Saudi Aramco was asked by the Ministry to step back to the previous target of 12 million bpd yesterday.
Saudi Arabia ordered the government-owned oil company Saudi Aramco to suspend its plans for expansion and cut down on its planned maximum sustainable oil production capacity to 12 million barrels per day (mbpd); four years ago, this cap was increased up to 13 million bpd.
Aramco was directed by the Ministry of Energy back in March of 2022 to increase the maximum production capacity to 13 million bpd. It had a little standoff situation with Russia the same year over market share. Aramco was asked by the Ministry to step back to the previous target of 12 million bpd yesterday.
For decades, the Saudi Kingdom has held the world’s only largest spare oil capacity to keep a hedge to absorb any major disruptions to global production like border conflicts or natural calamities. Their neighbor and fellow OPEC member, the United Arab Emirates, has also increased their capacity in the past few years.
A source with direct knowledge of the matter said that this decision to lower targets neither indicates any change in their viewpoint regarding future oil demand nor any kind of technical fault; it is simply a government order that Aramco is following.
Saudi Arabia, the largest global oil exporter, is producing nearly 9 million bpd, slightly less than its capacity after the kingdom reduced oil output as per an agreement with OPEC+ in 2023. The oil output was reduced to even out the market supply flooded with exports from non-OPEC producers.
The source added that currently, Aramco has a spare capacity of 3 million bpd, which will be helped by a very important liquids displacement program that will require an additional one million bpd of oil and refined products for production. This volume further adds to the strength of Aramco to stay unharmed and smoothly pass through adverse market conditions.
Saudi Arabia and the UAE have been at the forefront of advocating that fossil fuels are here for a few more decades and cannot be replaced by the energy mix in the next few years. They have also called for more capita expenditure in the oil and gas sector globally.
Crown Prince Mohammed bin Salaman had said that Riyadh would not be able to increase production after it touches 13 million bpd, which has now been scrapped, during the visit of US President Joe Biden in July 2022.
Analysts question whether the kingdom has altered future predictions and pulled hands from further capital investment.
Morgan Stanley analysts wrote that the reduced capacity target could signal a change in the government’s expectation regarding future oil demand.
The United States and the European Union, major oil importers, have transitioned towards crafting policies for a transition from crude to cleaner sources of energy, which might have reduced capital investment plans.
RBC Capital Markets analysts noted yesterday that they expect Aramco to reduce spending. Last year, Aramco expected a capex of $45-55 billion and predicts that this might increase in the coming years.
RBC analysts anticipate that the capex budget could be lowered by almost $5 billion annually in the upcoming years. They say that the planned $12 billion Safaniya project with a capacity of 700,000 bpd will be halted for now.
Aramco is yet to publish its annual report, which will have an update on its capital expenditure for last year; results are due in March.
Amin Nasser, CEO of Aramco, said that he views oil demand at 104 million bpd for the current year. This represents an increase of 1.5 million bpd, and low stocks will help tighten the market further.
According to the International Energy Agency (IEA), the global oil demand touched a high of 101.7 million bpd last year and is expected to grow up to 103 million bpd this year.