February 2024, Vol. 251, No. 2
Guest Perspective
Guest Perspective: Aramco’s Best of Both Worlds
By Paul Hickin, Editor-In-Chief, Petroleum Economist
(P&GJ) — Saudi Aramco’s energy strategy should teach The West a lesson: invest in hydrocarbons now. Not only is oil and gas crucial for near- and medium-term energy security and affordability, but there is also a huge amount of money to be made that can be put toward the transition.
The oil and gas behemoth had raised its capital spending to $37.6 billion, in 2022 and issued guidance of $45-55 billion in 2023 as it prepared to add 1 MMbpd to its oil capacity by 2027, while more than doubling its gas production by the end of the decade.
Amin Nasser, head of the world’s largest oil producer, has been repeating the same lines: The world is facing a major supply crunch as most companies are reluctant to go against investor pressures around environmental, social and governance (ESG).
A report by intergovernmental association the International Energy Forum and information provider S&P Global Commodity Insights backs up the assertation. It warned that annual oil and gas investment needs to rise by 28%, to reach $640 billion, by 2030 to ensure adequate global supplies.
But the fear factor goes deeper after COVID caused oil prices to hit record lows and as the robust rebound has left energy companies, formerly oil and gas companies, awkwardly returning money to shareholders under the moniker of capital discipline. This comes amid complaints on energy affordability from the public and cries of an energy deficit from experts.
Research by professional services firm Deloitte highlights the trend. “Capital discipline is now a practiced norm for most in the industry. Despite oil prices more than doubling over 2020 levels, capex growth was below 10pc” it noted. in a webcast for Petroleum Economist.
“The industry has been running ahead of the oil price cycle, for instance, it generated around $1.35 trillion of free cash flows in 2022, three times higher than the previous high price period of 2013-14,” Deloitte pointed out.
Deloitte explains that free cash flow has been directed toward paying dividends and doing buybacks, while the old drivers of M&A activity, such as investing and acquiring for growth and increasing market share, seem to have been sidelined.
Investing in hydrocarbons is the lifeblood of an oil and gas company, while energy transition can look like a transfusion. It could be the final irony for energy companies: amid fears of stranding assets, they become stranded from their traditionally lucrative fossil fuel assets. If this is the last hurrah, that means investing now.
ExxonMobil’s mantra of investing against trend has often worked out well for the US energy major. CEO Darren Woods said, “While our results clearly benefitted from a favourable market, the counter-cyclical investments we made before and during the pandemic provided the energy and products people needed as economies began recovering and supplies became tight. We leaned in when others leaned out.”
New Old Mantra
Jeff Currie, head of commodity research at Goldman Sachs, points out that energy security concerns have changed the investment profile for oil and gas, and that “you can already see it in the willingness of some of the companies like BP that took up some of their petroleum investment in their recent quarterly announcement.”
“As we go through the transition, it is about focusing on maximizing energy but minimizing emissions and doing so in and such a way that focuses on reliability, which was clearly missed in Europe over the course of the last couple of years,” Currie said.
Currie highlights the fact that oil and gas are far cleaner burning fuels than wood or coal and, with the underinvestment in oil and gas, lower-income households as well as lower-income countries have shifted towards these traditional fuels.
BP has certainly become more confident and clearer in its message. At International Energy Week last year in London, CEO Bernard Looney emphasized the importance of an orderly transition given the need for affordable, reliable supply.
“Ask people today what they want from energy, and the answer is more likely to be an energy system that works. An energy system that works is one that provides energy that is secure and affordable as well as lower in carbon,” Looney said. “We need to invest in the energy transition, and we need to invest in today’s energy system, which is predominantly an oil and gas system.”
The Biden administration’s handling of super-indie ConocoPhillips’ Willow oil and gas project highlights the internal conflict of policymakers: flip-flopping between blocking oil and gas projects on environmental grounds and greenlighting some of them on long-term security needs.
The U.S. Department of the Interior approved Willow, located in the National Petroleum Reserve-Alaska (NPR-A), the large federal enclave west of the producing oilfields on the Alaska North Slope. The green light allows ConocoPhillips to boost oil output by an estimated 180,000 bpd, with first oil coming by the end of the decade.
The move came one day after Biden announced new restrictions on oil and gas off Alaska’s Arctic coast, along with new protections in ecologically sensitive onshore areas in the National Petroleum Reserve in Alaska (NPR-A).
Meanwhile, Aramco has been much clearer on how it wants to tread both paths. It has doubled down on blue hydrogen and ammonia amid a ramp-up of both gas production and CCS technology, rather than investing in renewables to power electrolysis.
Aramco plans to expand gas production by more than 50% by 2030, with the Jafurah Field – expected to produce up to 2 Bcf/d (56.6 MMcf/d) by 2030 – anticipated to provide feedstock for hydrogen and ammonia production.
The company also intends to construct a 9 mtpa CCS project at the Jubail industrial complex, expected to be one of the largest in the world when it goes on line in 2027.
Given Aramco is a hydrocarbon giant and a low-cost producer, “blue hydrogen makes perfect sense for its business, commercial and technical perspectives,” according to Manal Shehabi, founding director of consultancy Sheer Research & Advisory.
The problem of energy security vs. energy transition is maybe easier to solve for Aramco than for others. Nevertheless, the answer is the same: Do not neglect your resources. It could be costly to both sides involved in the debate.
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