DUBAI / RIYADH – Reuters: The slump in demand for crude oil during the Coronavirus pandemic has prompted oil companies to consider the possibility that the fossil fuel market (coal, oil and gas) has reached its peak, and that the time has come for a new global energy shift.
However, sources in the oil industry and analysts said that Saudi Aramco intends to increase its production capacity so that it can pump as much as possible from the country’s huge reserves when demand recovers, before oil loses its value by switching to clean sources of energy.
The sources said that Aramco believes that it can lower prices than its competitors and continue to profit even when prices drop, depriving competitors of profit, because Saudi Arabia has about 20 percent of global proven reserves, and production costs amount to only four dollars per barrel.
Take the money as long as it is available
Officials and sources said that Riyadh is now planning to implement what appeared to be a threat in March, during the oil price war with Russia, to increase production capacity from 12 million barrels per day to 13 million.
Aramco’s approach stands in stark contrast to its Western competitors, such as British BP and Dutch-English “Shell”, which intend to restrict spending on oil production so that they can invest in renewable energy and clean energy, in preparation for a world that lives at low rates. From carbon emissions.
The sources added that the state-run oil giant is amending, with this new focus on oil, ambitious expansion plans in upstream activities, and is now aiming to seize assets in existing projects in major markets such as India and China, instead of building giant, expensive factories from the start.
“We expect oil demand growth to continue in the long term, driven by population increases and economic growth,” Aramco said in a statement. “Fuels and petrochemicals will support the growth of demand … and forecasting an imminent peak in oil demand simply does not correspond to the reality of oil consumption.”
Sources familiar with the policy-making process in Saudi Arabia say that the possibility that crude oil has reached its peak makes Saudi Arabia, the world’s largest oil exporter, to exploit its reserves from it more urgent as long as it can do so, to generate the necessary money to finance the economic reforms that it wants to undertake.
The Saudi Crown Prince, Prince Mohammed bin Salman, is trying to establish new industries to reduce his country’s dependence on oil, through the ambitious “Vision 2030” program aimed at diversifying economic resources.
However, in order for the program to succeed, Prince Mohammed needs substantial liquidity. Aramco’s oil sales are its main source of revenue.
“The crown prince said he would work on diversification, but he did not say he would destroy the oil industry,” one of the sources said. As long as it is possible to achieve more income from it, why not? Take the money and invest it in another area. ”
“Let us agree that, in light of the global economic situation, full diversification will not be achieved by 2030,” he added. “To rid itself of a giant economy like Saudi Arabia completely of dependence on oil requires at least another 50 years.” Therefore, as long as oil is with us, we will extract more money from it if this is possible.
Analysts and sources familiar with the company’s plans also said that Aramco is focusing on how to pump larger quantities of cleaner fuels that reduce greenhouse gas emissions, giving it a better chance to compete, at a time when governments are tightening carbon emissions rules.
The carbon density of Aramco’s oil production is 10.1 kilograms of carbon dioxide for every barrel it produces, and it is the lowest among its competitors. The company wants to lower this level from that limit at the end of this year.
“Our priorities are to maintain our low carbon intensity and low production cost, while delivering the energy supplies the world needs,” says the world’s largest oil company.
She added that she “is looking into ways to reduce emissions through technology, such as increasing the efficiency of engines, better fuel formulations, extracting carbon … and converting carbon dioxide and hydrocarbons into useful products.”
“Aramco” said that one example of the possibility of using hydrocarbons in hydrogen supplies is the recent transfer of a shipment of blue ammonia to Japan for use in generating electricity without any emissions, adding that this is achieved for the first time in the world.
“In this example, 50 tons of carbon dioxide, after its extraction, was reused in the production of methanol and enhanced oil extraction,” she said.
The sources said that the company will also continue to develop its gas resources to meet the high local needs, and the Saudi government’s ambitions to become an exporter of gas, as well as through plans to sell stakes in some of its assets, such as the activity of the local pipeline network.
“There will always be room for oil and the lowest carbon emissions will win,” said Amrita Sen, founding partner at Energy Aspects research. And OPEC’s strength in the oil market will return, especially for those who can produce oil in the cleanest possible way, and Saudi Aramco matches this description. ”
Willingness to grab more market share
Sources familiar with Saudi Arabia’s thinking in the field of oil said that Aramco’s plan to increase production capacity to 13 million barrels per day is central to its strategy, as it wants to be ready to seize a larger share of the market when demand recovers. Sources and analysts say that Saudi Arabia also needs to prepare for the expected ambiguity surrounding oil prices after the Covid-19 epidemic, to ensure the continuation of spending and economic reforms plans without being largely affected by the oil price at $ 40 or $ 60 a barrel.
The prevailing thinking in Saudi Arabia is that as long as oil prices are expected to remain low, and may fluctuate around 50 to 60 dollars per barrel for years, oil prices are supposed to be supported by the closure of fields in regions such as the United States where the cost of oil production is high.
“Saudi Arabia, as the least expensive producer, could see an increase in volumes and market share in the coming years, even if global oil demand does not recover and prices do not recover,” said Chrysianis Christens, a manager on the staff of Fitch Ratings in the Middle East and Africa. Because it is natural that the lack of investment leads to a decrease in production in other regions.
The sources said that passing through peak oil demand may also lead to a new price war, and an end to the efforts of the Organization of Petroleum Exporting Countries (OPEC) and its allies to limit supplies, so Riyadh wants to arm and prepare for battle.
All oil producers will face a similar need to monetize their reserves and energy investments before they lose value. Unlike Saudi Arabia, the economy of OPEC members such as Venezuela, Iraq and Iran will be heavily dependent on oil and gas.
“If the peak in demand for oil surprises the prevailing view that it occurs much later, then Aramco will benefit from a higher market share and a greater spare production capacity to reduce another unwanted increase in prices,” said Rapidan Energy Group founder Bob McNally.
He added, “Even if the increase in demand occurs quickly, the demand for Saudi raw materials will likely grow, because production in the higher-cost countries that are not members of the OPEC + group will decline at a faster rate while the Kingdom’s interest in managing supplies will continue to stabilize prices.”
Eye on the downstream strip
Another key aspect of Aramco’s strategy is the review of the new administrative organization for institutional development that the company established last August of the company’s costly plans to acquire assets in the downstream sector, i.e. refining and distribution.
Aramco had made big bets on petrochemicals and oil refining as a way to mitigate the impact of a slowdown in oil demand growth.
However, the sources said that in an industry that may be on the cusp of a long-term recession, Aramco is now looking to buy assets that investors want to dispose of instead of setting up projects from scratch. The sources said, confirming previous reports, that the company, for example, has postponed plans to build a refining and petrochemical complex with investments amounting to ten billion dollars with the Chinese giant “Norinco” for defense industries in China.
But the sources added that the Saudi company is interested in investing in another project in China, where it will buy a stake in Zhejiang refinery and petrochemicals complex south of Shanghai, and get its hands on an oil storage facility.
Officials of the Zhejiang Petroleum and Petrochemical Company were not immediately available for comment. Aramco is also keen to invest in India, and it is holding talks with the Indian company, Reliance Industries, to buy a 20 percent stake in its oil and chemical activity, but negotiations have dragged on over the price of the deal.
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