Aramco’s upstream comes into focus
Saudi heavyweight must achieve ambitious government pledge despite revenues feeling the squeeze
The Saudi energy ministry’s directive for state-owned Saudi Aramco to increase its maximum sustainable capacity (MSC) by 1mn bl/d to 13mn bl/d will be a challenge for the company given financial pressures and competing upstream priorities.
The immediate trigger for the directive, issued on 11 March, was the price war launched just days earlier when Opec+ talks failed to prolong production cuts. The economic backdrop was further weakened by the Covid-19 pandemic.
Aramco did not disclose a timeframe for bringing the additional capacity online or say where it would come from. But the company began by digging into existing spare capacity and inventories to raise output by roughly 2.5mn bl/d to a historic high of 12.3mn bl/d.
Aramco claims such levels could be maintained for up to a year without additional capex. However, this seems improbable given the dangerous lack of production flexibility inherent in pumping full-tilt. There is an additional uncertainty around how the impact on the state budget of c.$30/bl oil would translate to Aramco’s finances.
While the government’s directive may have been a politically motivated knee-jerk reaction, existing expansion plans do offer a degree of coherence with a larger MSC in the medium-term. In 2017, as prices recovered from a mid-decade slump, Aramco launched three major offshore field development projects designed to yield a combined capacity of 1.15mn bl/d. It previously indicated, though, that the new production would be used to offset declines elsewhere rather than to add to the MSC, which has stood at 12mn bl/d for years.
Production drop-off at maturing assets have long been a source of domestic concern as well as global debate. A programme of rolling redevelopment at offshore fields has been underway for more than two decades. But, assuming Aramco is not sitting on an undisclosed find, new capacity planned at the Berri, Marjan and Zuluf fields now appears destined not to help tackle declines but instead to contribute towards the larger MSC.
Declines at maturing assets have long been a source of domestic concern as well as global debate
The good news for the government is that two of the three projects are already in the engineering, procurement and construction (EPC) phase. Aramco awarded contracts worth some $18bn in July for the Berri and Marjan projects, which are due to deliver 250,000bl/d of Arabian light crude and 300,000bl/d of Arabian medium crude respectively. A tender for the main EPC packages on the Zuluf scheme, designed to add 600,000bl/d, had been expected this quarter.
The Marjan and Berri schemes should deliver roughly half the MSC hike by mid-decade—although contract durations could be extended to spread the outlay should the revenue squeeze persist. The implementation phase at Zuluf appears likely to be pushed into next year at the earliest.
But the bad news is that Aramco’s finances had already taken a hit even before prices declined to four-year lows, triggered by Covid-19 and failed Opec+ talks. The company was obliged to disclose its financial situation after listing on the local Tadawul stock market in December. The 2019 results were presented on 15 March and made unhappy reading for shareholders. Net profits slumped by 21pc last year, to $88.2bn, on the back of a combination of subdued prices and the deep production cuts aimed at supporting them.
13mn bl/d – Aramco MSC target
With this year’s results looking likely to be even worse, the company declared its intent to sharply reduce capital spending. Aramco had already pared back by 6.6pc to $32.8bn in 2019. In 2020, it will cut by up to 24pc, to $25-30bn, with outlays in 2021 and beyond "under review".
The downstream appears likely to be the main casualty. Progress on a suite of refining and petrochemicals projects planned in the US and across Asia is expected to stall. At home, a landmark joint venture with Saudi state-controlled petrochemicals producer Sabic to develop a plant capable of producing chemicals directly from crude is likely to face delays.