Middle East drilling rates down almost 20% since Aramco's crude expansion halt

The cost to use a drilling rig to explore for crude oil and natural gas in the Middle East may have bottomed out after dropping almost 20% since the end of 2023 after Saudi Aramco cancelled its long-planned crude output capacity expansion in late January.

The average Middle East rate for a jackup able to drill in 361-400 feet of water was $120,000/day in April and May, the lowest since July 2023 and down from a seven-year high of $145,000/day in December and January, according to Petrodata Rigs by S&P Global. The global average for the same rig was $130,000/day in April.

The average Middle East rate based on current demand is expected to range from $110,000 to $140,000/day by the end of this year, revised down from the first quarter 2024 as Aramco has suspended 22 rigs, of which at least six to nine are likely to be permanently released, said Pamela Cordova, principal research analyst at Petrodata Rigs in London.

Nonetheless, the market remains strong with a high and stable contracted utilization of 93%, and rates are unlikely to drop more than 20% as contractors try to find work for the units elsewhere, according to Petrodata Rigs forecast.

"The market has been impacted but remains strong," Cordova said.

Saudi Arabia's energy services companies are scaling back on deployment of rigs in the country after Aramco cancelled its long-planned 1 million b/d capacity addition.

The capacity scale-back has had a knock-on effect on Saudi contractors and rig suppliers for whom Aramco was their biggest client in the country.

Several suppliers have had their contracts cancelled as Aramco looks to reallocate resources toward natural gas development projects. The Saudi oil company continues to spend on replenishing capacity lost to natural decline to maintain its current capacity of 12 million b/d. However projects such as the offshore Safaniya and Manifa have been cancelled leading to fewer rigs required in the country.

Saudi company ARO Drilling said in April that it received a notice of suspension for one of its 19 rigs contracted by Aramco.

ARO Drilling is a joint venture between Houston-based Valaris and Aramco.

In the same month, Saudi energy services company ADES said it agreed with an unnamed client to temporarily suspend operations on five of its 33 offshore jack-up rigs in Saudi Arabia for up to 12 months.

ADES is reallocating its rigs elsewhere in the region. On May 26, state-owned Kuwait Oil awarded ADES Holding six drilling contracts for onshore upstream work as Kuwait moves ahead in its expansion work to offset declines in some of its large aging oil fields. The award covers ADES' four existing operating rigs in Kuwait as well as two newbuild units.

ADES announced in mid-May that the contract for Admarine 502 with Thailand's PTTEP is signed and the unit has left Saudi Arabia as it prepares for the contract, Petrodata Rigs reported.

PTTEP has awarded an 18-month firm and nine-month optional contract for the jackup. The unit was released by Saudi Aramco earlier in May at the end of a three-year contract. This is the award for an incremental unit for PTTEP called Rig #15. The total contract value from the firm and optional terms is about Riyals 354 million ($94.4 million) including mobilization, Petrodata Rigs said. Admarine 502 will also soon arrive in Bahrain for contract preparations, it noted.

Aramco is focusing attention on expanding gas production. In February, it awarded an engineering, procurement and construction contract to Gas Arabian Services to expand its master gas program from the Shedgum power plant to east-west pump stations-1.

The gas push follows discovery of an additional 15 Tcf of natural gas and 2 billion barrels of condensate in the onshore Jafurah unconventional field.

The total number of offshore drilling rigs Saudi Aramco operates for land and offshore is about 300 rigs in Saudi Arabia, expected to remain unchanged because the number of offshore rigs that will be dropped for oil will be compensated through the increase for offshore and onshore rigs for gas, according to Petrodata Rigs data.

Aramco has reduced the number of its offshore rigs contracted for offshore drilling to 88 from 92 since January 2024. This is still the largest offshore fleet contracted by a single operator globally, according to Petrodata Rigs.

Demand in the region is now likely to drop to an average of 153-160 jackup rigs in the next two years, down from 170 estimated in January but higher than the historical average of 130 rigs.

In the next two years, 36 jackups are rolling off contract with Aramco, although many of them may be renewed depending on Aramco's budget allocated to oil drilling in 2025 and 2026, according to Petrodata Rigs. Depending on the existing contractors' ability and appetite to find work for the rigs elsewhere, with a higher day rate than what is being offered by Saudi Aramco for the extensions, the operator may have the upper hand in day rate negotiations after cancelling its expansion program, Cordova said.

Aramco did not respond to a request for comment.