Saudi Aramco on Tuesday said it was asked to cut its planned maximum sustainable oil production capacity to 12 million barrels a day (bpd), having raised it to 13 million bpd almost four years ago.
The move in no way reflects a change of view on future oil demand scenarios nor stems from any technical issue, but was simply a directive from the government, a source with direct knowledge of the matter told Reuters.
"If the government decides to go the other way, the company is ready," the source said.
Aramco was asked by the Energy Ministry in March 2020 to boost its maximum output capacity to 13 million bpd the same year it had a stand-off with Russia over market share. On Tuesday, the ministry asked Aramco to return to its previous target of 12 million bpd, the company said.
"Aramco currently has spare capacity of 3 million bpd and that will be supported in the near future by a very important liquids displacement programme which will avail another 1 million bpd of oil and refined products for production," the source added.
Benchmark Brent crude futures LCOc1 were little changed, up about 0.04% to $82.43 per barrel as of 1108 GMT.
Capex U-Turn?
Analysts questioned whether Saudi has actually changed its outlook and whether it may claw back on capital investment.
The decision could reflect "a government expectation that demand for its oil will no longer rise as strongly as previously expected", Morgan Stanley analysts wrote in a note.
"It may be to save money. But most likely it implies that it sees no need for this extra oil in the global market," said SEB analyst Bjarne Schieldrop.
Aramco had said it expected capex of $45-55 billion in 2023, the highest in its history, and indicated it would raise this in the years to come.
RBC Capital Markets analysts in a note on Tuesday said they expected Aramco to curb spending instead.
"All in all, we expect the capex budget could be lowered by (around) $5 billion per annum over the coming years relative to the prior guidance," they wrote.
Projects without final investment decisions such as the 700,000 bpd Safaniya project "are likely to be deferred", RBC said.
"We had assumed (a roughly) $12 billion budget for the Safaniya project, of which $3 billion was to be spent in 2024," they noted.
Aramco is expected to provide an update on its capital expenditure plans when it announces its 2023 full-year results in March.
CEO Amin Nasser told Reuters earlier this month he saw oil demand at 104 million bpd in 2024, meaning growth of about 1.5 million bpd, and that demand growth, combined with low stocks, would help tighten the market further.
Growth Areas
The reversal will drive momentum towards Aramco's growth areas, such as gas and new energies, the source said. Aramco made its first M&A foray into liquefied natural gas last year, buying a minority stake in MidOcean Energy for $500 million.
Some analysts said lower spending on maximum capacity could translate into more money for the government to spend on other projects.
"Certainly, lower capex by Aramco provide scope to increase transfers to the government and the PIF to support the Vision 2023 objectives and the diversification of the economy, which we see as the main area of policy focus," said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
OPEC members Saudi Arabia and United Arab Emirates have repeatedly called for more investment in oil and gas and argue fossil fuels will be part of the energy mix for decades to come.
Yet major consumers, including the United States and the European Union, have adopted policies aimed at transitioning away from fossil fuels to cleaner energy which has discouraged such investment.
(Reuters - Additional reporting by Ahmad Ghaddar, Vladimir Soldatkin, Alexander Cornwell, Rachna Uppal, Ron Bousso; editing by Christopher Cushing and Jason Neely)