Saudi Aramco said on Tuesday it would cancel plans to expand its oil output, a remarkable turnaround from one of the world’s top oil producers.
Aramco, Saudi Arabia’s national oil company, said it had been instructed by Riyadh’s government to keep its “maximum sustainable capacity” of crude oil production at 12 million barrels a day and abandon efforts to raise it to 13 million barrels a day. day until 2027, a plan that was announced several years ago.
The oil giant did not give a reason for the withdrawal. But it could be a sign that the Saudis are changing their thinking about future supply and demand for their oil. Global oil supplies have recently been stronger than the Saudis expected due to strong output growth from shale drilling in the United States, now the world’s biggest oil producer, and other sources. At the same time, some analysts expect demand to decline over the next decade.
“The decision probably reflects the view that the world does not need as much oil from Saudi Arabia as previously expected,” said Neil Beveridge, an analyst at Bernstein, a research firm.
The government may want to free up money to spend on Crown Prince Mohammed bin Salman’s ambitious development plans, as well as alternative energy sources such as natural gas and hydrogen. Aramco said it was instructed to dial back the expansion by the energy ministry, which is run by Prince Abdulaziz bin Salman, the crown prince’s older half-brother.
A reduction in future capacity at a time of rising tension in the Middle East could raise concerns, but Saudi Arabia’s move does not mean there will be a drop in oil volumes anytime soon, analysts say. Right now, Aramco is producing about three million barrels a day less than it can.
However, Mr Beveridge said the reduction in capacity investment was “bullish” for oil prices. He also said the Saudis may be sending a message to close allies such as the United Arab Emirates and Kuwait that they should back off their own expansionist plans.
Oil prices, however, fell slightly in Tuesday’s trade.
Of course, recent experience is against investing heavily in producing more oil. Saudi Aramco has invested billions to expand production, but the company has been unable to pump nearly its stated capacity of about 12 million barrels per day.
That’s because as leaders of OPEC Plus, the producer group, the Saudis are keeping production at around nine million barrels a day in order to prop up prices.
Aramco said, however, that it would continue with some plans already underway to have extra production to offset the natural decline of existing oil fields.
What the Saudi government may be trying to do is allow Aramco to reduce its investment commitments at a time when high industrial activity has driven up the cost of drilling and other services.
“It gives Aramco room to slow down,” said Richard Bronze, head of geopolitics at Energy Aspects, a research firm. That leeway, he said, would allow the company to choose when it wants to spend money on developing new oil fields rather than forcing it to do so when costs are high.
