Aramco’s production U-turn will not hit demand for oilfield services, analysts say

World's largest oil exporting company likely to defer expansion projects at Safaniya and Manifa in the Arabian Gulf

Oil tanks at the Saudi Aramco oil facility in Abqaiq. Reuters
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Saudi Aramco’s production U-turn will not hit the demand for oilfield services and equipment in the kingdom, analysts have said.

Shares of major oilfield services companies dropped last week after Aramco, the world’s largest oil exporting company, scrapped plans to boost production capacity to 13 million barrels per day by 2027, from 12 million bpd currently.

Analysts say Aramco’s decision may have been influenced by factors such as escalating costs of developing new projects, ample spare capacity and weakening demand outlook for crude amid growing adoption of renewable energy and electric vehicles.

At the moment, Saudi Arabia is only producing 9 million bpd as part of Opec+ supply cuts aimed at stabilising the oil market.

The announcement comes as oilfield services companies, which assist energy producers in drilling new oil and gas wells, are increasingly turning to the Middle East region to drive future growth, especially with the US shale sector facing a slowdown.

Analysts say Aramco will most likely defer expansion projects at the Safaniya and Manifa offshore oilfields in the Arabian Gulf. The company did not immediately respond to a request for comment.

Safaniya, 200km north of the city of Dhahran, is the world's largest offshore oilfield in terms of recoverable resources.

Aramco was close to selecting preferred bidders for two large onshore engineering, procurement, and construction (EPC) contracts at Safaniya, worth $5 billion, according to media reports last month.

Several oilfield services firms have a large exposure to the kingdom’s jack-up rig market. These rigs are used to drill wells in shallow waters.

“We think the market overreacted and the jack-up rig count will likely remain stable to modestly up in 2024, and other projects, including Marjan, Berri and Zuluf, will continue to move forward,” said James West, senior managing director at Evercore ISI.

Saudi Arabia was deploying 88 rigs as of January, up from 79 in the same period last year, according to Baker Hughes data.

Aramco, which plans to increase the Marjan and Berri fields’ output capacity by 550,000 bpd by next year, may adjust its capital expenditure target lower or increase spending on natural gas, Mr West said.

Aramco has said it would update its capital spending guidance when its full-year 2023 results are announced in March.

The company's capital expenditure numbers have consistently increased over the past few years amid a growing focus on downstream operations and gas production.

Before reducing its output target, Aramco was expecting its capital expenditure for last year to be in the range of $45 billion to $55 billion, up from $37.6 billion in 2022. It stood at $31.9 billion in 2021 and $26.9 billion in 2020.

“We remain confident the long-duration offshore and international upcycle will continue and drive significant growth opportunities for oilfield services companies in 2024 [and beyond],” Mr West said.

The Big Three of oilfield services – Schlumberger, Halliburton and Baker Hughes – recorded strong fourth quarter results, with higher oil prices boosting drilling activity in the US and international markets.

The companies are optimistic about the Middle East, where several national oil companies are planning to significantly increase their production in the next few years.

Schlumberger, whose shares fell nearly 10 per cent following Aramco’s announcement on January 30, said it was working “very closely” with the state-run energy giant and that, as per its understanding, only two offshore oil expansion projects that have not yet begun would be suspended.

“Our forecast for significant growth for 2024 in the kingdom remains intact,” said Olivier Le Peuch, the company's chief executive.

“The combination of our revenue mix in the kingdom, which is weighted toward onshore and the expanding gas market, and our unique market position in other countries in the Middle East will continue to support the multi-year growth cycle in the region.

“Global energy demand continues to increase, and international production is expected to play a key role in meeting supply through the end of this decade.”

Halliburton and Baker Hughes declined to comment.

Expansion plans

Meanwhile, other Middle Eastern countries are pressing forward with plans to increase production.

UAE’s Adnoc is investing in its major onshore and offshore oilfields to increase crude production to 5 million bpd by 2027. The Abu Dhabi-based energy company also aims to reach gas self-sufficiency by 2030.

Kuwait plans to bring its oil production up to 3.2 million bpd by next year and 4 million bpd by 2035. It also aims to double its gas production in the longer term.

To achieve these goals, the Gulf country plans to invest $43 billion in oil and gas projects until 2027.

Iraq, Opec’s second-largest producer, is looking to boost its output to 7 million bpd by 2030.

“We saw several final investment decisions [in Iraq] last year and two new bid rounds opened,” said Alexandre Araman, principal analyst, Middle East upstream, at Wood Mackenzie. “Gas is also a priority with aggressive growth target, mainly thanks to projects to capture flared gas.”

Iraq remains the second-biggest country in terms of flaring after Russia, Mr Araman told The National.

Updated: February 07, 2024, 1:19 PM