The tight oilfield supply market is forcing Saudi Arabia to reach out to new contractors and offer more generous terms as it embarks on an unprecedented drilling campaign to raise production.

In recent months, executives from Saudi Arabian Oil Company, or Saudi Aramco, have flown to Houston to lure drilling companies to participate in the boom.
Aramco, the national oil company, has already significantly raised drilling “dayrates,” or daily payments, to attract vendors to the kingdom and is facing pressure from at least one leading contractor to further sweeten the terms.
The Saudi predicament illustrates how high commodity prices and limited infrastructure are altering the rules of engagement between energy producers and oilfield suppliers. As architects of the industry’s purse-strings, operators have traditionally enjoyed wide leverage in their dealings with oil service companies, such as those that operate the rigs used in drilling for oil or gas.
Now these companies – whether private oil giants or national oil companies – are being forced to haggle with the comparatively modest oilfield service business, which includes a handful of mostly-US contractors that own and operate the most technologically-endowed drilling rigs.
“The Saudis have usually been indifferent to their relationships with the oil services companies,” said Kurt Hallead, an analyst with RBC Capital Markets in Austin, Texas. “Now they are much more willing to reach out and say, ‘Are we treating you all-right? Are we paying you on time? The power is in the hands of the service company,” Hallead said.
That’s being reflected in the share prices of the rig companies too, most of which are up about 50 per cent this year, slightly better than the already hot energy sector.
The effect of the altered landscape is especially pronounced for the Saudi relations with drillers because of the magnitude of the buildup, part of a multi-billion dollar capital programme to raise production capacity by 14 per cent through 2010.
The Saudi rig count has already surged to 42 from 31, according to Baker Hughes, but the number is expected to go far higher. David Pursell, an analyst at Pickering Energy Partners Inc., sees the number of oil-related drilling rigs jumping from 15 to 80 or 100 in just a couple of years. He likens the surge to “asking a marathon runner to start sprinting.”
The kingdom, the de facto leader of the Organisation of Petroleum Exporting Countries, faces exceptional pressure to lead the energy industry’s response to global demand growth.
The International Energy Agency, the energy watchdog for rich consuming nations, and the US want Saudi Arabia to invest heavily in raising its crude output.
To spur participation from a wider range of suppliers, a team of Aramco executives visited Houston this summer to meet with a range of drilling companies. Such meetings are considered routine with most operators, but the campaign was a novelty for Aramco.
“There have been representatives coming to solicit rigs for Saudi Arabia,” said James Day, chief executive of Noble Corp, which has previously had rigs in Saudi Arabia, but not now. “I’ve not seen that before. I think that represents how tight the market is.”
Rowan Companies Inc (RDC) chief executive Danny McNease, who also met with the delegation, said the Saudi pitch emphasised the desire to build a long-term business relationship.
“They’re saying ‘These are our plans, and we want you to participate in that, and this will be a long-term relationship’,” McNease said in an interview. “Probably for the next 5-10 years, there’s going to be a lot of work.”
Rowan, which hasn’t worked in Saudi Arabia since the early 1980s, originally signed a contract to provide five offshore rigs. However, the company lost one of the five rigs during Hurricane Rita.
As a result, the contract has been modified, and Rowan will deliver the four rigs around December, said Rowan spokesman Bill Provine.
The Saudi authorities want more equipment, but Rowan may not be able to bid because all of its equipment is already taken, Provine said.
McNease said he was lured back to Saudi Arabia in part by the kingdom’s willingness to commit to long-term contracts. Rowan’s contracts are for three years at a daily cost of about $100,000, compared with about $65,000 under the previous contract. Rowan was also able to extract a commitment from the Saudis to cover additional material, labor and insurance costs, all of which have been rising in recent years, McNease said.
Nabors Industries Ltd (NBR), which has long been the biggest US driller in Saudi Arabia, is pressing for a similar deal.
While Nabors welcomes the Saudi willingness to commit to multi-year contracts, the company will sign contracts elsewhere if the kingdom does not step up, said chief executive Gene Isenberg.
“We’re telling them we’ve now lost X-dollars, and if they want us to continue, we want X-dollars,” Isenberg said. “Competition is going to make the Saudis more flexible for the assets they need and want.”
This is not the first time drilling contractors have held the upper hand in negotiations with operators – the last banner period came in the mid-1990s before the oil price crash of 1998.
But such periods are usually short-lived for a sector that has been mostly plagued by overcapacity since the oil boom of the 1970s and early 1980s.
“The drilling companies have to balance long-term business prospects with short-term pressure on the operator,” said Bryan Bartlett, the former chief engineer for Aramco.
But the drillers know there is an ever-shrinking set of available rigs with top technology and trained crews. Leading drillers are loathe to take rigs from one client to give to another and Saudi Arabia has security-related issues that have kept some US companies away.
As the Saudi buildup continues “it’s my expectation we’ll participate in that growth,” said Isenberg, the Nabors chief executive.
“The Saudis are important, but everything else is booming as well,” he said. “We have alternatives that didn’t exist a year ago. Right now, there's more demand than supply.”