Page 5 - AfrElec Week 13

AfrElec COMMENTARY AfrElec
which is around $80 per barrel, said Michael Liebreich at Bloomberg New Energy Finance (BNEF).
It is worth noting that Aramco can point to lifting costs of $8.2 per barrel, but the $80 figure comes from the Saudi government’s reliance on oil receipts for the majority of its income.
Indeed, Liebreich predicted that Saudi Ara- bia’s foreign exchange reserves might sustain record low oil prices for only two or three years.
Russia’s break-even figure is just $40, said Liebreich, demonstrating that Saudi Arabia’s strategy of winning market share is expensive and will diminish its foreign exchange reserves.
Crucially, Aramco is ratcheting up produc- tion beyond its previous Maximum Sustainabil- ity Capacity (MSC) of 12mn bpd to a record 12.3 mn bpd and perhaps to 13mn bpd.
If it is playing a long game of cementing mar- ket share then it is pushing its oil facilities to the limit and digging into the country’s financial reserves.
Saudi strategy
Aramco has effectively pulled out all the stops to boost output beyond its well-established MSC of 12mn bpd.
It itself has asked oil service companies to support the rise in output to 12mn bpd from April and for the foreseeable future, Reuters reported.
Aramco is also eating into inventories and boosting gas output to free up oil production capacity. The kingdom’s COVID-19 lockdown had hit domestic demand for energy, again free- ing up some barrels for export.
By April 2, there had been no agreement or even talks between the Saudis and Russia, although US President Donald Trump has repeatedly said that some contact would be made
after speaking to both countries’ leaders. Meanwhile, Bloomberg has reported that Aramco is looking to sell a stake in its oil pipeline
subsidiary to raise up to GBP10bn ($12.4bn). Aramco is committed to paying $75bn in div- idends to shareholders this year, which include buyers of stock at its $29.4bn IPO in December. It must also pay the first installment of its $70bn
purchase of chemicals producer SABIC.
Low oil prices mean that these commit- ments could be difficult for Aramco even as it pumps record volumes and ramps up heavily discounted exports. As such, this could limit the time that Aramco keeps production and exports
at record levels.
Investment cuts
Oil companies have reacted to the shocks by cutting investment for 2020. Aramco has cut 2020 investment from $35bn to $25bn, while Royal Dutch Shell has lowered its spending from $25bn to $20bn, and BP from $15bn to $12bn.
BP said it would wipe $1bn off its upstream spending by deferring exploration and appraisal activity and optimising major project spending.
Falling prices is good news for buyers, and China is the world’s largest oil importer will be looking to take advantage of low oil prices to drive its post-COVID-19 reconstruction, which has already seen a boom in coal as a generat- ing fuel. For example, Saudi Arabia and Russia are Chain’s two largest oil suppliers, and Sin- opec-owned Unipec bought 800,000 tonnes of Russia’s Urals blend – which usually goes to Europe – as Urals fell to $13 on March 30.
However, full storage capacity worldwide is the next worry for the oil market, as full storage will again pull down demand and depress prices.
“With major producers pumping barrels freely and the IEA suggesting that short-term
Week 13 02•April•2020 w w w . N E W S B A S E . c o m P5