ARAMCO CUSHIONS PANDEMIC BLOW WITH HEALTHY BALANCE SHEET

Saudi Arabia continues to steer the global oil markets in the backdrop of a tough economic environment.

In May, the Saudi Ministry of Energy said it directed Saudi Arabian Oil Co. (Aramco) to cut oil production by 1 million barrels per day (bpd) to support markets, and encourage other OPEC members and allies to comply with the production cuts they had committed to in April.

The cuts take the total output curtailment from Saudi Arabia to 4.8 million bpd, and leaves production for the month of June to just under 7.5 million bpd. OPEC allies UAE and Kuwait also followed suit with cuts of 100,000 and 80,000 bpd, respectively.

Soon after, Prince Abdulaziz bin Salman bin Abdulaziz, the minister of energy, and Alexander Novak, Russia’s minister of energy, reaffirmed their commitment to help stabilise markets.

“We are also pleased with the recent signs of improvements in economic and market indicators, especially the growth in oil demand and the ease in concerns about storage limits as various countries around the globe begin to emerge from their stringent lockdowns,” the two countries said in a joint statement.

OPEC has cut its world oil demand forecast by 9.07 million bpd this year, compared to 6.85 million bpd.

In a first for oil futures prices, US crude oil benchmark West Texas Intermediate settled below zero at -USD 37.63 per barrel on 20 April. The following day, ICE Brent hit an 18-year low of USD 19.33 per barrel, with North Sea dated benchmark trading at one point at an unprecedented USD 10 per barrel below the futures contract.

But there are green shoots of recovery.

Data from China – the world’s largest oil importer – showed oil imports rising to 9.84 million bpd in April, a slight increase from the 9.68 million bpd in March, suggesting that the Chinese economy is starting up after the coronavirus-induced contraction in the first quarter.

The International Energy Agency (IEA) notes that the number of people under lockdown will fall from 4 billion to 2.8 billion by the end of May.

Mobility still remains limited for many citizens, but businesses are starting to reopen gradually and people are returning to work, which will provide a boost to oil demand, albeit modestly at first, according to the IEA.

“Taking into account these developments as well as new mobility data from advanced economies that was stronger than in our previous forecast, we have raised our 2Q20 demand estimate. For 2020 as a whole, last month’s forecast of a decline of 9.3 million bpd is improved to -8.6 million bpd,” the IEA said.

Aramco’s results in the first quarter underscored the company’s fiscal strength in the face of adverse economic conditions and low commodity prices.

The company reported net income of USD 16.7 billion in the first quarter, despite lower commodity prices, downturn in refining and chemicals margins and inventory re-measurement losses.

Cash flow from operating activities was strong at USD 22.4 billion in the first quarter, compared to USD 24.5 billion in the same period of 2019. The company said it paid dividends of USD 13.4 billion for the fourth quarter.

“The COVID-19 crisis is unlike anything the world has experienced in recent history and we are adapting to a highly complex and rapidly changing business environment. Aramco has demonstrated resilience during economic cycles and has an unparalleled position due to a strong balance sheet and low-cost structure,” said Aramco CEO Amin Nasser.

“We have delivered solid earnings with robust free cash flow, despite weak energy demand and low oil prices. We remain committed to the safety of our people while delivering on our long-term value creation strategy for all of our shareholders.

The company intends to pay dividends of USD 18.75 billion for the first quarter of 2020 in the second quarter, which will be “the highest of any listed company worldwide.”

During the quarter, the company resumed operations at Al-Khafji Joint Operations (KJO), an offshore partitioned territory between Saudi Arabia and Kuwait.

The company also discovered oil and gas reservoirs in the northwest part of the kingdom and another in the central area.

The Fadhili Gas Plant also raised its processing capacity from 1.5 billion cubic feet per day (bcfd) to 2 bcfd and is on track to reach its full capacity of 2.5 bcfd this year.

“Furthermore, Saudi Aramco implemented additional measures to optimise spending which resulted in reducing expected 2020 capital expenditures,” the company said. “In light of market conditions and recent commodity price volatility, Saudi Aramco continues to expect capital expenditures for the fiscal year 2020 to be between USD 25 billion to USD 30 billion (2019: USD 32.8 billion).”