During the COVID-19 pandemic, the drop in demand for crude has prompted oil producers to accept the possibility that the market for fossil fuels has peaked and the time for a global energy transition has arrived.
But Saudi Aramco aims to raise its production capacity so that when demand picks up, it can pump as much of the kingdom’s large oil reserves before a move to cleaner energy makes crude all but worthless, according to industry sources and analysts.
Well-devised strategy
Aramco estimates that with approximately 20 percent of the world’s proven reserves and production costs of only $4 a barrel, it will beat rivals and continue to make money even though lower oil prices make it unprofitable for rivals, the sources said.
Following an oil price war with Russia in March this year, Saudi Arabia now plans to increase its ability to 13 million barrels a day (bpd) from 12 million bpd, officials and sources have said.
The strategy of Aramco contrasts dramatically with Western rivals such as BP and Shell, who aim to reduce oil production spending so that they can invest in clean and green energy as they prepare for a low-carbon future.
The state-run oil giant is also revising aggressive downstream expansion plans with a renewed focus on oil, and now aims to capture assets in existing projects in key markets such as India and China, rather than constructing costly mega plants from scratch, the sources said.
“We expect oil demand growth to continue in the long term, driven by rising populations and economic growth. Fuels and petrochemicals will support demand growth speculation about an imminent peak in oil demand is simply not consistent with the realities of oil consumption,” Aramco said in a statement.
Saudi Vision 2030
Sources familiar with Saudi policymaking claim the likelihood that demand for crude has peaked makes it more pressing for the world’s biggest oil exporter to tap its reserves while it can generate cash to fund Saudi Arabia’s economic reforms.
Under his ambitious Vision 2030 strategy to diversify the economy, Saudi Crown Prince Mohammed bin Salman is trying to build new industries to decrease the kingdom’s reliance on oil. But Prince Mohammed needs lots of cash for the plan to succeed and Aramco’s oil sales are his main source of revenue.
As policymakers tighten carbon regulations, Aramco also focuses on how to pump more, cleaner fuel while reducing greenhouse gas emissions to give it a stronger chance to compete. The oil output of Aramco already has a so-called carbon intensity which is the lowest among its rivals and by the end of this year it wants to drive that down even further.
“Our priorities are to sustain our low carbon intensity and low cost of production, while delivering the energy supplies the world needs. Aramco is researching ways to reduce emissions through technology, such as making engines more efficient, better fuel formulations, carbon capture and sequestration, and turning CO2 and hydrocarbons into useful products,” the company said.
Ready for battle
Sources say that Aramco’s decision to increase its capacity to 13 million barrels a day is essential to its strategy as it wants to be able to win a greater market share as demand recovers.
Saudi Arabia also needs to be prepared for the oil price uncertainty anticipated after COVID-19 so that it can continue investment plans and economic reforms that are largely unaffected by crude prices at $40 a barrel, or $60, sources and analysts said.
The idea in Saudi Arabia is that shutdowns in places like the United States, where shale oil is expensive to produce, could boost prices, even though oil prices are expected to remain depressed and could stay around $50-$60 for many years.
The fall in peak oil demand could also lead to a new price war and an end to attempts to curb supply by the Organization of Petroleum Exporting Countries (OPEC) and its allies, so Saudi needs to be prepared and battle-ready, sources said.
Before they lose value, all oil producers will face a similar need to monetize their reserves and energy assets. Besides Saudi Arabia, OPEC members’ economies such as Iraq, Russia, Iran and Venezuela are all heavily dependent on oil and gas.
