INTERNATIONAL contractors were prepared for the worst when Saudi Aramco summoned them to a meeting at its Al-Khobar headquarters in the first week of March. With oil prices barely one-third of their mid-2008 peak of nearly $150 a barrel, the news from the world’s largest oil producer was unlikely to be positive.
Their fears appeared to be confirmed after Aramco’s announcement that its spending would be cut to around $60 billion over the five years to 2014 – by some reckonings a reduction of some $40 billion from its previous capital expenditure (capex) estimates.
Aramco had even more potential pain in store for its international contractors. Under new guidelines, they must now set up joint ventures with local Saudi firms if they are to secure engineering, procurement and construction (EPC) contract awards – significantly reducing the foreign companies’ operational freedom.
However, the news could have been worse: Aramco’s five-year budget is still substantial, at $60 billion. It includes $28 billion for upstream investment and $32 billion for downstream spending and covers a total of 144 projects – with $7 billion set aside for the largest ventures, including eight very large projects.
The size of the reduction in Aramco’s capex budget is also open to doubt. In November, Saudi finance minister Ibrahim Al-Assaf spoke of plans to spend $100 billion in the oil sector by 2014. And well placed local sources question whether Aramco is now determined to reduce that by $40 billion. Certainly, there are inconsistencies in the official line: in April, oil minister Ali Al-Naimi told an energy round table in Tokyo that Saudi Arabia is spending “some $70 billion” on capital projects to ensure the future availability of crude supplies.
Nonetheless, with the completion of Khurais, Shaybah, Nuayyim and Khursaniyah oilfield developments, as well as the delays in approval for the Jubail and Yanbu refinery projects, Aramco’s capex programme is bound to be reduced relative to past spending levels.
The country’s lower production level – around 8 million barrels a day (mbpd), compared with 9.5 mbpd-10.0 mbpd previously – will inevitably result in a reduction in drilling activity and the cost of rigs. “Aramco has already reduced 25 rigs from its peak in July 2008 and may be going further down still,” says Sadad Husseini, a former head of exploration and production at the company. “At an average spending rate of $50,000 a day for land rigs and well-related equipment, that alone would represent a cost saving of $2 billion over five years. Assuming 10 wells per rig per year, that would be a reduction of 1,250 wells and a saving of a further $2 billion in well flowlines and manifolds.”
The government’s public-policy position remains that Aramco is fully committed to its long-term investment plans. These call for the raising of production capacity to 12.5 mbpd by this month: much of the increase will come from the Khurais field, which was due to begin production of 1.2 mbpd in June. An additional 250,000 bpd is scheduled to come on stream at the Shaybah field in the Empty Quarter. Some 100,000 bpd of additional Arab Extra Light crude was also due to become available at the Nuayyim field.
However, assuming the kingdom attains this production benchmark – which will leave it with a very large spare-capacity buffer, of 4.5 mbpd – spending is bound to be reduced in future years. There has already been some reduction in Aramco’s upstream plans as a result of the global recession: in November, Aramco shelved a 100,000 bpd heavy-oil development at the Dammam field, saving itself $1.2 billion.
