Saudi Arabia, through its state oil giant Saudi Aramco, has decided to abandon plans to expand its oil production capacity to 13 million barrels per day (bpd) by 2027. This decision, revealed in late January and influenced by the country’s Ministry of Energy, marks a significant departure from earlier ambitions and carries potentially profound implications for the global energy landscape. This thought leadership article delves into the ramifications of Saudi Arabia's strategic pivot, exploring its effects on oilfield service providers, engineering and construction contracts, and the anticipated drilling trends.

Strong supplier performances and sustained drilling

Stock markets responded adversely to the announcement, witnessing an average 7% drop in stock value for major oilfield services (OFS) suppliers, including SLB, Halliburton, Baker Hughes and Weatherford International. Despite this, the general consensus among market players is that near-term activity will continue as planned with minimal disruption. Multinational OFS giant SLB achieved its highest-ever returns in the Middle East in 2023, with over 20% of revenue coming from the region. This surge was fueled by contract awards in its reservoir performance, well construction, and production systems divisions, including a five-year deal with Qatargas – since rebranded as QatarEnergy LNG – and a contract with Saipem in Saudi Arabia. Additionally, regional rig supplier Arabian Drilling is seeing the entirety of its revenue and portfolio servicing Saudi Arabia with fellow rig operator ADES, indicating there will be no reduction in the near-term rig count.

This outlook aligns with Rystad Energy’s projections of drilling activity in Saudi Arabia. The anticipation is that drilling in legacy onshore and offshore fields will persist over the next few years, maintaining Saudi Arabia's current production levels of 12 million bpd. Approximately 11,000 new wells are expected to be drilled from 2023 to 2030, primarily driven by infill operations, accounting for over two-thirds of new wells, with onshore drilling declining slightly from 2027 to 2030. As the decade progresses, gas drilling is predicted to increase in the country, reflecting rising production from Saudi Arabia’s unconventional assets, such as Jafurah. This expansion is evident in the growing demand for rigs dedicated to shale gas operations.

The robust drilling landscape in Saudi Arabia has a cascading effect on the demand for oil country tubular goods (OCTG). It is anticipated that OCTG demand in Saudi Arabia will peak in 2025 at 356,000 tonnes and then decrease to 335,000 tonnes in 2027. This expected decline is attributed to a reduction in onshore drilling as mature assets decline and greenfield projects enter their brownfield phase.

Rig demand stays healthy as backlogs squeeze suppliers

Onshore and offshore drilling activity mirrors regional and Saudi Arabian rig demand. Jackup demand is expected to persist from this year to 2030, driven by activity in Qatar, Saudi Arabia, the UAE and Egypt, with total expenditure of $51 billion over the same period. Onshore rigs are projected to decline across the region up to 2030, leading to a reduction in land rig demand. However, land rig demand remains substantially higher than jackups, with land rigs reaching 718 rig years in 2030 compared to 110 for jackups.

In Saudi Arabia, approximately 90 jackups are currently in operation, equating to 91.64 rig supply years. Despite this, the country faces a significant backlog in contracted rigs, totaling around 406 rig years. The anticipated suspension of the Safaniya and Manifa projects is expected to result in a loss of about 15 rig years annually from 2027 to 2030. This potential decline could affect both contract awards and extensions, impacting pricing levels in the jackup market. The diminishing demand for rigs may also influence dayrates, which have experienced a 50% increase since the period between 2019 and 2021, currently averaging around $120,000 to $130,000 per day.

Saudi Arabia's shift in oil production plans has notable implications, impacting service providers and drilling dynamics. Market resilience and sustained drilling signal stability, while considerations for rig demand and pricing evolve. Key indicators such OCTG demand and jackup market robustness gain in significance. Saudi Arabia's recalibration underscores the industry's ongoing need for adaptability in a changing global landscape.