Testing times for the Kingdom
Despite the global oil oversupply and the subsequent free fall in crude oil prices, Saudi Arabia is determined to maintain high output levels and press ahead with its oil and gas projects in future to control market share
These are challenging times for the Kingdom of Saudi Arabia as experts, industry players, the man on the street, as well as nations (both non-OPEC members and non-GCC OPEC members) are in unison putting the onus on the world’s largest oil producer for the free fall of crude oil prices.
Saudi Arabia’s ‘stubbornness’ in keeping its crude oil output as high as 10.25mn barrels per day (bpd), to keep the US shale oil producers at bay and Russia from encroaching on its market share, is responsible for the global oil supply ‘glut’, the stakeholders say.
They also say that Saudi’s oil policy is not just spelling doom for the global energy market - with no signs of oil price recovery in the foreseeable future – but is also wreaking havoc on the Kingdom’s own economy.
“Saudi Arabia’s present policy is aimed at limiting oil output from high-cost oil producers. This ‘laissez faire’ strategy seems to be directed at reducing oil oversupply,” Ehsan Ul-Haq, a London-based senior oil market consultant at KBC Energy Economics, told Oil & Gas Middle East.
The International Monetary Fund (IMF) even went on to say that, given the current scenario, Saudi Arabia may become bankrupt within the next five years! While the below par crude oil prices (presently trading at around $42 a barrel) is dealing blows of billions of dollars in losses to the economy each week, the country’s net foreign assets fell for a seventh month to $654.5bn at the end of August, the IMF estimates.
So much so, Standard & Poor’s cut Saudi Arabia’s credit rating by one level to A+, saying the decline in oil prices will increase the Kingdom’s budget deficit to 80% of its revenue.
‘The nation’s credit outlook is negative as the decline in oil prices makes it difficult to reverse the fiscal deterioration. The widening deficit and a high reliance on energy revenue ‘point to vulnerabilities in Saudi Arabia’s public finances’, S&P said in a statement.
Some industry players however disagree and dismiss such moves as ‘exaggeration’. “These are rumours. The Saudi economy is strong and has a strong resolve. It is one of the largest and strongest in the Middle East,” Osman A. Ibrahim, group president & CEO of Rawabi Holding, a Saudi-based oilfield services company and long-time contractor to Saudi Aramco, said.
Haq agrees saying, “I think, Saudi Arabia has enough reserves to weather the storm.”
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With proven reserves of about 270bn barrels of oil, Saudi Aramco owns some of the world’s largest oilfields including Haradh, Manifa, Nuayyim and Qatif.
The world’s largest oil producing company is pumping hard from its oilfields and has major expansion plans for its Khurais oil field. The project plans to raise Khurais' output by 300,000 bpd to 1.5mn bpd by 2018, and allow it to produce 143mn standard cubic feet per day of associated gas and 34,000 bpd of natural gas liquids.
Also, “Aramco is implementing expansion plans at Shaybah field in the Empty Quarter to increase oil production capacity and natural gas liquids (NGL) this year,” Haq mentioned.
Moreover, the world's top oil exporter is pressing ahead with gas-related projects to meet rising domestic demand and conserve oil for export and refining. Aramco has recently awarded Petrofac an EPC contract for a sulphur recovery plant near Jubail.
The work is part of Aramco’ Fadhili gas programme, a greenfield development located 30km west of the city of Jubail in the Eastern Province of the Kingdom. The gas plant will have a capacity for around 2,500 MMSCFD and will process sour gas from the Khursaniyah oil field and the Hasbah non-associated gas field.
Also, China's Shandong Electric Power Construction Corp (SEPCO) has signed a contract, worth an estimated $800mn, to build a gas compressor station for Aramco. The gas facility is part of the expansion of Saudi Arabia's main gas pipeline.
Overseen by Aramco, the project, known as ‘Master Gas System 2 (MGS 2)’, will raise the system's capacity to 12.5bn cubic feet (bcf) of gas a day by 2018 from 8.4bcf a day currently.
Saudi Arabia has also been focussing on petrochemical productions, apparently to compensate for some of the dent in profits otherwise incurred from oil sales. The Kingdom shipped high volumes of refined oil products in August, rising to 1.347mn bpd from 1.075mn bpd a month earlier, a record high since at least 2002, figures published by the Joint Organisations Data Initiative (JODI) showed.
