Maintaining MSC at 12 mbpd may affect oil prices: Analysts

Oil barrels

The decision to maintain the maximum sustainable capacity (MSC) at12 million barrels per day (bpd) could impact oil price rise in the medium and long terms, analysts told Argaam.

Analysts added that ADES Holding Co. and Arabian Drilling will be affected by Saudi Aramco’s decision.

Impact on ADES and Arabian Drilling

Mazen Al-Sudairi, Head of Research at Al Rajhi Capital, said ADES has 33 offshore platforms and 11 onshore platforms contracted with Saudi Aramco. Its recent order of 19 platforms (worth SAR 3 billion) for the Aramco mega project is affected by the company's expansion plan in production capacity of one mbpd.

Mazen Al-Sudairi, head of research at Al Rajhi Capital

Al-Sudairi added that the ADES contract constitutes a fraction of Aramco's annual capital expenditure, amounting to about $40-$50 billion.

He explained that if Saudi Aramco terminates the contract with ADES, it will have to pay a lump-sum compensation of 50% of the order value, thus no partial or full termination of the contract.

He stated that the contract is fixed, extending for five years, two of which are for 16 rigs, with three fixed years, besides an optional year for three rigs. It is valued at $1.5 billion, which helps the company manage its financials.

On Arabian Drilling, the analyst noted that it has 35 onshore platforms and 12 offshore platforms. All of the company's upcoming contracts for the onshore fleet are linked to unconventional gas fields. Meanwhile, only five offshore platforms are linked to the expansion of oil capacity with final terms, and there is a 50% cancellation penalty fee.

High Oil Prices

CEO of CMarkits Yousef Alshammari said one of the most prominent repercussions of the decision is the rise in oil prices in the medium and long terms.

Yousef Alshammari, CEO of CMarkits

In a call with Argaam, Alshammari predicted that Aramco would achieve high financial performance in 2024, if oil prices continue to soar. He noted that the company's profits amounted to SAR 604 billion ($161 billion) in 2022, expecting it to achieve similar performance.

He added that prices will continue to rise due to lower production, with the average price of oil likely to reach $100, pointing out that the increase is due to higher demand and lack of investment. This is coupled with lower, volatile prices, which would further hike prices over the next two to 10 years.

He further explained that Aramco has not significantly increased its production and was expected to raise it in late 2026 and 2027, but a large part of the expansion has not been completed.

Alshammari anticipated financial abundance for the company, which can be redirected, indicating that there may be capital spending on renewable energy projects, gas and projects to convert oil to other chemicals.