Aramco CEO Warns of Oil Market Catastrophe in Prolonged War

Saudi Aramco’s chief executive officer warned the impact on global oil markets will be “catastrophic” the longer the disruption from the Iran war drags on.

In his first public comments since the conflict choked Middle East energy shipments, the head of the region’s largest oil producer said Aramco can divert more crude to an alternative route that avoids the Strait of Hormuz. Still the company can’t export its normal quantities because of capacity constraints.

Saudi Arabia is reducing output by as much as 2.5 million barrels a day, joining United Arab Emirates, Iraq and Kuwait in deepening cuts, Bloomberg reported on Tuesday. CEO Amin Nasser declined to disclose production levels, but said on a conference call that Aramco was “not utilizing for the time being” some of its heavier oil grades.

“There would be catastrophic consequences for the world’s oil market the longer the disruption goes on, and the more drastic the consequences for the global economy,” Nasser said. “While we have faced disruptions in the past, this one by far is the biggest crisis the region’s oil and gas industry has faced.”

Aramco is racing to divert oil from its usual route through Hormuz toward Yanbu on the Red Sea coast. It can pump as much as 7 million barrels a day through a pipeline to the west, and will ramp up to that level in coming days, Nasser said. About 2 million barrels a day of that will go to domestic refineries dotting the Red Sea coast. The company is still exporting refined products like diesel from its western refineries, he said.

Aramco normally exports about 7 million barrels a day of oil. Most of the current exports through the East-West pipeline are its most plentiful Arab Light grade, and some Extra Light, Nasser said.

“So certain areas where we have Medium and Heavy we are not utilizing for the time being because we have adequate capacity to meet our requirements,” he said. The company is using its global network, including storage sites outside the kingdom, to meet market needs, he said.

Aramco has also been forced to shut down Saudi Arabia’s biggest oil refinery following a drone strike, which it’s working to restart, Nasser said. Some other oil fields have been targeted, according to Saudi government statements.   

Buybacks and Dividend

On Tuesday, Aramco announced a first-ever buyback plan of $3 billion. It plans to repurchase up to 350 million ordinary shares over the next 18 months starting in March and may retain them for a maximum of 10 years.

The repurchase is tiny for a company that has a market valuation of about $1.7 trillion, and would further reduce its already small free float. Aramco is buying back the stock at a time when shares have risen almost 12% this year, even though they’ve lagged behind other global supermajor such as Shell Plc and Exxon Mobil Corp.

Aramco is boosting its base dividend to $21.9 billion for the quarter ended Dec. 31, a 3.5% increase from the preceding three months. The higher payout will benefit the Saudi government and the sovereign wealth fund, which together own more than 97% of Aramco. The government depends heavily on the company’s huge payout for its multitrillion-dollar economic diversification plan.

The company’s free cash flow — funds left over from operations after accounting for investments and expenses — rose to $27.5 billion in the quarter, which covered the total dividend for a second-straight quarter after falling short for a prolonged period previously. Adjusted net income in the quarter fell 1.9% to $25.1 billion, matching analyst estimate compiled by Bloomberg.

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