MONETIZING VAST MIDEAST RESERVES

Amena Bakr and Rafiq Latta - Feb 22, 2021

The Covid-19 pandemic has prompted Saudi Arabia and other Mideast producers to rethink how they will monetize their vast oil and gas reserves, with the emphasis shifting to more rapid development. Although the world has some 10 million barrels per day of idle crude oil production capacity at the moment, with Saudi Arabia accounting for 3 million b/d of that itself, key Mideast producers are moving to expand their low-cost, low-carbon production capacity so that they can remain dominant producers in the future -- even in a decarbonizing world. Covid-19 has accelerated the energy transition and helped drive Saudi Arabia's decision to hike its capacity by 1 million b/d to 13 million b/d. For similar reasons, Abu Dhabi plans to expand its production capacity by 1 million b/d to 5 million b/d by 2030. On the gas side, Qatar is likewise pushing ahead with a major expansion of its LNG capacity to solidify its position as the largest low-cost, low-carbon LNG producer. The goal in all three cases is to remain highly competitive with other sources of supply and maximize output as global demand wanes.

The Saudi expansion concept was originally unveiled last March, but that was during the price war with Russia, so many observers viewed it more as a threat than a concrete plan. But Energy Intelligence understands that the Saudi leadership still wants to follow through, even if it's unclear how state oil giant Saudi Aramco would fund the program. No time frame has been set for when the expansion might take place. Aramco’s management is worried about financing the program while oil demand remains weak from the pandemic and price support is heavily reliant on Opec-plus production cuts. There is also concern within Aramco that it could end up sitting on costly idle capacity if Opec-plus output cuts are kept in place past the current deal's expiration in April 2022.

The pandemic has hastened the energy transition and heightened fears of stranded assets across the oil industry, pushing major producers to consider monetizing their reserves a faster pace. But the belief that global oil markets will be short on supply in the coming years -- due to recent underinvestment in upstream projects and slower US shale growth -- is also very real. This would require those with spare capacity to step in to fill any supply gap, increasing the call on Aramco's barrels. For example, Helle Kristoffersen, president of strategy and innovation at Total, said recently that oil markets might see a shortfall of 10 million b/d between now and 2025. "Given the natural declines in existing oil fields ... the message is simple: We need new oil projects and that is true even if you take a very cautious view on short-term demand recovery and on future demand levels,” she said.

Aramco remains committed to boosting its production capacity over time as it seeks to leverage its low-cost, low-carbon reserves, which it believes will give it a competitive advantage over its rivals -- even as the energy transition gathers pace and hurts oil demand. Energy Intelligence understands new Aramco capacity would mainly come from its offshore fields. While these are more expensive to develop than its very low-cost onshore fields, the bulk of their production is heavier crudes where price differentials have been strong in spot markets.

The elephant in the room for Aramco is the $75 billion per year dividend it has promised investors, which threatens to constrain its investment capabilities unless oil prices keep rallying. The Saudi leadership could look to sell more Aramco stock in the future to raise funds, or leverage its strong credit rating to issue more debt. Rising oil prices would lift Aramco's cash flow -- and its valuation.

UAE and Qatar

In the United Arab Emirates (UAE), Abu Dhabi National Oil Co. (Adnoc) plans to increase its capacity by 1 million b/d to 5 million b/d by 2030 -- a plan that could be accelerated depending on global supply needs and the pace of the transition. It also plans to become self-sufficient in natural gas output by the end of the decade, while also expanding its carbon capture and storage (CCS) capabilities significantly. Adnoc argues that oil and gas demand won't fall off a cliff anytime soon, and Abu Dhabi's low-cost, low-carbon production gives it a competitive advantage over its rivals. Oil exports will remain an important source of government income for Abu Dhabi -- and the UAE -- for some time, even as the Opec member continues to diversify its economy away from hydrocarbons.

Gas-rich Qatar is also advancing its game-changing LNG megaexpansion and is much further along in the process than Saudi Arabia or Abu Dhabi. Qatar's potential impact on the LNG market illustrates how the Saudi and UAE expansions could affect oil. On Feb. 8 Qatar awarded the $13 billion main construction contract for what is being billed as the "biggest LNG project ever" to a partnership of Chiyoda and TechnipFMC, which should see some 32 million tons per year of low-cost LNG start to flow from late 2025. State-owned Qatar Petroleum's (QP's) North Field East (NFE) project is an industry-defining project that will shape investment decisions for the next decade and usher in a new era of low-carbon LNG. NFE will be followed by the 16 million ton/yr Phase 2 of the expansion, dubbed the North Field South (NFS) project. QP is also leaving open the possibility of expanding beyond the 126 million tons/yr of capacity it hopes to reach with completion of NFS.

Qatar has underscored its determination to see off higher-cost rivals with this LNG capacity expansion program, while also signaling its intent to monetize more of its gas as fast as it can. The megaproject's low-carbon footprint could also become one of its most valuable attributes as the energy transition gains momentum. In addition to building some 3.3 million tons/yr of CCS capacity dedicated to the expansion, QP is putting in some 1.6 megawatts of solar power to fuel Ras Laffan. The subtext is clear: This is a landmark project for low-carbon LNG that will be hard for others to compete with on cost or in terms of environmental benchmarks.

Near-Term Contradictions

The big unanswered question for the medium-term oil production capacity expansion plans of Saudi Arabia and Abu Dhabi is how they will be reconciled with the current effort of the Opec-plus group to constrain global oil supply in an effort to prop up prices. To maximize output and monetize oil reserves, Saudi Arabia and Abu Dhabi will need to dispense with production restraints, which are the most powerful tool of oil market management. Exactly when and how this will happen, no one can say. But Saudi Arabia and Abu Dhabi are clearly preparing for that day.

Amena Bakr is chief Opec correspondent at Energy Intelligence. Rafiq Latta is a Nicosia-based senior correspondent at Energy Intelligence.

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