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Saudi Arabia has dropped a plan to expand the kingdom’s daily oil production capacity, in a major policy reversal by the world’s largest oil exporter.
State-run Saudi Aramco said on Tuesday that it had been asked by the energy ministry to abandon a plan to increase its maximum sustainable production capacity from 12mn barrels a day to 13mn b/d by 2027.
The multibillion-dollar investment programme had set the company apart from much of the industry, where spending on oil production is generally falling because of concerns about climate targets and future demand. Saudi Aramco accounts for about 10 per cent of the 100mn barrels of oil the world consumes every day.
The decision was taken by the ministry of energy and was not driven by any technical or operational issue at the company, which remains in a position to restart the investment programme if requested, according to a person familiar with the matter.
The move is a significant policy shift for the kingdom. Saudi Aramco chief executive Amin Nasser has spent the past two years advocating for more investment in oil production across the industry.
“The 100mn barrel system, because of lack of investment, is really fragile in terms of its ability to cope with any unforeseen interruptions,” Nasser told the FT in 2022.
But in the past 18 months, Saudi Arabia has repeatedly cut production as part of Opec’s efforts to support prices amid slowing demand growth and increased output from the US and other producers. As a result, Saudi Aramco is currently producing about 9mn b/d, down from an average of 10.2mn b/d in the first three months of 2022.
That means the company already has 3mn b/d of spare capacity that it could bring online to meet any sudden rise in demand, reducing the immediate need to increase its maximum output further, said the person familiar with the decision.
The move “can be interpreted to suggest that OPEC+ is beginning to recognise it has a problem”, said analysts at Citi in a note. With rising spare production capacity putting pressure on prices, the analysts said it made “little sense” for Saudi Arabia to invest heavily to increase its own production capacity.
“The decision today by [Saudi Arabia’s] government to halt the programme appears to be a huge rethink of strategy and will have wide ramifications to Aramco capital spending, the Gulf supply chain and of course OPEC+ oil policy,” they said.
Saudi Arabia expects to free up a further 1mn b/d of oil for export by displacing liquid fuels used in the kingdom for power generation with gas, the person added.