Key Middle East Producers Ease Off Drilling Going Into 2018

Last year saw record low global oil and gas discoveries. The 2018 picture looks similar, despite a nascent major return to deepwater drilling. The Middle East, a bright spot in the downturn, kept drilling at near-record levels in 2017, but dwindling cash reserves mean activity has eased.

The Middle East’s key oil and gas producers defied the global downturn in the three years following the collapse of oil prices in mid-2014. Saudi Arabia, Kuwait, Abu Dhabi and Oman all responded to falling upstream costs by ramping up drilling to record levels. But GCC drilling activity, as evidenced by rig count figures, peaked in October 2016.

For Oman, the most cash-strapped GCC country ( MEES, 5 January ) the rig count peaked at 73 in December 2015. Saudi Arabia’s rig count peaked the same month at 129, although its fall off has been less dramatic.

Kuwait did carry on raising its rig count into 2017 but the figure has eased since peaking in August – only Abu Dhabi’s has continued to rise, according to Baker Hughes figures (see tables).

Kuwait’s record average rig count of 54 for 2017 is due to a 33% increase in the gas rig count from 2016. After years of political stagnancy holding up development, Kuwait has finally managed to push ahead with developing its Jurassic gas reserves and is set to bring 312mn cfd online in this quarter ( MEES, 15 December 2017 ). As work advanced, the number of gas rigs has surged, from an average of 9 in 2016 to 12 in 2017 – including a record 15 in August.

Kuwait’s gas output has remained flat in recent years, falling to 1.65bn cfd in the first nine months of 2017 from 1.67bn cfd in 2016 and 1.64bn cfd in 2015. With the tender for a new 590mn cfd gas plant closing in February, Kuwait’s gas drilling is set to stay high ( MEES, 13 October 2017 ).

For Abu Dhabi, the finalization of its primary onshore concession, Adco, in February appears to have sparked a renewed surge in oil drilling ( MEES, 24 February 2017 ). Abu Dhabi posted a record number of onshore drilling rigs in December, 39, as it averaged 35 for the year as a whole.

Opec kingpin Saudi Arabia has seen both drilling and production ease off going into 2018. Its latest oil rig count of 58 is at the lowest level since February 2014 and down 32% from the record figure of 85 hit in April 2015.

This fall has been somewhat offset by an increase in drilling for gas, with the number of active gas rigs in the kingdom averaging over 50 for most of the last three years. And this could rise further with Riyadh planning to increase gas output to 17.8bn cfd by 2020, and then to 23bn cfd by around 2026, up from 12bn cfd in 2016 ( MEES, 15 December 2017 ).

On an annual average basis the Saudi rig count peaked at 125 in 2016, one more than 2015, with the monthly average figure falling to 118 for 2017 – still the third highest on record. Despite cutting 400,000 b/d from its crude output last year in line with the late-2016 Opec/non-Opec output deal and planning to maintain similar production this year ( MEES, 12 January ), maintaining spare production capacity is key to Saudi Arabia’s position as leader of Opec. And this means it must keep drilling.

Elsewhere in the Mena region, Algeria saw its rig count hit 58 in July 2017 last year, the highest figure since May 1983. On an annual basis Algeria’s rig count averaged 57 in 2017, level with 2016 at the highest since 1983. However Algeria’s high rig count figures are more an indication of weakness than of strength: the country has seen scant exploration in recent years leaving it ever-more reliant on eking out extra barrels from infill drilling at aging fields.

One well currently being drilled, which should appear in January data is offshore Cyprus. Italian firm Eni is currently drilling the Calypso prospect on Block 6 with the Saipem 12000 drillship with results expected at the end of February ( MEES, 5 January ).

