Saudi Arabia suspends oil drilling after Aramco cancellation

The cost of using a drilling rig for oil and natural gas exploration in the Middle East has hit a low after falling almost 20% since the end of 2023. The drop follows the cancellation by Saudi Aramco of its plan to increase oil production capacity in January. In April and May, the average rate for a jack-up rig capable of drilling in 361-400 feet of water is $120,000/day, the lowest since July 2023.

Impact on rental rates and the market

Pamela Cordova, principal analyst at Petrodata Rigs in London, estimates that rental rates in the Middle East will be between $110,000 and $140,000/day by the end of the year. Despite this slowdown, the market remains strong, with contract utilization stable at 93%. Saudi Arabia’s energy services companies are reducing the use of their platforms after Aramco canceled a 1 million barrel per day capacity increase.

Effects on suppliers and contracts

Aramco’s cancellation of projects impacts drilling rig suppliers. Several contracts were canceled as Aramco reallocated its resources to natural gas development projects. Aramco maintains its current capacity of 12 million barrels per day, despite the cancellation of the Safaniya and Manifa offshore projects. ARO Drilling receives a suspension notice for one of its 19 rigs under contract with Aramco. ADES, another energy services company, is suspending operations on five of its platforms in Saudi Arabia for up to 12 months.

Reassignment and new contracts

ADES manages to reallocate some of its platforms elsewhere in the region. On May 26, Kuwait Oil awarded ADES six drilling contracts for upstream onshore work. ADES also signs a contract for the Admarine 502 with PTTEP in Thailand, and the platform leaves Saudi Arabia to prepare for this contract. Aramco is now focusing on expanding gas production, awarding contracts for the development of the main gas program.

Current situation and future prospects

According to Petrodata Rigs, the total number of offshore drilling rigs operated by Saudi Aramco in Saudi Arabia is around 300, a figure that is expected to remain stable. Regional demand for jack-up rigs is expected to drop to an average of 153 to 160 rigs over the next two years, down from 170 estimated in January. This drop is attributed to the cancellation of Aramco’s oil expansion, although contract renewals are possible depending on the budget allocated to oil drilling in 2025 and 2026.

Analysis and future thoughts

The ability of contractors to find work for rigs elsewhere, at higher dayrates, will influence dayrate negotiations with Aramco. Aramco’s decisions regarding resource reallocation and rig management will have a significant impact on the regional drilling market.
Saudi Aramco’s strategic decisions, including canceling its oil production capacity expansion, are redefining the drilling landscape in the Middle East. Even though platform rental rates have fallen, the market remains robust thanks to stable contractual usage. Drilling service providers must adapt to these changes, reallocating resources and seeking new opportunities to maintain their business. Ongoing adjustments and reallocations demonstrate the sector’s resilience and flexibility in the face of unforeseen challenges.