Saudi Arabia’s government on Tuesday ordered state oil company Saudi Aramco to halt its oil expansion plan and to target a maximum sustained production capacity of 12 million barrels per day (bpd), one million bpd below a target announced in 2020. Saudi Arabia has for decades been the holder of the world’s only significant spare capacity, providing a safety cushion in case of major supply disruptions caused by conflict or natural disasters. In recent years, fellow OPEC member the United Arab Emirates has also built up its capacity.
Aramco’s lowered target 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 Raised Capacity in 2020 Amid Market Share War with Russia
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. Saudi Arabia, the world’s largest oil exporter, is currently pumping around 9 million bpd, well below its capacity after it cut production as part of an agreement with OPEC and its allies last year. The kingdom, the de facto leader of OPEC, cut output to balance markets in the face of rising supply from non-OPEC producers.
The decision to raise capacity in 2020 was seen as a signal of Saudi Arabia’s readiness to defend its market share and to flood the market with cheap oil if needed. However, the move also increased the pressure on Aramco’s finances and resources, as the company had to invest billions of dollars to maintain and expand its production facilities.
Aramco Faces Multiple Challenges in the Changing Oil Landscape
The decision to lower capacity in 2024 may reflect Saudi Arabia’s recognition of the multiple challenges facing Aramco and the oil industry in general. These include:
- The uncertainty over the future of oil demand, as major oil consumers, including the United States and the European Union, have adopted policies aimed at transitioning away from fossil fuels to cleaner energy.
- The competition from other oil producers, especially the United States, which has become the world’s top oil producer thanks to its shale revolution, and Russia, which has also increased its output and market share in recent years.
- The environmental and social pressures, as Aramco and other oil companies face growing scrutiny and criticism from investors, activists, and regulators over their carbon emissions and their impact on climate change and human rights.
By lowering its capacity target, Saudi Arabia may be signaling its willingness to cooperate with other oil producers and to adhere to the OPEC+ agreement, which aims to stabilize the oil market and to support oil prices. The move may also help Aramco to save costs and to focus on its growth areas, such as gas and new energies.
