The government of Saudi Arabia has directed its state-owned oil giant, Saudi Aramco, to halt its expansion plans and revise its maximum sustained production capacity target to 12 million barrels per day (bpd). This decision represents a reduction of one million bpd from the target set in 2020, signalling a shift in the kingdom’s oil strategy.
For decades, Saudi Arabia has held the distinction of possessing the world’s most significant spare oil capacity, providing a crucial buffer in the event of disruptions to global output. However, the recent directive to scale back Aramco’s capacity expansion plan suggests a recalibration of Saudi Arabia’s approach to oil production and market dynamics.
According to a source with direct knowledge of the matter, the revised target for Aramco’s maximum output capacity does not reflect a change in the assessment of future oil demand or any technical issues. Instead, it stems from a directive issued by the government. Despite this adjustment, the source emphasized that Aramco remains prepared to adapt to any alternate directives from the government.
The decision to lower the capacity target comes amidst ongoing efforts by Saudi Arabia and fellow OPEC members to balance global oil markets in the face of fluctuating supply and demand dynamics. Currently, Saudi Arabia is pumping approximately 9 million bpd, well below its capacity, as part of an agreement with OPEC and its allies to stabilize oil prices.
Aramco, which currently maintains a spare capacity of 3 million bpd, is poised to augment its flexibility in responding to market conditions with an additional 1 million bpd through a forthcoming liquids displacement program, as outlined by the source.
While Saudi Arabia and the United Arab Emirates have advocated for increased investment in oil and gas, global trends towards cleaner energy have prompted a reevaluation of future investment strategies. The lowered capacity target for Aramco may reflect a realization that future oil demand may not align with previous projections, as noted by analysts.
In response to the directive, Aramco is expected to reassess its capital expenditure plans, with potential adjustments to its budget and project timelines. Analysts anticipate a reduction in Aramco’s annual capital expenditure by approximately $5 billion relative to prior guidance, with a focus on prioritizing key growth areas such as gas and new energies.
The revision in Aramco’s capacity target is poised to have broader implications for Saudi Arabia’s economic diversification efforts and government spending priorities. Lower capital expenditure by Aramco could potentially translate into increased transfers to the government and the Public Investment Fund (PIF), supporting the kingdom’s Vision 2030 objectives and the diversification of its economy.
As Saudi Aramco prepares to announce its 2023 full-year results in March, stakeholders await further updates on the company’s revised capital expenditure plans and strategic priorities in the midst of evolving global energy transitions.