After the March OPEC+ meeting, in response to Russia’s refusal of Saudi Arabia’s suggestion for further production cuts, Saudi Arabia and UAE declared to open their oil taps to increase production to 12.3 million barrels per day (bd) and four million bd from April 2020 respectively.
While the majority of the world’s upstream projects look unprofitable after the recent price war, Saudi benefiting from the low lifting cost, low capital cost and low breakeven prices will be relatively shielded and can still put its upstream expansion plans into action. Having said that, it should be also noted that having an oil-based economy, Saudi heavily relies on the oil market and even small fluctuations in oil price can have a significant impact on government revenue and consequently its decision on domestic expenditure. Saudi Aramco, the state-owned company operating all of Saudi’s oil fields, announced plans to cut its capex budget for 2020 by $10bn, almost 75% of the initially planned value. Saudi’s decision to increase its production from one side and cutting capital costs from another side can suggest that the majority of the budget cut would be focused in other sectors than upstream oil.
Prior to the price war, UAE’s giant national oil company ADNOC was expecting more than 15 expansion and new projects to come online between 2020 and 2024. However, as the world economy continues to struggle, despite having a reasonably low breakeven oil price, most of its upcoming projects shared with major IOCs, are likely to be delayed, at least in the short-term. IOCs have already started reviewing large investments and is considering budget cuts.
In the best case, even if Saudi Arabia and UAE are capable of accomplishing their pledge for output increase, the main question is how they are able to offload or store surplus oil while global demand is weak, storage availability is reducing and crude transportation is becoming more expensive. In light of the fact that there is still uncertainty around how long multiple countries’ lockdowns and travel restrictions will last and when the world may get back to a semblance of normalcy, the best solution for Saudi, UAE and all other countries with oil-based economies is to seek a new production cut deal with both OPEC and major non-OPEC producers such as Russia and the US to rebalance an oversupplied market. OPEC and Russia are holding a virtual meeting on 9 April with hopes of an output cut agreement that could stabilise the global oil market.