Saudi Aramco said on Tuesday it would cancel plans to expand its oil production, a notable reversal by one of the world's top oil producers.
Aramco, Saudi Arabia's national oil company, said the Riyadh government had ordered it to maintain its “maximum sustainable capacity” of crude oil production at 12 million barrels per day and give up the initiative to increase it to 13 million. barrels per day by 2027, a plan announced several years ago.
The oil giant did not provide a reason for the pullback. But it could be a sign that the Saudis are changing the way they think about future supply and demand for their oil. Global oil supplies have recently been stronger than the Saudis anticipated due to strong growth in production from shale drilling in the United States, which is now the world's top oil producer, and other sources. At the same time, some analysts expect demand to stabilize over the next decade.
“The decision probably reflects a view that the world does not need as much Saudi oil as previously expected,” said Neil Beveridge, an analyst at Bernstein, a research firm.
The government may want to free up money to spend on Crown Prince Mohammed bin Salman's ambitious development plans, as well as alternative energy sources such as natural gas and hydrogen. Aramco said he had been instructed to curb the expansion of the Energy Ministry, led by Prince Abdulaziz bin Salman, the crown prince's older half-brother.
Reducing future capacity at a time of rising tension in the Middle East could raise concerns, but the Saudi move does not mean there will be a drop in oil volumes any time soon, analysts say. Right now, Aramco is producing about 3 million barrels a day less than it can.
Still, Beveridge said reduced investment in capacity was “bullish” for oil prices. He also said the Saudis could be sending a signal to close allies like the United Arab Emirates and Kuwait that they should back off their own expansion plans.
However, oil prices fell slightly in trading on Tuesday.
Certainly, recent experience advises against major investment in the production of more oil. Saudi Aramco has been investing billions to expand production, but the company has not been able to pump anywhere near its stated capacity of around 12 million barrels per day.
This is because, as leaders of OPEC Plus, the producer group, the Saudis have been keeping their production at around 9 million barrels per day to prop up prices.
Aramco said, however, that it will continue with some plans already underway to have additional production to offset the natural decline of existing oil fields.
What the Saudi government may be trying to do is allow Aramco to reduce its investment commitments at a time when high industrial activity has raised the costs of drilling and other services.
“Aramco is being given room to slow down,” said Richard Bronze, head of geopolitics at Energy Aspects, a research firm. This leeway, he said, would allow the company to choose when it wants to spend money developing new oil fields rather than being forced to do so when costs are high.
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