Aramco is building a $20bn refining and petrochemical complex at Yanbu on the Red Sea coast. The new refinery would have a capacity of 400,000 bpd and stand next to an existing refinery at Yanbu, wholly owned by Aramco, which has a capacity of 240,000 bpd and would also supply the planned petrochemical complex.
Aramco has also sought a $5bn loan for the project, with reports saying the funds will be used to replace some of the capital Aramco invested when it built the plant together with China’s Sinopec, freeing up cash for use in other projects.
On the other hand, SPIE Oil & Gas Services, the consortium of Saudi Aramco and Sumitomo Chemical, has been awarded a contract for the Petro Rabigh II project. Petro Rabigh II is the expansion of the original phase I of the Petro Rabigh refining and petrochemical complex located about 150km north of Jeddah. The project consists of the expansion of the existing ethane cracker, the construction of an aromatic complex and an ethylene plant.
Speaking at the 2015 Gulf Petrochemicals and Chemicals Association (GPCA) Annual Forum in Dubai, Abdullatif Al-Othman, chairman of Saudi Arabia General Investment Authority (SAGIA), said over $150bn worth of investments have been identified in the Kingdom’s petrochemical sector and the government is ready to provide the necessary support for both local and foreign investors.
"[I urge investors] to explore what we (Saudi Arabia) offer in the region. Should you decide to pursue business at the GCC, know that you’ll be at the forefront of the development of the downstream industry, allowing you to become a key player in a growing, lively and vibrant business environment before competitors can,” Al-Othman said.
However, along with other GCC NOCs such as ADNOC, Aramco too has reportedly been cutting down on capital expenditure (CAPEX), including on crucial aspects such as oilfield servicing to HSE standards. Media reports suggest Aramco renegotiating some contracts and postponing some projects due to falling oil prices, and has asked international oil service companies for as high as 25% discounts.
“I think, the work of service providers should be seriously impacted by lower spending by Saudi Arabia, although the impact has not been too severe until now as service providers have been able to reduce their fees,” Haq said.
He however said “Saudi Aramco is unlikely to cut costs as much as to jeopardise HSE standards, because it can risk its status as a major NOC.”
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Oil and gas services professionals at last month’s ADIPEC although maintained that reduction on CAPEX by Aramco – the biggest source of service contracts in the Middle East - was unlikely to have an impact on their business.
“If companies are reducing CAPEX, they are also increasing OPEX (Operational Expenditure). Now we see a huge demand from our customers for such products, mainly advanced process solutions that help in optimising value,” Yiannis Bessiris, Regional Business Leader – Advanced Solutions, Honeywell, said.
“Some of the expenses are very important for production and Saudi Aramco is known as one of the top quality producers. They will never cut costs and cut corners to save money; they will always maintain the same level of quality. What they are trying to do is be more efficient,” Ibrahim told Oil & Gas Middle East.
Scramble for market share
Despite the painstaking efforts to drill high volumes of oil each day, Saudi’s strategy to maintain its dominance as one of the largest (if not the largest) oil exporter in the world seems to be somewhat futile till now. Saudi Arabia's crude oil exports fell by 278,000 barrels per day (bpd) in August, with the nation shipping 6.998mn bpd in August, down from 7.276mn bpd in July, according to JODI data.
American shale oil producers have somehow resisted the low oil price pressures and have kept production high, although recent reports say some producers are finding it difficult to survive in the low oil price situation and have shut down a few rigs.
Russia too is eating into Saudi’s stronghold oil market in Asia, overtaking the Kingdom in becoming the top exporter to China in September. Even underweight Iraq beat Saudi in becoming the largest crude oil supplier to India in September, the third time in 2015. India shipped in about a fifth of its imports from Iraq in September, while Saudi Arabia's share dropped to 17% from about 22% in August.
Haq attributed the shift to a hike in Saudi's official selling price (OSP) of crude. “Saudi sells oil at OSP under term deals, while Iraqi oil is also sold in the spot market. And in an oversupplied market you often find Iraqi barrels trading at discounts to the OSP,” he said.
