Saudi Aramco, (ARMCO) reported Q-2, 2022 earnings this week and launched the tongues with the large amount of cash that is generated in its daily operations. Net income of $48.4 billion, free cash flow of $34.6 billion for the quarter and $65 billion for the first half substantially dwarfed prior year figures of $22.6 billion and $40.9 billion for the same period. All of this was driven by the realization of prices for crude oil that surpassed the $113.00/bbl mark for the quarter, surpassing the prices of the previous year ($67.90) by ~66%.
What was remarkable, and documented in a recent Wall Street Journal article, was the company’s capital allocation budget to ramp up production remained largely unchanged at the low end of its previously announced range of $40-50 billion by 2022. The Journal article went on to note:
“To be fair, $40 billion is much, much more than it was in 2021, but Aramco is doing very well. It pulled in more than $65 billion in free cash flow in the first half of this year. That spending also includes diversification into natural gas, wind, solar power and blue hydrogen. And while capital discipline is laudable, surely if management truly believes that oil demand is growing over the next decade, it should at least accelerate plans to expand its maximum sustainable oil capacity to 13.0 million barrels per barrel. day, currently set for 2027.”
Where the Saudi mindset seems to turn away from its oil-producing cousins on the other side of the planet, is what to do with the excess cash now being made. Weather US shale producers are raining wealth on its shareholders, in the form of share buybacks and special dividends, KSA, which owns 94% of ARAMCO, has focused on paying down debt and diversifying its energy portfolio. Somehow mimicking the actions of mega oil producers like ExxonMobil, (NYSE:XOM) Chevron (NYSE:CVX), and BP (NYSE:BP), by delving into forms of alternative energy.
The supermajors, tired of being pummeled by climate alarmists, and having totally bought into the Paris Agreement Net Zero by 2030, they have been diverting capital from legacy sources into cleaner forms of energy that raise their ESG scores. author of, The end of the fossil fuel crazeTerry Etam summed up their plight in an article published in the BOE Report discussing the next gap between supply and demand-
“There is little growers can do to help. Its ‘inventory’ (oil and gas reserves) is in incredibly high demand and its price is rising. What would help alleviate this situation is finding and developing more reserves, but the global cultural elite, the group that dominates Western political schools of thought, has ‘scientifically’ linked any weather event, anything, to climate change, which is linked to ‘burning fossil fuels’, which is therefore bad, and the mere suggestion of increasing production is unacceptable”.
In this sense, the supermajors have been “greenwashing” their portfolios in some cases and beginning to make the transition in others. Here they stand apart from the Saudis who intend to bridge the gap between oil and green energy for the foreseeable future.
Despite Aramco CEO Amin Nasser’s publicly stated view that oil demand will grow for the rest of this decade, KSA appears in no rush to accelerate the timeline to reach the 13mm BOPD upper threshold set for 2027. Instead, KSA has embarked on an ambitious, decade-long quest to diversify its economy away from its sole reliance on oil and gas, choosing a multipronged approach that includes hydrogen, wind and solar power.
One area they are focusing their efforts on is the production of hydrogen-H2. A Financial Times-FT article notes that the Saudis plan to dominate H2 production, within a few years. With its abundant gas supplies near the city of Neom, a Blue-H2 plant is under construction with $110 billion of capital. This plant is expected to take 2.2 billion cubic feet of gas per day from the Jafurrah supergiant gas field, to process Blue H2. It is expected to come into operation in 2026.
Another massive hydrogen project will produce Green H-2, with power supplied by a 99-turbine wind farm. SP Global discusses this in an article concentrating on Acwa Power’s 240,000 mt/t per year green hydrogen project that will produce 1.2mm mt of ammonia. Production is also expected to begin in 2026.
Finally, solar energy is believed to have limitless potential in the Kingdom. It makes sense since the sun shines there more than 300 days a year. Consequently, KSA is launching a number of new solar farm projects. The Kingdom’s sovereign wealth fund this year alone awarded two prizes totaling 1 GW IPP. One went to Acwa Power for a 700 MW farm in Al-Rass and a second smaller 300 MW farm in Saad. The Kingdom has a goal of installing 54 GW of solar generation by 2030.
Solar energy is also finding industrial uses such as glass point complex takes shape This 1.5 GW project, the world’s largest solar farm, will power an aluminum smelter plant designed to use solar mirrors in water-filled pipes to produce solar steam. This will save approximately 600 thousand tons of carbon per year.
It’s pretty clear from the decisions KSA is making about allocating capital for renewable forms of energy that its feet are firmly planted in both camps. The higher price regime that has been installed in the oil market since 2021 has provided the cash to finance the projects that we have discussed, which will boost the Saudi Vision 2030 initiative.
At the same time, like their shale counterparts in the US, they are committed to orderly development of their legacy oil reserves in a way that will preserve value well into the future as much as possible. That’s just good stewardship.
What this means is that despite pleas from world leaders, including the US president, to produce more oil at lower prices, oil producers in the US and Saudi Arabia are apparently determined to keep the cap on capital spending. This will have the effect of keeping supplies tight and prices higher than they would otherwise be.
By David Messler for Oilprice.com
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