Can Saudi Aramco deliver on its oil production promises?

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If the oil market were a religion, its central article of faith would be the maximum production capacity of Saudi Aramco, a principle based on trust in what we hope to be true and belief in properties of which we have not yet been witnesses. The market is about to have its epiphany.

Aramco, the Saudi state-owned oil giant, says it can sustainably pump 12 million barrels a day, well above the kingdom’s OPEC+ target of 11 million barrels in August. For the global economy, Saudi spare capacity is the last line of defense against increased energy inflation. But aside from a few senior corporate executives and a handful of Saudi royals, no one knows for sure whether Aramco can deliver on its promises. Others either have blind faith in Aramco – or simply don’t.

On Tuesday, French President Emmanuel Macron was caught at the Group of Seven summit passing US President Joseph Biden second-hand information suggesting the Saudis don’t have as much oil-producing capacity as they claim. . Call it French secularism.

The truth will come out in the coming weeks. On Thursday, OPEC+ will give the green light to the final in its round of monthly production increases, giving Riyadh a target of nearly 11 million barrels a day for August. Aramco has only pumped at this level for a grand total of eight weeks in its entire history, in late 2018 and early 2020. Now it faces the prospect of holding this level or higher, for several months, maybe even longer, for the remainder of 2022 and into 2023.

For the past eight weeks or so, there has been frantic activity within Aramco to prepare for a production ramp-up. “MSC”, as the maximum sustainable capacity is known at the company’s headquarters in Dhahran, was the main topic of discussion. Company insiders, speaking privately, say it can hit 12 million barrels per day in 30 days and maintain that level for at least 90 days. How about longer? Aramco is simply confident that it will prove skeptics like Macron wrong. Have faith, that is the message.

The company is taking steps to increase its MSC from 12 million to 13 million barrels. But the first increase, a tiny extra 25,000 barrels a day, won’t arrive until 2024. The bulk of the expansion, including boosting production from three key oil fields known as Zuluf , Marjan and Berri, is scheduled for 2025 and 2026.

Aramco’s maximum capacity is a mystery as it has never been tested for an extended period. In April 2020, Riyadh recorded its highest monthly average ever, at 11.55 million barrels per day. At the time, Aramco briefly – for a few days, I mean – pumped 12 million barrels per day. Aramco executives, including CEO Amin Nasser, took selfies in front of a giant screen wall showing production hitting record highs. At one point, it jumped to 12.3 million barrels. Smiles all around.

Behind closed doors, however, things were more complicated. Privately, Saudi oil industry executives describe the effort as a real challenge and express concern about the need to maintain production. It’s one thing to hit the target briefly, it’s another to keep pumping and pumping at that level for a year, according to internal thinking.

Oil executives and energy officials who have spoken to the Saudis in recent months have received mixed signals about Aramco’s capabilities. Many were told, unequivocally, that the company would do what it promised: the 12 million level is guaranteed. But I heard a different version from a few others who have intimate ties to the kingdom and say anything above 11.2-11.3 million barrels for more than a few months would prove difficult.

This more skeptical version echoes what Macron heard Biden say at the G7. According to Macron, Sheikh Mohammed bin Zayed, ruler of the United Arab Emirates, told him that the Saudis could not currently increase production much, perhaps an additional 150,000 barrels per day and, if more was needed, Riyadh would have need another six months. “They don’t have huge abilities,” the French leader was surprised to say.

Optimistic and pessimistic scenarios can be simultaneously true. Pumping 12 million barrels per day may be possible and also very difficult; difficult does not necessarily equal impossible. Experience shows that Riyadh will do whatever it takes to maintain its reputation as the world’s most reliable oil supplier. Money will not be a problem; additional drilling would be approved, maintenance delayed, and oil reservoirs would be tapped if necessary.

Aramco can pull a few more levers to deliver, rather than produce, additional crude, maintaining the illusion of higher capacity. The company maintains extensive crude storage in Egypt, the Netherlands and Japan, from where it can ship more barrels. Additionally, he maintains a strategic reserve of refined products in underground caverns at five locations around the kingdom. It can tap into this little-known reserve, which took two decades to build, to supply its domestic market with gasoline, diesel and jet fuel for a while, reducing crude input to its local refiners and freeing up more for the ‘export. In secret, this is precisely what Riyadh did after the 2019 attack on its major oil processing center in Abqaiq.

Experience also shows that whenever the market has doubted Saudi’s ability to increase production, the kingdom has proven the naysayers wrong. Perhaps the most notable example is how the late Matt Simmons, author of the much-regarded book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy”, lost a bet based on his views. that Saudi oil production had peaked.

And yet, there are reasons for concern.

Aramco is not only using its idle capacity to meet increases in global oil demand, but also, according to the IPO prospectus, to “maintain production levels during routine field maintenance.” As Riyadh transitions to maximum sustainable production, Aramco would be forced to operate its oil fields at full capacity with little possible maintenance – a recipe for trouble. Any unplanned outage, which Saudi Arabia can normally conceal through its spare capacity, would be catastrophic. There would be no cushion.

Regardless of the true potential production figure, one thing is clear: the days when Aramco could easily pump more and more barrels are over. Now every additional barrel is a fight. Whether or not you trust the Saudis, the world is facing a settling of scores.

More from Bloomberg Opinion:

Biden needs more than Saudi oil: editorial

Who gets what from your £100 tank of fuel: Julian Lee

• The United States is depleting its strategic oil reserve faster than it seems: Javier Blas

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former Bloomberg News reporter and commodities editor at the Financial Times, he is co-author of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”

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