FEATURE: Saudi Aramco faces tough 2021 as rivals race for oil capacity

Saudi Aramco may be forced to play catch-up in 2021 as rival state-controlled oil companies closely aligned to OPEC policy in the Middle East race to add new production capacity and win back market share despite deep pandemic-induced output cuts.

Aramco began 2020 with a chunky capital expenditure budget of between $35 billion and $40 billion, but this figure was progressively lowered throughout the year as the demand shock caused by the global pandemic forced the kingdom into severe production cuts along with OPEC, Russia and other allies.

By the third quarter, Aramco’s capex had been halved to $20 billion. Its pledge to maintain a hefty $75 billion dividend to shareholders — while many IOCs have slashed theirs — is an albatross, as well.

However, the company remains focused on lifting Saudi Arabia’s maximum spare capacity from 12 million b/d to 13 million b/d, sources said, and therefore the capex cuts will not be exacted on projects aimed at increasing production.

“The $10 billion capex cuts will likely be deployed among projects in development, where their development is delayed. It’s not going to impact production or any of the pipelines,” said one Saudi-based analyst, who asked not to be named due to the sensitive nature of his position.

Aramco’s tighter spending has resulted in several international contractor companies working on pipeline and offshore projects not getting paid for several months, three sources told S&P Global Platts. The payments are set to be delayed further, with Aramco not intending to make any payments to these companies until 2021, a source added.

“The offshore sector is suffering from this. The reasons cited are cutting back on production expansion plans, to align spending with cash flow and dividend commitments,” said a second source. “It’s unlikely that the contractors will be paid in full. We expect some resolution, albeit in Aramco’s favor.”

Aramco did not respond to a request for comment.

Keeping up with neighbors

The company’s retrenchment stands in contrast with the kingdom’s close neighbors and OPEC partners in the Gulf.

State-run ADNOC in the UAE, which has about a third of Aramco’s production capability, approved in November a mammoth $122 billion capex program through to 2025 as Abu Dhabi pushes to raise capacity by about 25% to 5 million b/d. Although capex has been cut in Kuwait, its smaller state-run producer will still spend more per barrel on projects than Aramco.

On the one hand Aramco’s fiscal discipline looks prudent. Oil prices spent most of 2020 in the doldrums well below $50/b and, under the OPEC+ supply accord, the kingdom was forced to keep output below 9 million b/d for much of the year, leaving it with some 3 million b/d of unused spare capacity.

Saudi Arabia’s quota under the deal has eased to 9.119 million b/d for the first quarter of 2021, but lingering concern over the uncertain global economic outlook prompted energy minister Prince Abdulaziz bin Salman to announce Jan. 5 that the kingdom would unilaterally cut an additional 1 million b/d below that for February and March.

Aramco subsequently informed its key customers in Asia that term allocations of crude would be slashed 10-15% for February-loading barrels, market sources told S&P Global Platts.

Work slowdown

Aramco – which has listed a small proportion of its shares on the Saudi stock exchange — started 2020 with the strategy of expanding and not standing still.

Prince Abdulaziz had directed the company’s engineers in March to increase its spare to 13 million b/d as the kingdom prepared to fight a poorly timed price war against Russia, which appeared on the brink of ending its alliance with OPEC for fear of losing market share to US shale.

The Dharan-based oil company — which is larger than BP, Shell and Exxon Mobil combined — may still be planning to increase capacity in 2021, but work on vital upstream projects has slowed, sources have told Platts.

The slowdowns in work have mainly focused on costlier extraction schemes, one source said.

These include the $15 billion Marjan offshore field development, as well as peripheral offshore fields, and difficult onshore assets.

Further work programs on fields such as Khursaniyah, and legacy assets like Khurais and Abqaiq that need workovers and rehabilitation, are being delayed, the source said, whereas at Aramco’s low-cost giant fields such as Ghawar — the world’s largest — production is increasing.

“There are areas outside Ghawar that are being relied on in times of trouble because drilling there is so cost effective,” said a source with knowledge of the kingdom’s projects. “There isn’t a place in Ghawar that doesn’t have a drill, it is very dense. They’re beating the hell out of it.”
Source: Platts