Arabian Drilling delivers on ambitionsNovember 9, 2023
Ghassan Mirdad, CEO of Arabian Drilling, talks to The Energy Year about Saudi oil and gas drilling contractors’ preparedness for the surge in rig demand and the company’s role as a Saudi drilling champion. Arabian Drilling is specialised in onshore and offshore oil and gas drilling.
In brief, can you introduce Arabian Drilling to our readers?
Arabian Drilling is the national champion. We started in 1964 with one offshore rig. As of today, we have 50 rigs, of which 47 are in use, so our utilisation rate is high.
When it comes to rig count, we are expanding rapidly to meet demand from our client, Aramco. Here are some examples of our recent achievements: the company grew its rig count and steadily reached 35 units in 2017. However, in 2018 alone we added 16 rigs. In 2021, we reactivated nine rigs after the Covid pandemic. In 2022, we completed our offshore fleet expansion by adding five new jackups into the fleet. In 2023, we landed a new contract award with Aramco for an additional 10 land rigs.
As you can see, we have been in continuous growth mode for the last three years, and it shows that we know how to ramp up our operations. We’ve done it before, and we can do it again.
How prepared are national drilling contractors to leverage the surge in rig demand?
Drilling contractors must have a readiness plan that addresses people, equipment, process and infrastructure. Failing to plan is planning to fail in a challenging environment where the supply chain is facing delays and, in some cases, is completely broken. With a thorough plan and a robust execution, drilling contractors should be ready for the upturn in activity in Saudi Arabia.
How will the Jafurah unconventional gas project affect onshore drilling activities?
Onshore drilling will grow mainly through unconventional gas developments. There are several differences between unconventional and conventional well drilling, mainly that the conventional wells are normally quite far from one another.
In unconventional drilling, the wells are very close to each other or as we call it “pad drilling,” where on one pad you can have as little as two wells, all the way up to 12 wells or more. Additionally, the drilling techniques and equipment are different, the type of rigs is different, the operation is different, people’s competency is higher and, last but not least, economy of scale plays an important role.
As Arabian Drilling, we plan to play a part in unconventional drilling projects, as we suspect rig demand will require more than 50 additional rigs or even more. It will be a strategic sector to penetrate. It’s important to note that our existing onshore rigs can be modified into skidding, or “walking,” rigs.
How is the company growing its offshore fleet?
Prior to our IPO in Q4 2022, we operated seven offshore rigs. By the end of 2022, we successfully secured contracts for five additional jackup rigs, two of which started operations in Q4 ‘22 and the three others in Q3 ’23. These new additions signify a remarkable 70% expansion of our offshore fleet.
Arabian Drilling is strategically positioned to capitalise on Aramco’s expansion initiatives. We are actively expanding both our fleet and operational capacity. However, it’s essential to clarify that our growth strategy is not about gaining market share by undercutting competition, rather we are focused on service quality and safety that will deliver operational excellence to our clients and value to our shareholders.
What are the main variables affecting the supply and demand for rigs?
In the early 2010s during peak time, companies were building rigs on a speculative basis, with no secured contract. Even some shipyards themselves built rigs based on speculation. Once the downturn hit in 2015 and was thereafter followed by Covid in 2020, the demand for oil plummeted, rigs stopped working and drilling contractors’ revenue subsided.
Most drilling contractors defaulted on their newbuild rig payment obligations, while many shipyards went bankrupt and some of them merged. Today no shipyard is building rigs based on speculation, and without credit. Payments must be made in advance.
Capital discipline is key in the business of any drilling contractor, as the assets are of very high value.
Drilling operators are facing significant challenges in justifying and ensuring a return on investment for the building of new rigs. They are required to cover 80% of the upfront costs, and even with a contract in place, there is always an element of risk of having contracts being cancelled during an oil price downturn. This situation is likely to create a bottleneck in the supply of jackup rigs.
In addition, Saudi Arabia and the UAE have absorbed a large number of rigs due to their upstream expansion, which has created a shortage in the market.
How can Saudi Aramco’s localisation drive address the high demand for rigs?
This hard situation for international shipyards is a brilliant opportunity for the upcoming International Maritime Industries (IMI) shipyard in Saudi Arabia, a facility for the construction of offshore rigs. It represents an even greater opportunity if Saudi Aramco raises the localisation requirements for rigs built abroad. The Arabian Rig Manufacturing facility, focused on land rigs, is also an excellent initiative by Saudi Aramco and will complement the IMI shipyard perfectly.
What are Saudi Arabia’s advantages as a drilling market?
Despite the global volatility in the oil market, the Saudi market is somehow preserved from such volatility. Aramco has one of the lowest costs per barrel produced in the world. If oil prices tank, it’s still competitive.
Should world institutions decide to impose environmental sanctions against oil and gas producers, Saudi Aramco would potentially be the least affected since it has one of the lowest CO2 emission rates per barrel produced among oil and gas producers globally. Historically, it has been the least affected by downturns in the oil price.
Aramco treats its contractors as actual partners. During Covid, they didn’t cancel drilling contracts. Instead, they temporarily suspended a certain number of rigs for each contractor while ensuring they would be able to ramp up operations swiftly once demand bounced back. This way everyone shared the pain, but no company fell. Due to Saudi Aramco working as a partner with its contractors and its long-term vision, Arabian Drilling and other rig contractors managed to ramp up their operations in 2021-2022 to serve Aramco, with no disturbance to Aramco’s plans.
What are the key takeaways of Arabian Drilling floating 30% of its share capital in 2022?
Our team did an outstanding job with our IPO. We were initially listed at SAR 100 [USD 26.6] per share, raising IPO proceeds in excess of USD 700 million. In September 2023, the shares were trading above SAR 200 [USD 53.3], representing a more than 100% increase in less than a year. We diversified our investors, local and international, and it’s now much easier to raise capital.
Arabian Drilling is the first Saudi upstream services company that underwent an IPO. We performed very well even though investors compared us with peers operating in a much less competitive environment than Saudi Arabia. Here in Saudi, we compete with 17 drilling companies. Our performance during the oil price downturn helped convince many investors, and they were also convinced by the fact that we are serving the largest oil producer in the world.
What is Arabian Drilling’s strategy for expanding beyond Saudi Arabia’s borders?
We can expand in two ways. One is organically, by tendering with regional customers, which we are doing. A faster, easier way is through acquisitions. We’re pursuing both. After our IPO, with an enhanced balance sheet, the number of opportunities multiplied.
On top of this, with the increased demand, we are identifying opportunities to expand in our core market in Saudi, which could potentially offer a better return on investment. Should we stay in Saudi Arabia or pursue international projects? It’s a challenging question to answer.
Growing out of Saudi is part of our strategy. However, with the recent expansion in unconventional drilling in the country, we decided to seize this opportunity and shift our expansion further down the road.
We presented to the investors our five-year business plan roadmap, which included 10 land rigs through regional expansion, as well as four new offshore rigs and another 5-10 land rigs to support Saudi Arabia core market growth by 2026. In reality, we have almost achieved our 2026 target through adding 10 more land rigs through our unconventional activities and five new offshore rigs. It is worth mentioning that the extra offshore rigs are equivalent to four or five land rigs. Therefore, it is fair to say that we have achieved today what we originally envisioned achieving in the next five years.