Aramco Stands by Capex Plan, Details Variable Dividend

Saudi Aramco is standing by its capital spending guidance of $45 billion-$55 billion for 2023 and will increase that spending in the years ahead as previously announced, even though lower oil prices eroded its earnings in the first half of this year.

Capex rose to $10.5 billion in the second quarter of this year from $8.7 billion in the first, as Aramco worked to expand its oil production capacity to 13 million barrels per day by 2027 and pressed ahead with gas development projects.

Capital spending of $19.2 billion for the first half of the year was up 13.4% versus the same period of 2022, the giant oil company said in its latest quarterly earnings report.

"We feel very comfortable with the $45 billion-$55 billion capex range [for 2023]," CFO Ziad al-Murshed said during an earnings call, adding that Aramco still plans to increase capex through the middle of the decade.

Upstream capex rose to $8.4 billion in April-June from $7.4 billion in the same period of 2022, as the company continues to work on its upstream oil and gas expansion plans.

Downstream spending for the second quarter rose 10.4% year on year to $2 billion, driven by international investments and expansion projects.

Capex rose even as second-quarter net income fell 38% to $30.1 billion versus the same period of last year, but that was still slightly above the average forecast of 15 analysts who had estimated it at around $29.8 billion.

Aramco set its highest ever annual capital spending guidance after reporting record net income of $161 billion for 2022 as a result of high oil prices after Russia's invasion of Ukraine and higher production as oil demand recovered after the Covid-19 pandemic.

It also said at the time that annual capital spending would continue to increase through the middle of the decade. Its capex amounted to $37.6 billion in 2022.

Oil Expansion

Aramco is expanding its hydrocarbon production capacity despite a global trend towards decarbonization.

It argues that oil and gas will still be needed over the medium- to long-term to meet demand and safeguard energy security, which has become a hot topic since last year amid disruptions in energy trade flows related to Moscow's war in Ukraine.

Aramco said it is pressing ahead with several offshore oil projects, including production capacity increases of 300,000 b/d and 250,000 b/d at the Marjan and Berri fields, which are on track for completion by 2025.

The project to raise oil production capacity at the giant Zuluf field by 600,000 b/d to 800,000 b/d is on track for completion in 2026, Aramco said.

It's unclear whether this timeline for Zuluf might be impacted by the company's review of three contracts that were awarded to US firm McDermott.

Sources have told Energy Intelligence that McDermott has had trouble securing the required letters of credit.

Gas Expansion

Aramco is also proceeding with plans to boost gas production capacity to meet growing domestic demand in Saudi Arabia.

This effort is being led by the massive Jafurah unconventional gas project, which is "expected to commence production in 2025" and will gradually reach a plateau of 2 billion cubic feet per day by 2030, the company said.

In its downstream business, Aramco and partner TotalEnergies are proceeding with the giant Amiral petrochemicals complex in the kingdom after $11 billion worth of construction work was awarded to several companies in June.

The gas plans — along with the installation of renewable power capacity — will help the kingdom to eliminate the burning of crude oil for power generation by 2030, said CEO Amin Nasser.

Nasser added that international gas investments remain on Aramco's radar, with opportunities being evaluated, but no commitments made so far.

Performance-Linked Dividend

Aramco said that in addition to a base dividend of $19.5 billion for the second quarter, it will distribute $9.87 billion in performance-linked dividends over six quarters, starting with the third quarter of this year.

Subsequent distributions under the performance-linked dividend plan — announced earlier this year — will reflect results over the rest of 2023, the company added.

For next year and beyond, Aramco will target performance-linked dividends that amount to 50%-70% of annual free cash flow, net of the base dividend and other amounts, including external investments.