Annual Average Rig Counts*: Gcc Drilling Remains Steady At Near-Record Levels, Us Rebounds After 2016 Collapse

2017 vs 2016 vs 2015 2000 2005 2010 2011 2012 2013 2014 2015 2016
Saudi Arabia 118 -7 -6 25 37 67 68 81 83 103 124 125
Oman 55 -11 -12 24 34 44 43 51 50 59 67 66
Kuwait 54 +9 +7 12 12 20 32 31 32 38 47 44
Abu Dhabi 50 +1 +9 11 13 12 20 23 28 33 40 48
Dubai 2 -1 - 2 3 1 1 1 1 2 2 3
Qatar 10 +2 +2 6 12 9 8 8 9 10 8 8
Bahrain 2 +1 +1 * * * 3 4 4 4 1 1
GCC Total 290 -5 +1 80 111 153 175 198 206 249 289 295
of which oil 210 -0 - 61 85 109 125 145 157 185 210 210
Iraq 49 +6 -3 * * 36 36 58 83 79 52 43
Iran 61 +5 +7 27 40 52 54 54 54 54 54 57
Algeria 54 - +3 15 21 25 31 36 47 48 51 54
Egypt 24 -4 -17 18 29 55 67 67 53 53 42 28
Libya 1 - -2 7 9 16 3 9 15 10 3 1
US 875 +364 -103 916 1,380 1,541 1,875 1,919 1,761 1,862 977 510

*ACTIVE DRILLING RIGS (AVERAGE OF MONTHLY FIGURES). **NO DATA.

SOURCE: BAKER HUGHES.

RAY OF HOPE?

The big news story of 2017 was the rebound in US drilling. 2016 saw the average rig count almost halve from 2015, falling to 510. Drilling for oil bottomed out in May 2016 at 316 and although it rebounded to 768 in August last year, it has fluctuated since, falling to 742 in the first week of this year.

The main driver of that rebound has been drilling in the US’ key shale basins. Shale oil output hit 6.31mn b/d in December, up from 5.17mn b/d in the corresponding month a year earlier (see data, MEES, 12 January ).

The key basin is Texas’ Permian formation which accounts for the majority of output with 2.73mn b/d and the most active rigs. The share of Permian rigs to overall oil rigs rose to 54% in December, the highest since Baker Hughes began releasing basin data in February 2011.

RECORD LOW 2017

Big oil companies will be glad to see oil prices approaching $70/B in 2018, although the upside will likely be limited by a sharp upturn in US output ( MEES, 12 January ).

Although drilling in the Middle East remained strong through the downturn, globally that has not been the case.

Oslo-based consultancy Rystad says 2017 “was yet another record low year for discovered conventional volumes globally.” Less than 7bn barrels of oil equivalent were discovered last year, a figure not seen “since the 1940s” according to Rystad’s senior analyst Sonia Mlada Passos.

“The most worrisome is the fact that the reserve replacement ratio in the current year [2017] reached only 11% (for oil and gas combined) – compared to over 50% in 2012.”

The good news stories regarding discoveries in 2017 came offshore. Senegal saw key gas discoveries, with big oil finds off Mexico and Guyana – where ExxonMobil on 5 January announced a major new discovery some 100km northwest of the Liza project which the major sanctioned last year. Brazil’s prolific ‘pre-salt’ oil formations, meanwhile, secured major new exploration commitments which should keep the country’s output rising for decades to come ( MEES, 24 November 2017 ).

BP and its US partner Kosmos Energy had mixed success offshore West Africa in 2017. Offshore Senegal they discovered the 15 tcf Yakaar gas field, hot on the heels of 2016’s Teranga discovery. But offshore Mauritania it was less successful with the Lamantin-1 prospect coming up dry last month ( MEES, 15 December 2017 ).

2018: CAUTIOUS APPROACH

Companies will remain cautious going into 2018 and energy consultancy Wood Mackenzie says it does not expect to see a surge in activity this year.

“We expect most companies will maintain a highly cautious approach to exploration for a while yet. Competition for the best opportunities will be fierce. Industry investment and well counts will remain stubbornly low in 2018,” Wood Mackenzie VP for research and global exploration Andrew Latham says.

This, the consultancy says, is mainly due to a fall in the number of “committed explorers” among independent firms. Outside of US shale, the number of independent IOCs willing to embark on wildcat drilling has been decimated since 2014, with Kosmos being a rare exception.

