Adds JP Morgan report

By Francesca Landini

MILAN, Jan 30 (Reuters) - Shares in Italian energy contractor Saipem SPMI.MI plunged by 12% on Tuesday after damage caused by an incident involving one of its pipe-laying vessels and a decision by Saudi Aramco 2222.SE to drop its oil capacity expansion plans.

Saudi Arabia's government on Tuesday ordered state oil company Saudi Aramco to halt its oil expansion plan and to target a maximum sustained production capacity of 12 million barrels per day (bpd), one million bpd below a target announced in 2020.

Analysts said the decision could reduce demand for oilfield services providers including Saipem.

In 2020 the Italian company and Aramco signed a 12-year agreement covering onshore engineering and construction activities.

Saudi Arabia represents 7% of global oil sector capital expenditure and 11% of total offshore capital expenditure to 2030, Morgan Stanley said in a report, citing data from energy think tank Rystad.

The broker said that a significant proportion of Saipem's shallow-water fleet was contracted to Aramco.

The main impact will be on Saipem's pipeline projects, JP Morgan said in another report, adding that it estimated Aramco's move would have a 2-3% impact the Italian group's core earnings over the next five years.

Shares in Saipem closed 12.7% down at 1.32 euros on the Milan bourse, touching their lowest level since late October.

Elsewhere, top oilfield services provider SLB SLB.N tumbled nearly 10% after Aramco's announcement and weighed on the benchmark S&P 500 index.

Earlier on Tuesday Saipem confirmed that an incident on works at a pipeline managed by Australian group Woodside WDS.AX had involved the Saipem pipe-laying vessel Castorone but there were no injuries and no major damage to the vessel.

Woodside also confirmed there were no injuries to personnel and only localised damage to Saipem's vessel. Woodside continues to support its contractor in the ongoing trunkline installation, a Woodside spokesman said.

(Reporting by Francesca Landini
Additional reporting by Alessandro Parodi and Giancarlo Navach
Editing by Louise Heavens and David Goodman)

((francesca.landini@thomsonreuters.com; +39 02 66129437; Reuters Messaging: reutersitaly.thomsonreuters@reuters.net))