twitter linkedinfacebookacp contact us

Saudi Arabia's decision to abandon 13mn bpd capacity target astute: Woodmac

Aramco is sticking to its 12mn bpd maximum sustainable capacity target. (Image source: Adobe Stock)

Industry

Saudi Arabia’s decision to abandon the 13mn bpd oil production capacity target is an astute one, say analysts at energy consultancy Wood Mackenzie

Aramco’s announcement on 30 January that it has been instructed by the Ministry of Energy to maintain its Maximum Sustainable Capacity (MSC) at 12mn bpd, and not to continue increasing it to 13mn bpd, was viewed by with consternation by some, and interpreted as a significant policy shift.

However, it should be seen in the context of the Kingdom’s curtailed production, making the need to increase capacity less pressing, said Ann Louise Hittle, Wood Mackenzie’s vice president of Oil Markets.

“Based on our forecast for oil demand to peak in 2030, the shift to a 12mn bpd target from 13mn bpd should be absorbed in the market and not cause a tightening in the supply and demand balance this decade,” Hittle said.

According to Wood Mackenzie’s analysis, for H2 2023, Saudi Arabia’s crude oil production averaged 9mn bpd and this level is projected to continue for H1 2024 with an average of 9.1mn bpd. This will leave Saudi Arabia’s spare crude production capacity at 3mn bpd at present, which is higher than the usual 2 to 2.5mn bpd cushion the Saudis maintain to act as the main swing producer in the global oil market.

Curtailed production

“In recent years, Saudi Arabia’s production was being curtailed at varying levels since the pandemic. With the production agreement and voluntary cuts introduced in 2022-2023, the need to increase capacity was becoming less pressing,” said Hittle. “With spare capacity higher than usual and a persistent need to reduce production, this is an astute time to abandon the 13mn bpd capacity target.”

Alexandre Araman, principal analyst, Upstream for Wood Mackenzie, added that recent cost increases in the industry and pressure on prices likely factored into the decision as well.

“Aramco is heavily investing in a trio of oil megaprojects at Zuluf, Marjan and Berri, along with infill drilling at its legacy fields to slow production declines,” said Araman. “To increase capacity to 13mn bpd, other expansion projects such as Safaniyah and Manifa as well as the commercialisation of new discoveries are more than required. But costs have substantially increased since the pandemic and it makes less sense now for Aramco to go after projects that are getting more expensive when it doesn’t see opportunities to significantly increase production while prices are under pressure.”

Araman added that Aramco is investing in other opportunities besides crude oil, including the development of unconventional gas at the giant Jafurah Basin and the acquisition of a minority stake in MidOcean; in effect swapping additional investment in domestic oil for gas.

Aramco’s strategy is to increase gas production by more than half over 2021 levels, through 2030, subject to domestic demand. The company plans to further expand its gas business, including the development of its unconventional gas resources, increasing production and investing in additional infrastructure to meet the large and growing domestic demand for lower-cost energy. New gas discoveries have boosted these plans.

“While concentration on domestic oil in the world’s most advantaged basin is clearly a huge positive, increasing exposure to domestic and international gas will add more diversity and boost sustainability,” said Araman.