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Saudi Aramco doubles down on output hike as price war intensifies

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Via Financial Times

Saudi Aramco’s chief executive doubled down on the kingdom’s commitment to raise production in a price war with Russia and other oil nations, saying the state energy giant can sustain maximum levels of output without any additional capital spending.

A week ago Saudi Arabia slashed selling prices and announced plans to ramp up exports after Moscow refused to back a plan by Saudi Arabia-led Opec to deepen production cuts in response to the coronavirus outbreak, which has slashed demand.

Amin Nasser, speaking to analysts on Monday after Saudi Aramco’s full-year results announcement, said the company could sustain its maximum production capacity of 12m barrels a day for up to a year without any additional capital expenditure and could ramp up further “if required”.

In April, Saudi Arabia will supply the market with 12.3m b/d including oil from storage. Mr Nasser said levels in May were unlikely to be any different, comments that added further pressure on oil prices which have fallen to four-year lows

Mr Nasser said the company had been issued a directive by the government to expand maximum capacity to 13m b/d, which Saudi Aramco is doing on an “accelerated” timeline. “We see the increased level of production having a positive impact on our financials in the long term,” said Mr Nasser.

In the lead up to the company’s December stock market offering, Saudi Aramco sought to show itself as no different to other international energy majors. But the latest moves by the kingdom emphasise the extent to which it is an arm of the state, which owns 98 per cent of the company.

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On Monday, Brent crude, the international oil benchmark, fell below $30 a barrel for the first time since 2016 as the spread of the coronavirus hits the global economy and financial markets.

Saudi Aramco said it would cut capital spending in a lower oil price environment to between $25bn and $30bn in 2020, down from $35bn in 2019. The new targets would not include the expenditure required to deliver the 13m b/d maximum capacity target ordered by the government, the company said.

It was still unclear how long it would take for Saudi Aramco to reach this goal, with historical capacity increases taking years, Mr Nasser said.

Saudi Aramco until now has consistently tested oil production levels of around 11m b/d. But it will take billions of dollars of investment into how Saudi Aramco manages its reserves, oil production and exports to increase maximum capacity beyond 12 b/d.

Neil Beveridge, senior oil and gas analyst at Bernstein, said: “We expect this [13m b/d maximum capacity] can be achieved by 2023 with facilities expansion and increasing flow rates from existing fields.”

In a sign that the world’s most profitable company and largest oil producer is preparing to live with low prices for some time, Saudi Aramco’s chief financial officer Khalid al-Dabbagh said he was “very comfortable” with crude prices of around $30 a barrel. Saudi Aramco, he said, was able to meet its $75bn annual dividend payout commitment even in this environment.

Saudi Arabia relies on Saudi Aramco’s dividend to fill government coffers. The company, while still hugely profitable versus other international oil majors, took a financial hit in 2019, with net income down 21 per cent year on year to $88.2bn, as crude prices fell and it suffered from lower chemicals and refining margins.

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This is the first earnings announcement since it listed its shares in a mega $29.4bn offering that valued the company at $1.7tn. Saudi Aramco’s stock price has fallen below its flotation price of SR32 to SR28.70 amid the oil market turmoil.

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