(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON Oct 31 Soaring oil prices have spurred a
worldwide drilling boom that should result in much-faster growth
in oil production over the next 2-3 years, helping meet strong
growth in consumption, and tempering upward pressure on prices.
The number of rotary rigs drilling for oil and gas stands at
the highest level for over two decades, according to oilfield
services company Baker Hughes.
In the United States, 1,080 rigs were drilling for oil at
the end of October, up from 696 at the same point last year, and
easily surpassing the previous peak of 740 set back in 1987
(Chart 1). Canada has seen a similar upsurge.
Outside North America, 903 rigs were drilling for oil,
beating the previous peak of 832 in 2008, and the highest number
since the late 1980s according to Baker Hughes data (Charts
Intensive activity is needed just to offset natural output
declines from older fields. Nonetheless the upsurge signifies a
large increase in exploration and production (E&P) operations
that should filter through into greater output and more spare
capacity in the short to medium term.
TIME CHANGES EVERYTHING
While it is safe to assume supply and demand trends are
relatively fixed over short periods of up to 2-3 years, beyond
that horizon most elements of both production and consumption
become increasingly flexible and respond strongly to price
Bullish analysts point to low investment and E&P activity
during the extended period of low prices in the 1980s and 1990s
as laying the ground for the subsequent supply constraints and
surge in prices once emerging market oil consumption began to
grow strongly from the late 1990s and especially in the 2000s.
But prices have now been exceptionally high for most of the
last five years. The industry has responded strongly with a big
increase in drilling, and attracted more resources -- everything
from skilled engineers to new rigs and innovation in surveying
and drilling technology.
As a result, not only is there more E&P activity in the
short term, but the industry's E&P capacity continues to expand.
None of this rules out another price spike if demand again
starts growing too quickly for supply to keep up, or if there
are more unexpected disruptions like the loss of Libyan exports.
But the supply side of the industry has already begun to adapt
to meet strong emerging market demand. High prices may already
contain the seeds of their own destruction.
IMPROVING PRODUCTION OUTLOOK
Certainly Saudi Arabia sees no shortfall in medium-term oil
supply or need to boost its peak capacity. State-owned Saudi
Aramco has decided against another major expansion in capacity
from the current 12.5 million barrels per day because other
nations are already boosting output, according to news reports.
"There is no reason for Saudi Aramco to pursue 15 million
barrels (of output capacity)" Aramco Chief Executive Khalid Al
Falih was reported as saying in the Wall Street Journal in early
"It is difficult to see (an increase in capacity) because
there are too many variables happening. You've got too many
announcements about massive capacity expansions coming out of
countries like Brazil, coming out of countries like Iraq. The
market demand is addressed by others" said Falih.
Increased output does not hang on expectations from Brazil
and Iraq alone. The upsurge in E&P activity is global and should
contribute to faster growth in non-OPEC supply in the years
Too many analyses concentrate on near-term disappointments
in non-OPEC output (for example production problems in the North
Sea and Azerbaijan) and project them forward uncritically. The
broader context is more positive, with more intensive E&P
activity than at any time since the 1980s.
Even making adjustments for interruptions, declining output
from old fields and the need to drill more metres for every
barrel extracted, increased E&P will start to reverse decades of
under-investment and improve the supply picture substantially in
The market has already begun to price in improvements on the
supply side. Prospective output increases are one reason why
forward prices for Brent and other benchmarks in 2013 and beyond
remain under $100 per barrel, less than two-thirds of their peak
(Editing by Anthony Barker)