Saudi Aramco Cuts Five-Year Spending Plan, Announcing US$60-bil. Package

Cutting a Shrinking Pie

Saudi Aramco is today reported to have cut its energy project spending budget sharply between now and 2014, from peak expectations of US$120–130 billion over 2009–13, set in the first half of 2008, down to an expected US$60-billion spend between this year and 2014, according to Saudi daily al-Watan. The news comes from one of Saudi Aramco's main local contractors, which has been informed by the company of the new five-year budget allocations, meaning that there may still be some uncertainty over exact figures, as Saudi Aramco itself has yet to publish them.

The massive cut comes after Finance Minister Ibrahim al-Assaf late last year told Reuters that the kingdom's planned investments during the corresponding period would be US$100 billion, though without giving any further specifications or clarifications. The figure was not confirmed by Saudi Aramco itself, but indicated that the government and the NOC saw its investment needs shrinking, in synch with a worsening global downturn and emerging information about the depth of energy-market demand destruction during the first half of 2008.

Falling Costs and Weak Demand

As the worldwide recession has deepened, it has become apparent that Saudi Aramco's previous spending plans are rapidly becoming obsolete. To a certain extent, these plans had been forced by mounting political pressure from consumer markets on Saudi Arabia to demonstrate its long-term abilities to meet expected continued global demand growth by late 2007 and during the first half of 2008. While actual projects—with only small and relatively insignificant exceptions—have not been cancelled, Saudi Aramco has been swift to react to the falling demand by delaying projects, partly so as not to bring them onstream in a weak market and partly to capture the falling construction costs that are a result of easing shortages of material, skills, and technology as projects are abandoned elsewhere.

Saudi Arabia's standing as the world's largest oil exporter, oil-reserve holder, and OPEC's swing producer has put it in a position where it can—and constantly has to—plan with a long-term view. Hence, the company is by now already assessing global demand growth and declines far beyond the rumoured five-year project spending plan, trying to assess when a global economic recovery will take place and how the ensuing demand growth will look. Anticipating this, and with view to the numbers above, it is likely that Saudi Aramco sees the need to delay some of its later upstream mega-projects further, thus pushing most or all of their expected expenditure beyond the current five-year plan.

Saudi Aramco is also seeing much of the spending foreseen in early to mid-2008 shrinking away due to the drop in project cost inflation, from which the industry had suffered globally, especially after 2005–06 (see Saudi Arabia: 21 January 2008: Delays, Large Cost Overruns, Threaten Saudi Arabia's Refinery Construction Programme). With chronic material, skilled labour, technology and machinery shortages plaguing the worldwide oil and gas industry as oil prices shot up and more and more demanding hydrocarbon ventures looked economically feasible, Saudi Aramco was forced into consecutive increases in its planned spending in order to continue to demonstrate its ability to deliver sufficient quantities of oil to the world markets over the long term. Indeed, with oil prices rocketing in the first half of 2008, the political pressure on the kingdom to add production capacity and ease the perceived market tightness became immense (see Saudi Arabia: 20 June 2008: Expectations Grow on Saudi Oil Meeting; Greater Consumer-Producer Reciprocity Indicated and Saudi Arabia: 19 May 2008: Oil Prices Slide as Saudi King Gives U.S. President Token Output Increase). Raising the expected project spending further became one of only a few areas in which the kingdom could demonstrate its goodwill to consumer markets that were increasingly blaming OPEC and the country itself of pursuing a policy of blind price maximisation—a notion conflicting with the Saudi long-term principle of market stability.

With material costs and shortages now falling sharply, Saudi Aramco has already made savings of up to 15–20% on projects held back during the second half of 2008 and early 2009, indicating that cost deceleration could already by now have lowered Saudi Aramco's projected spending needs—all else being equal—by about half the cut from the finance minister's November US$100-billion-remark, to today's reported number (see Saudi Arabia: 3 February 2009: Retender Principle Proven at Saudi Karan Gas Field; Floodgates Open for More? and Saudi Arabia: 21 January 2009: Further Delays to Karan Gas Project as Saudi Aramco Faces Down Contractors over Prices).

Outlook and Implications

Saudi Aramco has not given any indication of impending project cancellations, preferring instead to hold back projects temporarily, in order to delay their completion till such time as global demand is expected to rebound, while at the same time capturing rapidly falling project costs. In order to emphasise its long-term market-balancing role, Saudi Aramco is unlikely to start cancelling long-term projects due to be tendered in the coming five years, although announcements of temporary (and perhaps de facto indefinite) project deferrals are much more likely. With the future demand picture still highly uncertain, and looking weak for at least much of the first half of the coming five-year period, Saudi Aramco is likely to favour delaying some of the large-scale field expansion and development projects that have not yet begun.