The world economy may be creeping back towards growth, with the expected rise in demand for energy, but there has been little sign of that in the gently fluctuating regional market for oil and gas drilling equipment.

Demand for drilling rigs across the Middle East has changed little since early 2009 – up slightly according to some industry monitors, marginally down say others.

But that could soon change. The international companies awarded concessions to expand the Iraqi oil industry are geering up to start work – and this will trigger an upsurge in demand for equipment, which could have supply and pricing consequences for rig users right across the Middle East.

Major expansion

Caution is always required when forecasting developments in Iraq. A fresh upsurge in violence could force oil companies to put some projects on hold. But unless there is a significant deterioration in security conditions across the south, where the projects will be concentrated, a major expansion in drilling and other pre-production activity can be expected.

“Rigs will need to start arriving in the next six to 12 months,” says Colin Lothian, a senior Middle East analyst at UK energy analyst Wood Mackenzie.

There is currently some temporary slack in the Gulf market for equipment, as a result of the completion of drilling work for several projects in Saudi Arabia including the Shaybah oilfield, as well as for two major projects in Abu Dhabi. This has been reflected in demand trends over the past 12 months.

According to data from US engineering firm M-I Swaco, the number of onshore rigs in Saudi Arabia has fallen to 62 in March 2010, from 73 a year earlier; while the number of offshore rigs has slipped even more sharply, in proportional terms, to just 14, from 20. Across the Middle East, though, excluding North Africa, 365 rigs were in operation in March this year, compared with 370 in March 2009.

This is perhaps not surprising, given the massive volatility of the global economy over the past three years, which has complicated the forecasting of short-term energy demand and pricing. But energy firms undertaking major projects will have based their feasibility on longer-term assessments of future sales prospects.

So just as the completion of established drilling programmes has led to a small downturn in demand in the Gulf over the past year, the prospect of new operations in Abu Dhabi, Kuwait, Oman and Saudi Arabia should nudge the trend back upwards before long. That is already evident in Abu Dhabi, where there are now a dozen offshore rigs in operation, compared with just eight in March 2009.

Chinese oil firm are expected to need extra rigs for their expanding operations in Iran. And preparatory work is already under way for Saudi Arabia’s offshore Manifa heavy oil development – for which land rigs will actually be used. The kingdom is building artificial islands that will act as drill pads in the Gulf.

But such projects will be dwarfed by the scale of the work programme set to begin in Iraq, where international consortiums have been allocated nine major projects in Rumaila, Zubeir, West Qurna, Majnin, Halfaya, Gharaf, Qaiyarah, Badra and Najmah.

Potentially, the development of these fields could generate incremental extra production of 10 million barrels a day – almost the entire current output of Saudi Arabia.

Lothian cautions that not all of this capacity is likely be delivered, at least in the near future. Yet even if these developments are only partially implemented, the scale of new activity will be huge.

Infrastructure requirements

“[Italian oil firm] ENI and a number of the other companies involved [in developing Iraq’s oil industry] have released figures on the number of wells that will be required, and they run into the thousands,” he says. “There will be a huge volume of rigs required for Iraq, and there is existing work in managing the well stock in Kuwait, Saudi Arabia, Abu Dhabi and Oman.”

There are already rigs on the ground in southern Iraq, operated by service firms working for the state-owned Southern Oil Company. But the real acceleration in activity will come with the start of work by international oil firms. This will have an impact right across the regional on the availability of oilfield infrastructure.

However, there are some constraints on the pace at which drilling work can expand in Iraq. The operators will need to develop infrastructure to handle the large volumes of associated gas that the new oil operations will produce. A pipeline network will also have to be built to bring in the water that will be pumped into the wells, probably from a facility in the Gulf. But even allowing for some delays, the impact of these developments on the market for rigs and other equipment will be immense.

There will be a huge requirement not just for rigs, but drilling crews and equipment needed to bring wells online

Colin Lothian, analyst at Wood Mackenzie

“Even if it takes longer than planned, there will still be a huge requirement, not just for rigs but for drilling crews and all the other personnel and equipment needed for bringing wells online and into production,” says Lothian. “The uptick in rig demand will lead to an uptick in demand for well casings, tubes, well heads, cement, specialist tools, completion pipework and so on.”

This will also have consequences for the economics of projects elsewhere in the region. Although the Iraq projects will require massive investment – a forecast of $20bn in the case of Rumaila, the largest – they will be “technically simple and relatively low-cost in per barrel terms”, according to Lothian.

Their scale and cost-competitiveness will give oil firms major purchasing power in the market for equipment: they will be able to offer large volumes of work, sustained by strong economics and with good long-term prospects. This could pose problems for smaller projects elsewhere in the region, especially those for which the economic case is much more fragile. These may struggle to attract or retain suppliers of rigs and other movable equipment.

Rigs Deployed*
Region
Africa    296
Asia Pacific   363
Canada    337
CIS    1022
Europe    161
Latin America    547
Middle East    365
US    1566
Total 4657
*At March 2010. Source: Schlumberger.

Challenges

“I would not be surprised if we see above-average demand and, therefore, inflation in the cost of equipment and in service company rates for rigs, drilling crews and so on,” says Lothian. “This is going to pose challenges for higher-cost small projects.”

While the ‘Iraq effect’ appears set to dominate the hydrocarbons industry over the next year or two, there have been small but significant shifts in rig activity in some other markets since early 2009.

Libya had two gas rigs in operation during the first quarter of this year, whereas none were active in January-March 2009, according to data from US analyst Baker Hughes. There was also a brief jump in Libyan oil rig use in February 2010 – with 18 in operation at one point.

International majors are increasingly active in the country’s offshore fields, as Libya’s National Oil Corporation presses on with its drive to boost output from 1.8 million barrels a day (b/d) in 2005 to 3.4 million b/d by 2020. Tunisia has also increased gas-drilling activity.

Back in the Gulf, Kuwait has had a marked expansion of oil drilling, with the number of rigs in use rising dramatically. According to M-I Swaco, the total number of rigs deployed has climbed from 25 in March 2009 to 43 a year later. Aware that the prospects of securing parliamentary go-ahead for its northern oilfields project remain poor, Kuwait Oil Company has been pressing on with efforts to boost output without the foreign partners that it originally hoped to bring in.

I would not be surprised if we see above-average demand … in the cost of equipment and … rates

Colin Lothian, analyst at Wood Mackenzie

In Egypt, drilling operations have dipped over the last 12 months, but the market is still more active than other areas of the Middle East, with 65 rigs still deployed. Oman is another major focus of activity: 53 rigs are in use as the country seeks to counter a forecast downward trend in oil output over the next 10 years.

Abu Dhabi seems likely to see a pick-up in rig usage as it steps up offshore operations, which account for about a fifth of its hydrocarbons output at present. This new emphasis explains the sharp rise in the number of offshore rigs now deployed, compared with near stability in onshore drilling operations.

Syria and Yemen also have continued drilling activity. With the economy already under huge strain, the authorities in Sana’a are desperate to reverse an expected long-term decline in output. In Syria, reports M-I Swaco, 35 rigs are currently in operation.