Saudi Aramco’s H1 results show explosive growth resulting primarily from favorably volatile crude oil prices over the past 6 months. But it is more important what it will do with that wealth in terms of investment.
A 65% average increase in the price of oil resulted in an increase in profits of 86% compared to this time last year, netting the company $88 billion.
The average price per barrel of oil for 1H 2022 was $105.6, significantly higher than only a year earlier at $64.1 driving most of this profit.
Considering the current geopolitical landscape, this was expected.
Increasing demand for oil products into summer alongside Russia’s invasion of Ukraine jeopardizing supply have resulted in the price of oil skyrocketing past its pre-war rates.
Aramco’s President and CEO, Amin Nasser signaled a commitment to increasing oil production going forwards from 12 million barrels per day (BPD) to 13 million by the end of 2027, citing increases in oil demand through the rest of this decade.
Nasser goes on to describe “downward economic pressures on short term global forecasts” referring to the widespread recessionary indicators he is expecting which could restrict short-term prospects for oil.
Alongside the seasonality of oil demand leading to lower prices in winter, falling demand for oil as countries enter recession has the potential to hurt Aramco’s near-term prospects considerably.
Rethink Energy doesn’t believe that oil prices will reach the peaks seen in March of this year ever again, while it may come close before the transport industry is able to significantly reduce oil consumption through the proliferation of EVs.
Particularly looking at Q4 of this year and Q1 of 2023, oil prices are expected to continue falling back to more reasonable levels hurting Aramco’s primary revenue source for the rest of the year.
Contrary to proposed future increases in oil output, Nasser reiterated the company’s commitments to investing in clean energy sources under the guise of diversification and environmentalism.
Among these investments are goals to install 12GW of solar and wind power by 2030, and the production of 11 million tons of blue ammonia annually also by 2030.
To support the latter, Aramco is investing in the Jafurah unconventional gas field. Looking to begin output in 2025, it aims to supply natural gas feedstock to produce blue hydrogen through ammonia.
Aramco’s pursuit of blue hydrogen is strategic rather than environmental, as the inclusion of natural gas within the supply chain for hydrogen is starting to become counter-intuitive – as most people are starting to realize that starting with an expensive feed stock and pouring on the costs of carbon removal, is no longer the cheapest way to produce hydrogen. This decision is taken purely to retain an outlet in the long term for the extraction of natural gas reserves. Effectively by 2030 producing hydrogen in this way will mean Saudi achieves a much lower end price for its natural gas, which may seem out of kilter with today’s soaring prices, but is nevertheless the case.
Nasser went on to describe Aramco’s “largest capital program in history” reiterating that the is committed to investment in both petrochemicals and lower-carbon solutions. Note that he didn’t say zero-carbon, but low carbon.
Not only are there increased costs in steam reforming methane to make hydrogen and CO2, but there is additional cost in blue hydrogen of storing that carbon, typically underground or under a sea. Both steps increase the costs of blue hydrogen significantly. However fugitive emissions from the extraction process way also still attract carbon taxes or carbon border taxation if that hydrogen is sold to be used elsewhere.
Certainly over the next 3 or 4 years a market may be found for blue hydrogen as green hydrogen fights to lower its price by cutting the price of renewable electricity and the capex cost of building electrolyzers.
Aramco’s insistence on developing blue hydrogen facilities despite it having immense potential in Saudi for green energy through solar deployment. In our world view Saudi Aramco will start heading for difficult times by around 2027 and beyond, and it should be investing now in renewables.