Commentary
Indrajit Sen
Oil & gas editor

Four years after having directed Saudi Aramco to raise its oil production spare capacity to 13 million barrels a day (b/d) by 2027, Saudi Arabia’s energy ministry has ordered the state energy enterprise to abandon the campaign.

The government did not say why Aramco has been instructed to scale back its oil spare capacity expansion drive. The move could be interpreted as an attempt by Riyadh to prop up oil prices, which have remained subdued for many weeks despite Saudi Arabia's voluntary oil production cuts going above and beyond those of the wider Opec+ alliance.

The price of global benchmark Brent crude jumped to more than $82 a barrel on the back of the Aramco announcement but later pared gains.

Regardless of what may have triggered it, the decision will disrupt the Saudi oil and gas projects market, as well as the global crude demand-supply mechanism.

Impact on upstream projects

Since being tasked by the energy ministry in March 2020 to raise spare capacity, Aramco has invested tens of billions of dollars in greenfield and brownfield oil production enhancement projects.

The state enterprise’s capital expenditure (capex) has been rising in double-digit percentages in the past four years: from $26.9bn in 2020 to $31.9bn in 2021 and $37.6bn in 2022. Aramco has previously said it expects 2023 capex to be $45bn-$55bn, including external investments. Like other hydrocarbons producers, the majority of Aramco’s capex is allocated to upstream projects.

With the government now directing Aramco to stop working to raise its maximum spare capacity, the company could be required to shelve big-ticket capacity enhancement projects such as the Safaniya increment programme.

Aramco has been evaluating bids it received last year for 10 offshore packages and at least five onshore packages of the project, which aims to increase the long-term productivity of the Safaniya field – the world’s largest offshore oil field.

Been here before

Riyadh’s decision to put the brakes on Aramco’s drive to expand oil production capacity may cause consternation, but such a pivot is not unprecedented. Considered the crown jewel of the Saudi state – and possibly its most effective geopolitical tool – Riyadh has tapped Aramco to serve its tactical interests on the global stage when needed.

The decision to mandate Aramco to invest in raising spare capacity in March 2020 was a demonstration of Saudi Arabia flexing its oil production muscle during a contest among Opec+ members for greater market share.

Aramco has not made it clear in its statement whether the energy ministry directive is a temporary arrangement, induced by prevailing market conditions, or a permanent measure. Riyadh is set to make its intentions clear at the next Opec+ meeting on 1 February, while Aramco will detail its capex plans for 2024 when it announces its 2023 results in March.