By Rakteem Katakey |Bloomberg, via RigZone.com| Saudi Aramco abandoned a plan to boost its oil output capacity in a huge reversal that will raise questions about the kingdom’s view on future oil demand. The surprise move comes after the world’s biggest oil producer had said in November that it was progressing “very well” with a multibillion-dollar project to boost capacity to 13 million barrels a day by 2027 as demand in China and India continues to grow. Saudi Arabia currently has a capacity of 12 million and is producing about 9 million a day, after it curbed output as part of OPEC+ efforts to revive the global oil market and prevent a surplus.
“It’s the clearest sign yet that the kingdom is moderating its expectations of global oil demand growth in the coming years,” said Vandana Hari, the Singapore-based founder of Vanda Insights.
The change of plan will take out a significant portion of the supply buffer that traders were expecting for later this decade, a gap that may be hard to fill by others. However maintaining the additional spare capacity is expensive, especially as oil demand is likely to slow in the future with the energy transition.
While crude remains the backbone of the economy, Saudi Arabia is expanding in natural gas, chemicals, and renewables. These businesses are likely to get a share of the money saved from the oil capacity expansion, said a person familiar with the plans.
It may also free up additional funds for the government. Aramco’s generous dividends have become ever more vital for Crown Prince Mohammed bin Salman’s pursuit of expensive projects such as the futuristic city Neom, the purchase of high-profile footballers and stakes in sporting leagues while looking to diversify the economy from oil.
The oil market, meanwhile, doesn’t need Saudi production capacity at 13 million barrels a day because there’s ample levels available after the Organization of Petroleum Exporting Countries reduced output, according to Amrita Sen, director of research at consultant Energy Aspects Ltd.
“We have to ask ourselves the question – over what timeline” will Aramco keep the lower capacity, she said on Bloomberg Television.
Aramco is also expecting an additional 1 million barrels a day of supply to be freed up for exports by 2030 due to the kingdom’s wider domestic plan to stop burning oil for power generation.