs there. Iran is also pushing ahead with exploiting its portion of the same offshore field, known as South Pars, signing a $4.8bn deal in July with France’s Total to develop phase 11.

Kuwait too looks likely to increase its drilling activity in the near future, after Kuwait Oil Company (KOC) put in a substantial order for new rigs. In mid-August, the state-owned upstream operator issued a series of tenders inviting companies to bid for contracts to supply a total of 85 oil rigs. The closing date for submissions was 16 October.

The dominance of oil rigs over natural gas rigs has grown this year. The number of oil rigs in use around the region has averaged 319 in 2017, up from 312 in 2016, while the number of gas platforms has dropped to 102 this year from 109 last year. The one market where the two types are most closely balanced is Saudi Arabia, with 61 oil rigs and 56 gas rigs as of September this year. The gap has narrowed significantly in the kingdom over the course of 2017 – in January there were 72 oil and 52 gas rigs.

This year has also seen a shift towards onshore platforms, with 375 onshore rigs around the region compared with 47 offshore. While the onshore sector has always been larger, the gap between the two had narrowed over the previous two years. However, a slight pick-up in the number of onshore rigs in 2017, alongside a small decline in their offshore equivalents, has meant the recent trend has been reversed.

Taken as a whole, these developments suggest an industry that is continuously adjusting its position in response to market dynamics. With the shale oil boom in the US showing no signs of weakening and the Opec production cuts deal likely to be extended, the sector will have to remain agile in the coming months and years.