With co-OPEC member Iran now gearing up for strong oil sales to Asia, in its post-sanctions era, the export battle is only set to intensify. “When Iran comes to market it will be a tough fight between Iran, Iraq and Saudi,” Haq said.
However, in a major achievement, Saudi Arabia has been able to make significant inroads into the European market, which has traditionally been a Russian stronghold.
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According to the head of Russia's biggest oil company Rosneft, Saudi Arabia has started supplying crude oil to Poland. "We are working under conditions of tough competition," Rosneft chief executive Igor Sechin told an investor conference in Moscow in October.
"Saudi Arabia has entered the Polish market for the first time, with deliveries via Gdansk," he said, referring to the port on the Baltic Sea.
“They (Saudi Arabia) are actively dumping, which is an element of the changes in world prices. Without doubt, the battle for markets is at this stage one of the key factors. We have to make every effort to prevent a decrease in our share of supplies,”Sechin said in an alarming note, without citing the volume of Saudi exports.
Saudi Aramco has also embarked on a policy to reclaim lost market share and enter into uncharted territory. The company has got a green from the Indonesian government to partner with state-owned PT Pertamina to build gas stations in the country.
Besides, Aramco Trading Company, a subsidiary of Saudi Aramco, has started an office in Singapore to market oil products, while looking to boost exports to Europe. Saudi Aramco also owns a separate company in Singapore named Aramco Asia Singapore, which was inaugurated in September, 2014 as part of an ongoing expansion in Asia.
To make its presence felt in the US, Aramco has opened up an R&D centre in Detroit as part of its drive to expand its global fuels programme. Back home, the Saudi government continues to attract global energy companies to set shop, with GE Oil & Gas in November completing the first phase of its expansion in the Kingdom, of what will be GE’s largest advanced manufacturing facility in the region.
What does the future hold?
Despite the global supply glut in the face of falling demand, Ali Al-Naimi, the Saudi Oil Minister, last month said he expects global energy demand to rise in 2016, mainly driven by energy-hungry Asia.
“Lower prices have resulted in the largest demand growth in five years in 2015 but the impact is expected to fade away in 2016. Due to stricter environmental regulations, oil demand is not increasing at the same pace as in the past,” Haq said.
Observers believe that Naimi’s statement is an indication of the Kingdom’s grit not to reduce its current levels of oil production. Being the dominant force in OPEC, the bloc is hence expected to toe Saudi’s domestic policy of maintaining output, despite differing pleas from members such as Algeria and Venezuela.
The Kingdom has received essential backing from its GCC peers Qatar and the UAE, with Qatar’s Energy Minister Mohamed Bin Saleh Al Sada also saying oil prices have ‘bottomed out’ and that he expects oil prices to rise in 2016.
The UAE Energy Minister has also said he did not regret last year's OPEC decision to maintain high oil output levels. "I am sure that the decision was right and I am confident that the market will stabilise," Suhail Mohamed Al Mazrouei said at an industry conference in Dubai in November. "We are not regretting the decision we took, we had no option. Yes it's painful for many producers around the world and we share that pain, but it doesn't mean that we need to do something that is not sustainable."
In a bid to ward off criticism and boost confidence in its policies, Al-Naimi recently also said that Saudi Arabia also is working with other OPEC members and producers from outside the group to ‘stabilise the market’. “Saudi Arabia is a very reliable supplier. We cooperate with OPEC and non-OPEC countries to stabilise the market,” he said at a conference in Manama, Bahrain.
Saudi is expected to press ahead with its spending on oil and gas projects in the coming year, despite analysts warning that crude oil prices could dip to as low as $30 a barrel. “The Kingdom has to reduce spending especially on infrastructure expansion and social services and has to lower fuel subsidies,” for its energy projects, Haq comments.
Although Al-Naimi had earlier ruled out the Saudi government removing fuel subsidies, the Kingdom would possibly halt infrastructure projects and seek loans to fund its energy plans, experts maintain.
“The global economy is going through an unstable period. Crude demand is expected to rise by one million barrels a day every year in this decade, and the world requires more investments in oil to compensate for declining recovery rates. The recovery rate for all the world’s oilfields is decreasing by about 4mn barrels a day,” Al-Naimi stated in Bahrain. “We need billions of dollars to continue exploration and producing oil and to invest in spare capacity to stabilise the market.”