Aramco attacks will not have lasting impact on Saudi credit profile, Moody's says

Saudi Arabia has access to 'ample' financial reserves to offset any temporary impact from loss of production

In this picture taken with low shutter speed, vehicles passes in front of the Kingdom Tower, a Riyadh, Saudi Arabia, landmark, Thursday, Sept. 19, 2019. Any attack on Iran by the U.S. or Saudi Arabia will spark an "all-out war," Tehran's top diplomat warned Thursday, raising the stakes as Washington and Riyadh weigh a response to a drone-and-missile strike on the kingdom's oil industry that shook global energy markets. (AP Photo/Amr Nabil)
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This month's unprecedented attacks on Saudi Arabia’s oil infrastructure will not impact the kingdom’s long term credit profile as the Arab world’s biggest economy has access to financial reserves that offset the effect on revenues following disruptions in crude production, according to Moody’s Investors Service.

“Given the temporary nature of disruptions, we do not expect a long-lasting impact on government’s credit profile,” Alexander Perjessy, a vice president and senior analyst at Moody’s said at a media roundtable on Monday in Dubai.

“[The] government has access to ample financial reserves as well as its strategic crude oil reserves that will be able to buffer the impact of any temporary decline in crude oil production and mitigates the loss of fiscal revenue and export proceeds.”

The financial assets of the Saudi Arabia, Opec’s biggest crude producer, stood at $500 billion (Dh1.84 trillion) at the end of July this year, which also includes the country’s gold reserves. A third of the total assets are composed of direct government deposits with the central bank.

“This is direct liquidity that the government can draw on in times of need,” Mr Perjessy noted.

Saudi Arabia, which accounts for 12 per cent of global crude supply, suffered its biggest outage after attacks on Saudi Aramco installations last week disrupted 5.7 million barrels per day of the country’s output. The lost output, which is equivalent to 5 per cent of global production, superseded supply shocks during the 1979 Iranian revolution and Saddam Hussein's 1990 invasion of Kuwait, according to the International Energy Agency.

The kingdom has since managed to restore 41 per cent of lost production, Saudi energy minister Prince Abdulaziz bin Salman, said in Jeddah on Tuesday, adding that full production will be restored by the end of this month.

A 7 million bpd capacity plant at Abqaiq, a key oil stabilisation centre in the country, suffered heavy damage in September 14 attacks. It is the largest oil installation of its kind in the world, which “sweetens” crude sourced from some of the biggest oilfields in Saudi Arabia’s Eastern Province. The plant currently operates at 2 million bpd capacity from pre-attack levels of 4.9 million bpd, Aramco chief executive Amin Nasser said on Tuesday.

The strikes on Saudi Arabia’s large Khurais field took offline around 2 billion cubic feet per day of associated gas, 1.3 billion cubic feet of dry gas, 500 million cubic feet of ethane and about half a million barrels of gas liquids.

The state oil, Aramco will continue to honour its export requirements and would reduce domestic refinery runs by 1 million bpd to 1.9 million bpd, Prince Abdulaziz said last week.

“The ability to quickly restore production to normal, if confirmed later this month as the government said it would do, demonstrates an important degree of resilience to potentially very damaging shocks,” Mr Perjessy said. This reflect a combination of strategic redundancies in Aramco’s infrastructure and production facilities as well as “very well managed operations and disaster recovery processes”, he added.

A more extended outage at Aramco installations however will lead to lower oil export proceeds and a wider Saudi budget deficit, according to Moody’s.

“We estimate that 1 million bpd loss of crude output would reduce the government revenue and exports by about $1.8bn, equivalent to 0.2 per cent of annual GDP for each month of outage,” Mr Perjessy said.

Last week, Saudi Arabia's Finance Minister Mohammed Al Jadaan said the attacks had "zero" impact on the kingdom's revenue or its economy, and the country's non-oil economy is on track to expand 2.9 per cent this year.

Moody’s, however, reduced its overall GDP growth estimates for the kingdom to 0.3 per cent this year from an earlier 1.5 per cent projection due to what it said is the kingdom’s over-compliance of crude production cuts under its Opec+ oil output pact.

The country’s announcement that it is targeting 9.8 million bpd in October, which is 5 per cent below of what it is required to cut, is an indication that that it will likely maintain its significant rate of over-compliance, despite the fact that its full production capabilities will be restored by the end of September.

Moody’s expect the Opec+, a group of Opec and non-Opec oil producing countries led by Saudi Arabia and Russia, will continue their deal to cut production beyond March 2020, when the current agreement to cut expires.