Saudi Arabia, the world’s largest oil exporter, is hoping to post its first budget surplus in nearly a decade next year on the back of improved oil prices and restricted government spending.

The country estimates it will achieve a surplus of 90 billion riyals ($24 billion), or about 2.5% of its gross domestic product, in 2022, its first since 2014.

The improvement in financial fortunes will give Saudi Arabia the financial muscle it needs to scale up its oil production capacity to 13 million barrels per day, up from the existing 12 million bpd capacity.

In a geopolitical context, strengthening oil-producing capacity while also investing heavily in mitigating its carbon emissions are seen as key planks of a strategy that could make Saudi Arabia the dominant global supplier of crude during an era in which demand for hydrocarbons tapers away, leaving producers that have higher costs and higher carbon emissions high and dry.

Opec members still produce almost 35% of the world’s crude requirements, with Saudi Arabia maintaining the largest share within the group.

Long-term International Energy Agency estimates suggest that, as the energy transition gathers pace, the Opec producers will increase their collective share of world oil production to almost 48% by 2050.

Saudi Arabia is also anxious to strengthen its hand in a region in which Iran is its key rival.

Iran has drawn up plans to increase its oil production capacity to up to 5 million bpd in another 10 years, but has to contend with US-led sanctions and fiscal weaknesses.

Saudi Crown Prince Mohammed bin Salman said the “surpluses will be used to increase government reserves to counter the needs posted by the coronavirus pandemic, strengthen the kingdom’s financial position, and boost its capabilities to face global shocks and crises”, according to the nation’s official press agency SPA.

Saudi Arabia’s fiscal projections next year are a marked improvement from recent years that have seen the country post heavy budget deficits as the coronavirus pandemic disrupted global economies and hammered oil prices.

In 2021, however, the nation is expected to post a deficit of 2.7% of its GDP.

But this is relatively better than the budget deficit of 298 billion riyals ($79.4 billion) posted in 2020, as lower oil revenues disrupted its economy.

Higher revenues

On the revenue front, Saudi Arabia anticipates its income in 2022 to increase to 1.045 trillion riyals ($278.6 billion), while spending has been pegged at 955 billion riyals ($254.6 billion), the SPA reported.

Saudi Arabia does not disclose the oil price around which it budgets its finances for the coming years. However, Upstream understands it is budgeting next year with an oil price assumption of between $50 and $60 per barrel.

Saudi Arabia’s economy is also expected to grow by almost 7.4% next year, after expanding by a modest 2.9% in 2021.

The nation’s budget document noted that Saudi Arabia’s economic growth would be driven by high oil prices and “the expected improvement in non-oil GDP assuming that the economy continues to recover gradually from the effects of the Covid-19 pandemic”.

Capacity expansion

Project watchers said Saudi Aramco’s multi-billion Zuluf offshore incremental project is expected soon to see the light of day, with the Saudi state-owned giant expected to place awards within months for the project.

“We see more flexibility on the project spending front and Zuluf is expected to be at the forefront of Aramco’s growth ambitions,” one person close to the Saudi long term agreement (LTA) arrangement with offshore contractors told Upstream.

Energy transition flawed, says Nasser

Aramco chief executive Amin Nasser recently spoke out on the energy transition strategy being adapted by the oil and gas industry and said that fossil fuels are expected to play a key role for a much longer time, indicating that the country's spending on hydrocarbon projects are poised for an increase.

Describing current energy transition strategies in western economies as "deeply flawed", Nasser said: “Energy security, economic development and affordability imperatives are clearly not receiving enough attention.”

Nasser said that new and existing energy sources, including oil and gas, will both need to operate in parallel for a much longer time, requiring billions of dollars of upstream oil and gas investments.

He raised concerns over the declining capital expenditure in the oil and gas sector, saying crude supplies have already started to lag.

“Across the industry, upstream capex fell by more than 50% between 2014 and last year, from $700 billion to $300 billion,” he said.

Nasser noted the declining capex is also “hurting spare oil production capacity, which is declining sharply" despite healthy demand growth.

Swing capacity in question

Despite spending billions of dollars, expanding its oil production capacity to 13 million bpd on the back of the Zuluf development, some industry insiders question Saudi Arabia's capacity to further scale up its oil production levels in the long term.

“Opec’s capability of emerging as a swing producer, including Saudi Arabia, is going to be quite restricted in the long term, as not many member countries have a long-term pipeline of oil-based development projects or discoveries,” one Middle East source said.

Saudi Arabia’s neighbour and fellow Opec member United Arab Emirates is also expanding its oil production capacity to 5 million bpd by the end of this decade, up from the existing 4 million bpd levels.

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