Saudi Arabia shelves plans to lift crude capacity to 13 million bpd

Quantum Commodity Intelligence – Saudi Arabia has dramatically cancelled plans to boost its production capacity by another 1 million bpd over the next few years, a move that would have lifted its crude potential to 13 million bpd.

The surprise announcement came in a statement from state-owned Saudi Aramco, with a governmental directive ordering the world's largest crude oil exporter to pause further expansion of its oil production capacity.

"Aramco announces that it has received a directive from the Ministry of Energy to maintain its maximum sustainable capacity (MSC) at 12 million barrels per day and not to continue increasing MSC to 13 million bpd," the company said in a statement on Tuesday.

Some analysts saw the move as an admission that future demand will not be there to match increased supplies as the energy transition speeds up, while Middle East producers face stiff competition from the booming US shale sector and surging South American production.

Aramco has invested billions over the years to develop and maintain production capabilities, while plans to lift capacity to 13 million bpd by 2027 were partly to conserve a sufficient supply 'cushion' to cover demand during times of crisis.

However, Saudi output slipped below 9 million bpd in the fourth quarter as the Kingdom reined in production as part of concerted OPEC+ action, leaving Saudi with around 3 million bpd of idled capacity, which still incurs a significant cost to maintain. Combined OPEC+ spare capacity is over 5 million bpd.

Rather than develop further capacity that may or may not be needed at the back end of 2020, analysts said that Saudi can also use the billions saved in development costs to invest in other sectors of the economy, as the country transitions away from a fossil fuel-based economy.   

Costs

Analysts have previously said the development costs of the additional capacity scheduled for 2027 are significantly higher than current production costs, with incremental barrels potentially 50% higher than current per barrel costs.

Saudi Arabia has also been expanding rapidly in downstream investments, including a number of overseas investments, particularly in China.

On Monday, Saudi Arabian energy minister Prince Abdulaziz bin Salman seemingly hit out, calling for greater "joint efforts" to ensure oil market stability and that the task should not be left to Saudi Arabia alone.

This was seen as a call on the international community to provide security in the region, but Saudi has also previously flagged the costs associated with it being expected to maintain a sufficient supply cushion in the form of idled capacity.

"Saudi Arabia and its partners have always been proactive in supporting the stability of the oil markets, but we believe that the health and safety of the international oil market is not the responsibility of Saudi Arabia alone but also the duty of all players in the global oil market," said the minister.

Separately, neighbouring UAE is still pressing ahead to boost capacity to 5 million bpd by 2027, up from the current 4.5 million bpd.