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Rig counts spike in Saudi Arabia, continue to fall in the U.S.

The most recent report from Baker Hughes (ticker: BHI) shows the fifteenth straight week of declining rig counts in the United States, but rig counts in Saudi Arabia spiked in 2014. Industry sources say that this is due to OPEC’s largest producer looking to maintain its spare capacity in the future, reports Reuters.

“The Saudis are probably worried about everyone else reducing capex as a result of low oil prices and about non-OPEC output falling off a cliff at some point,” said Gary Ross, executive chairman of New York oil consultancy PIRA. “We all know that supply disruptions are unpredictable, but they are certain.”

“The increase in Saudi rig numbers is like a signal to the industry – let’s be rational. We will need supply growth in the future.”

State-owned Saudi Aramco used a record-high 210 oil and gas rigs in 2014, up from around 150 in 2013, 140 in 2012 and some 100 in 2011, according to previous industry estimates. Amin Nasser, Aramco’s Senior Vice President in charge of upstream operations, said this month that the company has yet to decide whether to increase the rig number in 2015 from the 212 currently in service.

Sadad al-Hussenini, a former senior executive at Aramco and now an energy consultant, said the rise in the Saudi oil rig count had been evolving over a long period. “You need to drill more wells if you are producing 10 million barrels per day and maintaining your spare capacity,” he said. “It is also a natural phenomenon in the oil business that the more you produce, the more you deplete your reserves and the more rapidly your field capacity declines. You need to drill more wells more frequently, simply to maintain production capacity.”

Maintaining spare capacity

Events in the past few years, including the ongoing conflict in Libya, have tested Saudi Arabia’s ability to meet production disruptions. In 2008, Oil Minister Ali al-Naimi said production capacity would rise to 15 MMBOPD from 12.5 MMBOPD, but the plan was put on hold after the global financial meltdown pushed oil prices below the $40/bbl mark.

In order to ease pressure on its aging fields like Ghawar and Adqaiq, Aramco launched the Khurais and Manifa fields with total capacity of more than 2 MMBOPD. It also plans to increase output from its Shaybah and Khurais onshore fields by 550 MBOPD by 2017.The projects should allow the company to maintain its spare capacity of more than 2 MMBOPD, the largest in the world.

For 2015, industry sources estimated Aramco would deploy at least the same number of rigs as in 2014. Aramco declined to comment on those expectations, reports Reuters. This trend of increased rig counts runs counter to rig counts in the U.S., which have been steadily declining since OPEC’s decision last year to maintain production. The state-owned Saudi company has been trying to lure experienced American workers who have been laid off as a result of reduced industry activity.

Last week, Baker Hughes announced a further 5% drop in rig counts week-over-week. The total rig count in the U.S. for the week ended March 20, 2015, now stands at 1,069. Rigs in the U.S. are down 31% since the beginning of this year.

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