Saudi Arabia has taken a complete U-Turn, and, in a literal sense.

Last Tuesday, the Saudi state oil giant Aramco was instructed by the Saudi energy ministry, led by none other than Prince Abdulaziz bin Salman, the elder half-brother of the Saudi Crown Prince Mohammad bin Salman, to halt plans to boost its maximum sustainable crude output capacity to 13 million barrels per day (bpd), returning to the previous 12m bpd target.

“Aramco announces that it has received a directive from the Ministry of Energy to maintain its Maximum Sustainable Capacity (MSC) — at 12m barrels per day,” the company said in a statement last week. The Saudi government had previously mandated that Saudi Aramco boost production capacity to 13m bpd by 2027.

This was a complete reversal of the Saudi energy policy. Only last November, the world’s biggest oil exporter had said it was progressing “very well” with the multibillion-dollar project to boost capacity to 13m barrels a day by 2027.

For the last few years, Saudi Arabia has strongly advocated more investments in upstream oil projects and enhanced worldwide oil output. Calling for investments in the oil and gas sector, Saudi Arabia has been arguing that fossil fuels will be part of the global energy mix for decades to come and that producers worldwide need to share that burden.

With Saudi Arabia abandoning Aramco’s capacity expansion, some prospects may open up for countries like Pakistan

In the absence of new capacity, meeting the global energy needs would be difficult to meet, the oil kingdom has been underlining in recent years.

Crown Prince Mohammed bin Salman, during US President Joe Biden’s visit to the kingdom in July 2022, warned that Riyadh “will not have any more capability to increase production” after it reached the now-scrapped 13m bpd goal, media reports then said.

Despite recent reports by the International Energy Agency (IEA) that oil consumption is set to peak over the next few years, Aramco’s CEO has been unrelenting in underlining that the industry is underinvesting in new oil supply.

Regardless of plausible scenarios, including the emergence of alternative energy, oil will continue to be needed for decades. Aramco CEO Ameen Nasser has been insisting that in the rush to green energy, one cannot sideline fossil fuel, otherwise, there would be chaos in the energy markets. Fossil fuel would continue to play a dominant role in meeting the global energy demands for decades has been his mantra.

“The 100m barrel system, because of lack of investment, is really fragile in terms of its ability to cope with any unforeseen interruptions,” Saudi Aramco chief executive Amin Nasser told the Financial Times in 2022.

Does the Saudi decision to put brakes on its capacity expansion programme mean that Riyadh is not sure about the future crude demand scenario? While this remains a pertinent question, Grant Smith, writing for Bloomberg, thinks the Saudi decision could also be because of the rising output from several rival suppliers.

Thanks to the shale revolution, the United States is today’s world’s largest crude oil producer, with its output touching the 13.3m bpd mark last November. Smith added that rising US output also compelled Riyadh and Moscow to overcome years of rivalry and form the Organisation of the Petroleum Exporting Countries (Opec) plus alliance.

To add to the woes of crude markets, this deluge is being amplified by other producers, such as Brazil and the emerging oil play of Guyana. This means that despite several output cuts, oil prices have generally stayed between $70-$80 a barrel. Saudi budgetary requirements are believed to be considerably above that. And in the meantime, despite sanctions, Iran’s oil exports have now hit a five-year high.

According to the Nikkei Asian Review, Iranian crude oil exports grew by roughly 50 per cent last year to a five-year high of about 1.3m bpd, mostly directed to China. As per the IEA estimates, Iran produced 3m bpd in 2023, or 440,000 barrels more than its production in 2022. It now predicts that the Iranian output will increase by another 160,000 bpd in 2024.

Saudi energy managers must have been taking note of all these.

Further, Saudi Arabia holds a lion’s share of the OPEC’s available 5.1m bpd of spare capacity. The IEA estimates that of this, 3.2m bpd is held by Saudi Arabia alone. And these barrels are not being monetised. There are not many takers of these.

Another consideration behind the Saudi decision could be why to spend billions of dollars on a project that will not yield much, at least in the shorter term, especially when the Saudi economy managers are looking to generate more funds to meet governmental expenditures.

There is also a strong domestic dimension to the decision. The Kingdom needs money and plenty. Billions of dollars are spent on Crown Prince Mohammad bin Salman’s pet projects. Neom, tourism, sports and all such projects need money, and Saudi Arabia doesn’t have that to finance all the projects.

The Dubai-based bank Emirates NBD is projecting that Saudi Arabia may need to fill a $46 billion hole in its budget during 2024. From where that money is going to come?

That can only be generated if Aramco is squeezed further to pay higher dividends to the Saudi government — the main shareholder of Aramco. The company has already raised its quarterly payout to its major stakeholder by more than $10bn to $29.4bn over the previous two quarters.

Abandoning the 13m bpd expansion should help ease the pressure on Aramco’s budget by trimming about $5bn a year from annual spending, RBC Capital Markets said in an analysis.

The emerging scenario is opening doors to some exciting prospects for Pakistan. Riyadh is looking to lock in sales of its crude oil in the short- to medium-term. Pakistan is a strong candidate for transforming this Saudi interest into a concrete project.

With a population of roughly 250 million, a strong relationship with Riyadh, and some better economic management, Pakistan could easily emerge as one of the target markets for Saudi Arabia. That could push the prospect of the much-hyped Pak-Saudi joint venture refinery. The project seems to have hit obstacles but Islamabad can now strive to rejuvenate Saudi interest in that project.

Can Pakistan avail of the opportunity? The answer lies in a stable political setup in Islamabad. The buck stops at Islamabad and possibly more at Pindi.

Published in Dawn, The Business and Finance Weekly, February 5th, 2024