Saudi Arabia pushing investment in oil and gas to meet global demand

Saudi Aramco is planning to boost its maximum crude oil production capacity to over 13m barrels per day (bpd) by 2027, up from 12m bpd as of August 2022. This is set to bolster Saudi Arabia’s position in global energy markets and afford the Kingdom greater agility under various possible energy transition scenarios. The expansion plan was announced in March 2020 and is expected to be delivered in phases.

In August 2022 Amin Nasser, president and CEO of Saudi Aramco, announced capacity is expected to reach 12.3m bpd in 2025. In May 2022 the Ministry of Energy said capacity would reach 13.3m-13.4m bpd by the end of 2026 or early 2027. If needed, the ministry has said Saudi Aramco would be able to pump oil at full capacity and that production could be maintained at that level. Nasser has said the company could expand capacity further in the future.

The Kingdom aims to increase natural gas production by more than 50% by 2030, helping to free up oil for export, meet growing domestic energy demand for power generation and industry, and support economic diversification. More gas will also enable the Kingdom to expand its petrochemicals industry and support the development of blue hydrogen production. In the long run, it aims to become a gas exporter with an integrated global gas portfolio.

Saudi Aramco's Vision 

There are multiple reasons the Kingdom is undertaking a major expansion of its oil infrastructure. One of the stated ambitions is to meet rising global energy demand. Saudi Aramco expects global oil demand of 100m bpd to continue at the same level for at least another two decades. This is in line with projections by the Organisation of the Petroleum Exporting Countries (OPEC) in its 2045 outlook and ExxonMobil’s 2050 outlook.

Saudi Arabia and Saudi Aramco’s leadership believe the industry should invest more in new oil supply. Nasser has said he expects oil demand to continue to grow this decade, and that Saudi Aramco will maintain its policy of investing in new supply. Saudi Aramco’s total capital expenditure was $31.9bn in 2021, up from $26.9bn in 2020. In March 2022 it announced it would boost this to $40bn-50bn in 2022, with the majority spent on upstream.

Climate Concern

Saudi Arabia’s expansion plans come at a time when the International Energy Agency (IEA) has indicated that new oil and gas projects must be curtailed if the world is to reach net-zero emissions by 2050 and limit global warming to 1.5°C above pre-industrial levels. In its landmark “Net Zero by 2050” report, released in May 2021, the IEA noted that considerable declines in the use of coal, oil and gas will be needed over the next three decades. The rapid shift away from fossil fuels that the report lays out would see coal demand decline by 98% to less than 1% of total energy use by 2050, gas decline by 55% to 1.75trn cu metres and oil fall by more than 75% to reach 24m bpd by 2050.

BP has published a similar 1.5°C-compatible netzero scenario, which sees global oil demand peaking in the mid-2020s, before falling rapidly to around 25m bpd by 2050. Oil major BP’s 2°C-compatible accelerated scenario also sees oil peaking in the mid-2020s, with approximately 45m bpd in 2050.

OPEC and ExxonMobil’s projections assume a much slower transition. However, without a massive deployment of costly negative emissions technologies, global temperature could increase by more than 2°C by the end of the century and have catastrophic consequences on global weather patterns and climatic conditions. OPEC and ExxonMobil’s projections are based on the current policy environment and not the future anticipated policy environment, which is what rapid transition scenarios such as BP and the IEA’s net-zero scenarios assume.

Carbon Footprint

Regardless of the potential scenarios, Saudi Aramco has one of the lowest CO₂ footprints in the oil and gas industry in terms of production. It is also one of the lowest-cost oil producers in the world. These two factors point to the likely staying power of the Saudi oil industry, especially under a carbon-constrained scenario.

Based on the amount of greenhouse gas associated with the production of each barrel of oil, Saudi oil ranks among the world’s least carbon-intensive sources of crude oil. This is due to a number of factors. Geologically, Saudi oil is pooled in large reservoirs close to the surface, meaning less energy is expended to bring the oil to the surface. Other factors include reservoir management practices, flare minimisation, energy efficiency, and methane leak detection and repair. Saudi Aramco flares off less natural gas than other producers, and the company’s methane emissions are among the lowest in the industry. Saudi Aramco is aware that as the drive to decarbonise the global energy system accelerates, prioritising the use of oil with a lower CO₂ production footprint will likely become more important when considering future oil supply.

Net-zero Targets 

As part of Saudi Aramco’s efforts to reduce its CO₂ footprint, it announced a net-zero target in 2021 for scope-1 and scope-2 emissions by 2050. Scope 1 covers emissions produced as a result of the company’s operations. Scope 2 covers emissions from the energy the company buys to run its operations. The move was part of a shift among major oil companies which announced various net-zero targets in the run-up to the COP26 UN Conference on Climate Change to remain competitive and more proactively engage in addressing climate change and limiting global warming.

Saudi Aramco’s target excludes scope-3 emissions, which cover emissions produced by the products the company sells. These emissions from the end use of oil comprise the vast majority of oil and gas lifecycle emissions. For comparison, ExxonMobil also has a net-zero target for scope-1 and scope-2 emissions. However, companies such as BP and Shell have extended their target to include scope-3 emissions. The scope-1 target will see Saudi Aramco take steps such as using renewables to power its oil drilling and extraction equipment or capture, and sequester emissions resulting from these operations.

In 2021 Saudi Arabia set a national target to reach net-zero emissions by 2060. This covers all of the Kingdom’s domestically produced emissions from sectors such as transport, electricity production and manufacturing. The target does not cover emissions resulting from the end use of its oil exports. Rather, those emissions would come under the remit of the country consuming the oil products.

Market Share

Saudi Arabia’s higher production capacity will enable it to capture a greater share of the oil market under various scenarios. If international oil demand continues to grow, the expansion will help fill what Saudi Aramco says will be a looming supply gap left by other international oil companies cutting back on their upstream investments as part of their energy transition policies. Saudi Aramco expects this drop in investment to impact supply in the medium and long term, and is looking to help fill that demand. This explains why Saudi Aramco is working on expanding its capacity now. According to Nasser, it typically takes five to seven years to bring extra supply on-line, with work involving pre-engineering, drilling wells and developing pipelines.

However, if international action on climate change accelerates in line with ambitions to limit global warming, oil will likely be substantially squeezed in the coming decades. Under a rapid global energy transition, oil demand would peak in the coming years and then shrink, pushing prices down. Under such a scenario, capturing a larger share of the market and competing on volume sold internationally would be important for Saudi Arabia to protect its revenue from the oil and gas sector.

Oil Majors

The gradual reduction in oil and gas production by international oil majors may prove advantageous for the national companies that will have to meet demand. International oil companies are increasing investment in low- and zero-carbon projects. This includes targeting a significant boost in the production of renewable power, biofuels and hydrogen to diversify, and in some cases ultimately transform, their business models. This will help to maintain substantial profit under a low-carbon scenario. While international oil companies are subject to pressure from climate-conscious investors, national oil companies have greater flexibility.

As a low-cost national producer, Saudi Arabia is unlikely to curb its oil production under the energy transition. Its oil resources are most likely to meet international demand as the world looks to transition away from fossil fuels. The price that the Kingdom receives per barrel of oil under a carbon-constrained scenario will likely be lower than present, with production concentrated among a smaller number of low-cost producers in a more competitive market.