OPINION: The latest verdict this week from the world's largest oil company was loud and clear — Saudi Arabia is determined to pursue the oil price war against Russia for the foreseeable future, ensuring ample supplies of cut-price crude.
The battle has the potential of sounding the death knell for Opec as a price-fixing cartel.
Aramco’s top brass went out of their way during a conference call on 16 March to drive home the message that the desert kingdom is prepared to fight to the bitter end.
They candidly explained that Aramco’s massive production clout and low cost of production will give it the edge in the market share grab that followed the collapse of talks with Russia in early March to curtail supplies in response to the crushing impact of the coronavirus.
The event offered no signs of a possible compromise in the brutal emerging war that powerful Saudi Crown Prince Mohammed bin Salman is out to win at any price.
The fight carries enormous risks for the kingdom's finances and plans by MbS — as the heir-apparent is known — to diversify the economy by using oil revenues.
But the maverick prince has a proven history of making rash judgements and going to any length to punish enemies.
He pursued the bloody war in neighbouring Yemen, and was implicated by many, including the United Nations, in the murder by Saudi operatives in 2018 of dissident journalist Jamal Khashoggi.
The price war could not have come at a worse time, with the global economy reeling from a pandemic that has hammered aviation, road transport, supply chains and energy demand.
Oil has more than halved in price this year since climbing to a peak in January before the rapid spread of the Covid-19 virus, endangering the livelihood of many less-wealthy Opec producers.
The rout deepened after Aramco offered heavily discounted crude to customers to wean them off Russian oil. Aramco then announced it would raise its April output to a record 12.3 million barrels per day.
“In a nutshell, Saudi Aramco can sustain the very low price and can sustain it for a long time,” stressed Aramco chief executive Amin Nasser.
Chief financial officer Khalid al Dabbagh said Aramco is “very comfortable” with a per-barrel price of $30, adding that the company will be able to meet its dividend commitments during the downturn.
The executives maintained that Aramco’s maximum capacity is sustainable for one year without the need for any spending, because the kingdom has ample oil in storage it can tap into to raise sustainable capacity beyond the current 12 million bpd.
MbS has ordered Aramco to hike the spare cushion to 13 million bpd.
Aramco’s production costs are the lowest of any producer thanks to its enormous onshore reserves and super-giant fields.
Furthermore, the kingdom has foreign exchange reserves of roughly $500 billion that can cushion the impact of the price war.
However, the brave faces worn by Aramco executives hide the fact that winning such a war can be hugely costly to MbS’ vision of transforming Saudi society by creating a vibrant economy built on oil wealth.
It also risks breaking up Opec forever. The cartel was set up 60 years ago with the goal of protecting the interests of all members by ensuring healthy oil revenues through consensus decision-making.
Opec is no longer a collective voice but a fig leaf that MbS can wear when confronting rivals.
(This is an Upstream opinion article.)