Aramco reassesses priorities
An income squeeze is forcing upstream delays and a reappraisal of the company’s downstream portfolio
The revelation by state oil heavyweight Saudi Aramco in early August that second-quarter profits had slumped by almost three-quarters on the back of the oil price collapse and its deep production cut response was accompanied by similarly predictable news that capex would end up at the southern end of guidance.
Spending had already been lowered to $25-30bn in March. Two weeks after the results were released, the company announced the creation of a new division dedicated to “portfolio optimisation”—signalling the intent to review its increasingly sprawling and internationalised downstream business and potentially also to consider the partial asset sales mooted by its chairman six months before.
Decisions on where to wield the knife are relatively straightforward in the core upstream business, which is still a uniquely domestic affair. With Opec quotas set to keep Saudi production well below 10mn bl/d until April 2022 and the demand picture thereafter uncertain, the company's three major offshore oilfield expansion projects—designed to yield a combined 1.15mn bl/d—are obvious targets.
$110bn – Cost of Jafurah development
Contractors selected last year for work to add 300,000bl/d and 250,000bl/d at Marjan and Berri respectively have been told to slow the work schedule by 6-12 months to spread an $18bn+ cost. Tendering on a planned 600,000bl/d increment at Zuluf has also been paused.
But the ten signatories of so-called ' long-term agreements' with Aramco—conferring automatic and exclusive right to bid for jobs geared towards sustaining existing capacity at the kingdom's ageing Gulf fields—report a steady flow of contracts. Their client may be taking advantage of low bids owing to a dearth of other work to accomplish essential maintenance, a cost-effective means of sustaining its capacity cushion for when next required.
A $110bn price tag— even spread over 16 years—makes the plan to develop the c.200tn ft³ (5.66tn m3) Jafurah unconventional gas field in the Eastern Province another clear candidate for deferral. The scheme, which has been at various preliminary stages since the discovery of the shale deposits early last decade, was trumpeted in February as the central plank of the kingdom's gas strategy—designed to sustain a production plateau of 2.2bn ft³/d through to 2036.
But other projects afford some breathing space to the challenge of meeting domestic demand. These include the just-completed 2.5bn ft³/d Fadhili gas plant and the 1bn ft³/d Haradh and Hawiyah gas compression project at the supergiant Ghawar onshore oilfield. The evaluation of bids for three of the five main contracts on the c$3.5bn Jafurah first phase has been extended. Submission deadlines on the remaining two have been postponed.
Unpicking the downstream
The downstream presents far more complex challenges, even without also integrating the disparate assets of newly acquired petrochemicals counterpart Sabic. The late August creation of the new '"integrated corporate development organisation" led by former head of downstream Abdulaziz al-Gudaimi—reporting directly to chief executive officer Amin Nasser—suggests institutional recognition of the need for a more holistic portfolio approach.
Aramco had already been rapidly expanding domestically and overseas in the downstream for several years, but some of its Asian plans from the second half of the 2010s have already been found wanting on review. The firm walked away from a proposed investment in an Indonesian refinery last year. And while it denied multiple reports last month that it had suspended participation in a joint venture to develop a refining and petrochemicals complex in northeastern China, doubts remain about its commitment to the project.
India remains its key long-term target market. But Aramco may now concentrate on completing a planned $15bn acquisition of 20pc of the oil-to-chemicals business of the local Reliance Industries conglomerate—conferring on it part-ownership of the world’s largest refinery. And that may see it abandoning the slow-moving Ratnagiri project, provisionally agreed in 2017, to develop a giant greenfield refining and petrochemicals complex in the west of India. The estimated cost of the project, which would be conjunction with state-owned firms Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum, has ballooned by around 80pc, to approximately $70bn.