Saudi Aramco abandoned a plan to boost its oil output capacity in a huge reversal that will raise questions about the kingdom’s view on future oil demand.
The surprise move comes after the world’s biggest oil
producer had said in November that it was progressing “very well” with a
multibillion-dollar project to boost capacity to 13 million barrels a day by
2027 as demand in China and India continues to grow. Saudi Arabia currently has
capacity for 12 million and is producing about 9 million a day, after it curbed
output as part of OPEC+ efforts to revive the global oil market and prevent a
surplus.
Aramco will update its capital spending guidance when it
announces annual results in March, it said in a statement.
“It’s the clearest sign yet that the kingdom is moderating
its expectations of global oil demand growth in the coming years,” said Vandana
Hari, the Singapore-based founder of Vanda Insights.
The change of plan will take out a significant portion of
the supply buffer that traders were expecting for later this decade, a gap that
may be hard to fill by others. But maintaining the additional spare capacity is
expensive, especially as oil demand is likely to slow in the future with the
energy transition.
While crude remains the backbone of the economy, Saudi
Arabia is expanding in natural gas, chemicals and renewables. These businesses
are likely to get a share of the money saved from the oil capacity expansion,
said a person familiar with the plans.
Additional Funds
It may also free up additional funds for the government.
Aramco’s generous dividends have become ever more vital for Crown Prince
Mohammed bin Salman’s pursuit of expensive projects such as the futuristic city
Neom, the purchase of high-profile footballers and stakes in sporting leagues,
while looking to diversify the economy from oil.
The oil market, meanwhile, doesn’t need Saudi production
capacity at 13 million barrels a day because there’s ample levels available
after the Organization of Petroleum Exporting Countries reduced output,
according to Amrita Sen, director of research at consultant Energy Aspects Ltd.
“We have to ask ourselves the question – over what timeline”
will Aramco keep the lower capacity, she said on Bloomberg Television.
Aramco is also expecting an additional 1 million barrels a
day of supply to be freed up for exports by 2030 as a result of the kingdom’s
wider domestic plan to stop burning oil for power generation.