One former exploration specialist, London-listed and Africa-focused Tullow Oil, this week announced a tentative return to wildcat drilling. The firm had slashed its exploration spend by 75% in 2015 in response to the fall in oil prices ( MEES, 13 February 2015 ) and remained in cash-preservation mode for the two subsequent years.

But, in a 10 January trading statement the firm announced a planned hike in capex from 2017’s $250mn (level with 2015) to $460mn for 2018. Newly-acquired licences off Peru and Cote d’Ivoire will be a particular focus.

With few companies willing to take a punt on frontier exploration many of the big players are focusing on similar basins. “Competition for quality acreage will become more intense as the Majors and other big explorers chase the same opportunities,” Mr Latham says. In 2018 “the industry will drill fewer, better wells focused on plays that are commercially attractive,” he predicts.

December Rig Count: Saudi Active Oil Rigs Fall To 58, Lowest Since February 2014

December 2017 Breakdown
Dec17 Nov17 vs Nov17 vs Dec16 Oil vs Dec16 Gas vs Dec16 Onshore vs Dec16 Offshore vs Dec16
Saudi Arabia 111 115 -4 -14 58 -11 53 -3 92 -18 19 +4
Oman 55 55 - -4 46 -3 9 -1 55 -4 0 -
Kuwait 54 53 +1 +10 41 +7 12 +2 53 +9 0 -
Abu Dhabi 48 51 -3 - 48 +4 3 -1 39 +7 12 -4
Dubai 2 2 - - 2 - 0 - 0 - 2 -
Qatar 10 6 +4 - 6 -4 0 - 3 -2 3 -2
Bahrain 2 2 - +1 2 +1 0 - 1 - 1 +1
GCC Total 280 284 -4 -9 203 -6 77 -3 243 -8 37 -1
of which Oil 203 209 -6 -6 na na na na na na na na
Iran 61 61 - +4 na na na na na na na na
Iraq 54 51 +3 +13 54 +13 0 - 54 +13 0 -
Middle East Total 397 398 -1 +9 259 +9 77 -3 299 +7 37 -2
Algeria 50 55 -5 -2 34 -3 16 +1 50 -2 0 -
Egypt 23 22 +1 -1 16 -6 6 +4 18 - 5 -1
Libya 1 1 - - 0 - 1 - 0 - 1 -
Mauritania 0 0 - - 0 - 0 - 0 - 0 -
N Africa Total 74 78 -4 -5 50 -11 23 +4 68 -3 6 -2
MENA Total 471 476 -5 +4 309 -2 100 +1 367 +4 43 -4
MENA % of World* 21.9 22.5 -0.6 -3.6 US WEEKLY RIG COUNT (WEEK ENDING)
OPEC Total 457 455 +2 +10 24Nov 1Dec 8Dec 15Dec 22Dec 29Dec 5Jan
OPEC % of World* 21.3 21.5 -0.2 -3.2 TOTAL 923 929 931 930 931 929 924
World Total* 2,150 2,118 +32 +321 Oil 747 749 751 747 747 747 742
of which offshore 191 183 +8 -19 of which:
offshore % 8.9 8.6 +0.2 -2.6 Permian 393 397 400 397 398 398 400
USA 930 911 +19 +296 EagleFord 60 60 63 63 63 63 62
o/w shale formations 747 749 -2 +222 Gas 176 180 180 183 184 182 182
US-Oil rigs 791 797 -6 +313 Land 901 909 911 911 912 911 907
o/w Permian 398 397 +1 +146 Offshore 22 20 20 19 19 18 17

*'WORLD' EXCLUDES ONSHORE CHINA & FORMER SOVIET UNION (EXCEPT SAKHALIN).

SOURCE: BAKER HUGHES RIG COUNT EXCEPT IRAN-OPEC ESTIMATES. OIL/GAS BREAKDOWN EXCLUDES RIGS CLASSIFIED AS 'MISCELLANEOUS'