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Saudi, UAE gear up for long-term oil market fight with capacity plans

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03/11/2020 | 03:07pm EDT
FILE PHOTO: An Emirati man is seen near the logo of  ADNOC in Ruwais

Top oil exporter Saudi Arabia said on Wednesday it would launch a program to boost production capacity for the first time in more than a decade, signaling to Russia and other rivals it was ready for a long battle over production levels and market share.

Fellow OPEC member, the United Arab Emirates, followed suit by pledging to accelerate its plans to increase capacity.

Oil prices have almost halved since January after the collapse of a pact on cutting supplies at last week's meeting of the Organization of the Petroleum Exporting Countries, Russia and other producers, a group known as OPEC+.

All production limits were scrapped after Moscow rejected OPEC's call for deeper production curbs, prompting Riyadh and the UAE to say they would both ramp up output to record levels.

But they also promised to expand capacity, pointing to a longer term strategy to win market share from U.S. companies and other producers which increased output when OPEC+ was showing restraint.

"The race for market share is on and you have to bet on the Saudis because they are the ones with most of the spare capacity," said Gary Ross, founder of BlackGold Investors.

Saudi Aramco plans to raise its output capacity to 13 million barrels per day (bpd) from 12 million bpd, said the chief executive of the state-run oil firm, Amin Nasser, adding that Aramco was acting on an order from the Energy Ministry.

"The company is exerting its maximum efforts to implement this directive as soon as possible," he said.

The UAE said it would accelerate plans to raise capacity to 5 million bpd, a target it previously aimed to achieve by 2030. Its capacity was expected to be 4 million bpd by the end of 2020.

However, Riyadh and Abu Dhabi did not give a timeline for their capacity expansion plans, which will require billions of dollars of investment spent over several years to complete.

GLOBAL SHIFT

Saudi Arabia, which sits on the world's second largest oil reserves and with some of the lowest production costs, has long acted as a "swing producer", cutting or raising output to match demand and prop up prices. The role has won Riyadh international influence but sometimes at the cost of losing customers.

The global shift to cleaner energy sources is now making a stronger case for shifting away from the role as the oil market's central bank and toward pumping more oil, even at a lower price, to prevent its reserves becoming a stranded asset.

Till now, the kingdom has rarely produced above 10.5 million bpd despite having spare capacity. But on Tuesday it said it would boost supplies in April to 12.3 million bpd, suggesting it would even draw on its inventories.

U.S. oil companies, barred by law from joining any pacts to limit output, are among the first to feel the heat. As oil prices have plummeted, the U.S. firms which have helped the United States become the world's biggest crude producer, have announced plans to slash dividends and cut spending.

"What this move by Saudi does is wake the market up to the fact they have the capacity and can add quickly and that they can move into offense," said Christyan Malek of JP Morgan.

He said this was "a major lesson learned for not just Russia and members in OPEC -- who haven't taken their threat seriously -- but also shale producers and oil majors."

Russia's state oil giant Rosneft has long argued that OPEC+ cuts simply extended a lifeline to U.S. companies.

After the OPEC+ pact fell apart, Moscow said Russian oil companies might boost output by up to 500,000 bpd.

NEW INVESTORS Saudi Arabia's move to boost capacity to 13 million bpd would in theory allow the kingdom to export 9.2 million bpd, or 50% more than it would have if the plan for deeper OPEC+ cuts had been approved, Gary Ross estimated.

Riyadh also has another reason for chasing market share since listing a small stake in Aramco last year: new investors in the company want it to sell more oil.

Shares in Aramco have tumbled with oil prices. They were trading at 29.70 riyals ($7.91) on Wednesday, compared to its December listing price of 32 riyals.

JP Morgan's Malek said that, after the collapse of the OPEC+ deal, Saudi Arabia was "accelerating that path to take share despite not being fiscally ready".

Riyadh needs oil prices of around $80 per barrel to balance its budget.

Last year, Malek predicted Aramco would work on raising capacity to 13.4 million bpd for crude and 15.6 million bpd for liquids by 2025 if the kingdom's budget could tolerate the pain of lower oil prices.

Saudi Arabia previously embarked on a $100 billion push to raise its capacity more than a decade ago amid a price boom fueled by China?s growth. Since then, Saudi officials have brushed aside questions of new upstream investment.

After adding nearly 4 million bpd to capacity by 2009, Saudi officials and oil executives have talked on and off about a possible hike to 15 million bpd by 2020, although plans were formally dropped several years ago as oil demand growth slowed.

Nevertheless, it launched a $35 billion, five-year exploration and production plan in 2012 to sustain current capacity.

By Rania El Gamal and Dmitry Zhdannikov


Stocks mentioned in the article
ChangeLast1st jan.
AT HOME GROUP INC. -3.53% 15.975 Delayed Quote.201.09%
BYD COMPANY LIMITED -1.60% 154.1 End-of-day quote.296.65%
JUST GROUP PLC 1.01% 42.1 Delayed Quote.-47.24%
LONDON BRENT OIL -0.05% 37.64 Delayed Quote.-38.33%
MEMBERS CO., LTD. -2.43% 1770 End-of-day quote.-22.27%
SAUDI ARABIAN OIL COMPANY -1.46% 33.7 End-of-day quote.-4.40%
SHIFT, INC. 0.38% 13310 End-of-day quote.66.79%
THE GLOBAL LTD. -12.20% 223 End-of-day quote.-52.65%
THE NEW HOME COMPANY INC. -4.63% 5.15 Delayed Quote.15.88%
WILL GROUP, INC. -4.33% 773 End-of-day quote.-38.26%
WORLD CO., LTD. -2.36% 1323 End-of-day quote.-50.84%
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