Abu Dhabi's oil ambitions hit by rigs shortage

Shortage of drilling rigs threaten Abu Dhabi oil production as order books of rig builders fill up

The order books of local rig builders are swelling with demand. Mike Young / The National

A shortage of drilling rigs threatens to hold back Abu Dhabi's ambitious plans to expand oil production.

Operating companies and foreign partners in exploration projects privately complain of difficulty in securing rigs to develop resources in the emirate.

At the same time, the order books of local rig builders are swelling with demand. Lamprell and Petrofac, two fabricators with UAE shipyards, had a combined order backlog of US$10.9 billion (Dh40.03bn) by midyear, up from just under $9bn in 2010.

Although near-term needs appear to be met - the Shah sour gasfield, the Upper Zakum redevelopment and Shuweifat to the west have enough equipment on site or scheduled for delivery - long-term expansions in Abu Dhabi's pumping capacity could be constrained.

"There is a shortage that could potentially stifle efforts to increase production," said Grant Paterson, the business development manager for SPD, a drilling consultancy. "The rig is the key piece of equipment - without it you can't do anything."

Regionally, the Middle East needs to double the number of rigs from the current level of 351, said Chris Faulkner, the chief executive of Dallas' Breitling Oil and Gas. For unconventional projects such as fracking that require many wells, the regional fleet would have to expand by a factor of five to 10.

Hanging in the balance is Abu Dhabi's master plan to raise oil production capacity to 3.5 million barrels per day (bpd) from levels of about 2.8 million today.

The first phase of that is expected to be completed this year and will bring the emirate to 3 million bpd, bringing the UAE in line with Iran and Iraq, the two countries that vie for the title of Opec's second-biggest producer.

Gas production is also a top priority with power generation needs growing by 11 to 12 per cent a year because of energy-intensive steel and petrochemical plants.

The expansion is being carried out by multibillion-dollar projects ranging from extracting toxic sulphurous gas from Shah to building artificial islands to use as bases for drilling wells as long as 10 kilometres.

OMV, Wintershall and Korea National Oil Corporation are currently involved in exploration ventures in Abu Dhabi. China National Petroleum is expected to follow soon if it is awarded a concession.

"Most of the joint ventures are really aggressively seeking production capacity expansions, so when you look at what Adma [Abu Dhabi Marine Operating Company] is doing, Adco [Abu Dhabi Company for Onshore Oil Operations], Zadco [Zakum Development Company], it's really a very ambitious plan to increase capacity for the UAE, and of course to really increase that capacity the UAE needs to drill more wells," said Morten Maurtizen, the UAE country manager for ExxonMobil.

National Drilling Company, a subsidiary of Abu Dhabi National Oil Company, secures all the rigs for projects in the emirate, including two renovated rigs for ExxonMobil's joint venture project at Upper Zakum and four new ones on order from China.

But they don't come cheaply.

"The rig rates have shot up with the oil price," said Rainer Seele, the chief executive of Wintershall. "Not only the rates have gone up, but also the drilling activities have increased significantly."

Rigs are moving over longer distances than before, he added, as exploration and production move into the Russian Arctic, Chinese shale and other frontiers.

Rig manufacturers are racing to keep up with demand driven in part by a wave of drilling in North America triggered by shale gas, where fracking requires pockmarking the land with wells. Out of an average 3,436 rigs deployed around the world today, 1,943 are in North America, according to the latest count from Baker Hughes, an oilfield services company.

"Only so much horsepower exists on the planet to drill oil and gas wells, and only so much new horsepower is built every year," said Mr Faulkner. "They're not going to build them in two days - it takes time."

* with additional reporting by Florian Neuhof