Saudi Arabia reverses plan to raise oil output

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

Saudi Arabia has for decades been the holder of the world’s only significant spare oil capacity, providing a safety cushion for global supplies in case of major disruptions caused by conflict or natural disasters. In recent years, fellow Opec member the United Arab Emirates (UAE) has also built up its capacity.

The kingdom is the world’s largest oil exporter and is pumping around 9-million bpd, well below its 12-million bpd capacity after it cut production as part of an agreement with Opec and its allies last year.

Saudi Arabia, the de facto leader of the oil cartel, and Russia have spearheaded efforts with allies in the Opec+ producer group to cut output to balance markets in the face of rising supply from other big oil producers such as the US.

“Aramco currently has spare capacity of 3-million bpd,” a source with direct knowledge of the matter said. That gives Aramco plenty of scope to increase output if the market needs the oil, the source added.

If needed, Saudi Aramco could always boost its capacity target later, the source said. “If the government decides to go the other way, the company is ready.”

Aramco’s lowered target in no way reflects a change of view on future oil demand scenarios nor stems from any technical issue, the source said.

Aramco was asked by the energy ministry in March 2020 to boost its maximum output capacity to 13-million bpd the same year it had a stand-off with Russia over market share.

March Brent crude futures, which are due to expire on Wednesday, rose 59c to $82.99 a barrel on Tuesday while the more active April contract was up 69c at $82.52. US West Texas Intermediate crude gained $1.10 to $77.88.

Aramco shares were also up marginally, closing 0.2% higher at 31.30 riyals ($8.35).

Saudi Arabia and the UAE have repeatedly called for more investment in oil and gas and argue fossil fuels will be part of the energy mix for decades to come.

Crown Prince Mohammed bin Salman during US President Joe Biden’s visit to the kingdom in July 2022 warned that Riyadh “will not have any more capability to increase production” after it reaches the now-scrapped 13-million bpd goal.

Yet major oil consumers, including the US and the EU, have adopted policies aimed at transitioning away from fossil fuels to cleaner energy which has discouraged such investment.

Analysts questioned whether Saudi has actually changed its outlook and whether it may claw back on capital investment.

The lowered capacity target could reflect “a government expectation that demand for its oil will no longer rise as strongly as previously expected”, Morgan Stanley analysts wrote in a note.

“It may be to save money. But most likely it implies that it sees no need for this extra oil in the global market,” said SEB analyst Bjarne Schieldrop.

Aramco had said it expected capex of $45bn-$55bn in 2023, the highest in its history, and indicated it would raise this in the years to come.

RBC Capital Markets analysts in a note on Tuesday said they expected Aramco to curb spending instead.

“All in all, we expect the capex budget could be lowered by (around) $5bn per annum over the coming years relative to the prior guidance,” they wrote.

Projects without final investment decisions such as the 700,000 bpd Safaniya project “are likely to be deferred”, RBC said.

“We had assumed (a roughly) $12bn budget for the Safaniya project, of which $3bn was to be spent in 2024,” they noted.

Aramco is expected to provide an update on its capital expenditure plans when it announces its 2023 full-year results in March.

Reuters