Aramco’s capex cut likely to affect oil and gas services companies

Strict stance: Storage tanks at an Aramco oil facility, in Jeddah, Saudi Arabia. The oil giant says it will not try to increase its maximum daily oil production after receiving an order from the country’s Energy Ministry. — AP

PETALING JAYA: The potential capital expenditure (capex) cut by Saudi oil giant Aramco could see less work for oil and gas services companies, says CGS-CIMB Research.

According to the research outfit drilling companies in South-East Asia may be at risk of potential daily charter rate (DCR) moderation, even if a couple of the many jack-up (JU) rigs that had previously moved to the Middle East make their way back to South-East Asia.

It noted that South-East Asian JU DCRs had benefitted significantly from the departure of many rigs to the Middle East in the past two years.

Earlier this week, Saudi Arabia has ordered Aramco to maintain its oil production capacity at 12 million barrels per day, abandoning a planned increase to 13 million.

Following this, Aramco is expected to cut its capital spending.

“In our view, Velesto Energy Bhd is at greatest risk of medium-term rate moderation if jackups that had migrated to the Middle East return to South-East Asia,” said CGS-CIMB Research.

However, the research outfit said the degree of the potentially negative impact on jack-up rigs and offshore support vessels DCRs will depend on whether other Middle East oil-producing countries follow Saudi Arabia down the same route of offshore capex cutbacks.

Having said that, CGS-CIMB Research expects Velesto to sign a new two-year umbrella contract with PETRONAS Carigali Sdn Bhd (a wholly-owned subsidiary of PETRONAS) at DCR of US$135,000 per day versus last year’s rate of US$105,000 a day, which “will protect Velesto in the medium term”.

“However, beyond the next one to two years, Velesto could be at risk of DCR moderation in the jack-up rig space. Our discounted cash flow valuation models a peaking of Velesto’s DCRs in 2025 and a decline from 2026 onwards,” it said in a report yesterday.

On the other hand, the research outfit does not expect any impact on floating production storage offload (FPSO) companies. It noted that Bumi Armada Bhd is focused on building its Indonesian portfolio of assets, while Yinson Holdings Bhd is planning to bid for the Balaine and Paon FPSO projects in Ivory Coast.

“Yinson is also making good progress on its three ongoing FPSO construction projects – two in Brazil and one in Angola,” it added.

CGS-CIMB Research does not expect any impact on oil prices for the near term, although Saudi Arabia’s move may reflect a downward shift in its internal expectations for long-term oil demand.

“Aramco had previously guided for capex spending of between US$48bil and US$52bil in 2023, up from US$38bil in 2022, with 60% of the capex designated for the upstream sector.

“It had also previously said that its capex will ‘continue to increase until around the middle of the decade’ as it expands its maximum sustainable capacity via multiple offshore projects,” said the research outfit.

With the new directive from the Ministry of Energy, Aramco may no longer spend as much capex as previously anticipated, with new capex guidance to be released in March, it added.