Saudi Arabian Oil Co
SAU:2222
Saudi Arabian Oil Co
SAU:2222
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Earnings Call Transcript
Other Earnings Calls
Welcome to Saudi Aramco's First Half 2020 Results Conference Call. [Operator Instructions]
Hello, and welcome to this audio webcast discussing Saudi Aramco's half year 2020 results. I'm Fergus MacLeod, Saudi Aramco's Head of Investor Relations. And we're joined today by Mr. Amin Nasser, Saudi Aramco's Chief Executive Officer; and Mr. Khalid Al-Dabbagh, our Chief Financial Officer.
Our webcast today will comprise a presentation followed by a question-and-answer session. We anticipate the entire call lasting around an hour. And I'd like to remind you that this webcast and conference call are being recorded.
Before we start, I would like to draw your attention to this cautionary statement. During today's presentation, we may make forward-looking statements that refer to estimates, plans and expectations. Actual results and outcomes could differ materially due to factors we note on this slide, and please also refer to our regulatory filings and website for more details.
With that, I'll now hand over the call to our Chief Executive Officer, Mr. Amin Nasser.
Thank you, Fergus. Welcome, ladies and gentlemen, and thank you for joining us from all around the world. It is a great pleasure to be with you today. I will start by providing some reflections on how our company has responded to the many challenges that 2020 has brought, including the impact of COVID-19.
In the face of the crisis created by the pandemic, I am proud that Aramco has proven its resilience by providing reliable energy supply to the world, even temporarily raising our daily crude production to a historic level of 12.1 million barrels per day at a short notice. I'm equally proud that we continue to deliver such robust financial performance despite reduced demand and lower oil prices. While the crisis brought the world to a standstill, Aramco kept going.
Let me outline our response to the unique challenges presented by the COVID-19 pandemic. The well-being, health and safety of the company's employees, dependents and their communities and contractors are the top priority for Saudi Aramco. This has been demonstrated and reinforced through the company's response to COVID-19. At the outset of the pandemic, an execution team composed of 2 new dedicated committees, was established to ensure the safety and well-being of our employees, our contractors and their communities as well as to maintain business continuity in a challenging environment of increased production and growing uncertainty. We promptly actioned a wide variety of mitigation measures, including communicating with all our international suppliers, to preserve the robustness of our supply chain network and to ensure multiple geographical sourcing of materials. We have protected both the health of our employees and communities and our productivity. We are determined to emerge from the pandemic stronger, and we will continue making progress on our long-term strategic journey, prevailed by ongoing investment in one of the lowest upstream carbon intensity energy companies in the world.
As a result of the COVID-19 pandemic, the second quarter has proven to be the most challenging economic period in generations with most industries suffering severe disruptions and significant economic losses, including the energy sector. Our entire industry is still contending with reduced demand and lower oil prices and incredibly challenging global business environment. These strong headwinds are reflected in our second quarter results. The crisis also sharply impacted the share price valuation of many companies in our industry with dividend cuts and, in some cases, even bankruptcy. We weathered that storm also with our share price performance comparing favorably to other international oil companies. And while it remains unclear how long the current wave of uncertainty will continue, we see growing evidence that the worst of the crisis might be behind us.
We are witnessing a partial recovery in the energy market in the second half 2020 as countries around the world take steps to ease restrictions and reboot their economies and as readiness for any further wave of COVID-19 improves. These challenging times have only strengthened our resolve and determination to be even more agile and disciplined. This is where resilience across oil price cycles is so important. It has allowed us to deliver the highest net income, dividends and total shareholder return amongst major oil companies. It allows us to continue investing in low-carbon intensity energy and to support new initiatives such as carbon capture, use and storage. We are accelerating emissions reduction efforts and supporting new initiatives such as the OGCI goal of reducing the average carbon intensity of their aggregated upstream oil and gas operations.
The OGCI recently announced a target to reduce emissions to between 20 kilogram and 21 kilogram of CO2 equivalent per barrel of oil equivalent by 2025 from a collective baseline of a 23 kilogram of CO2 equivalent per barrel of oil equivalent in 2017. Saudi Aramco has already achieved an upstream carbon intensity of around 1/2 the OGCI target. The company's greenhouse gas emissions were verified by an independent third party. Our resilience has allowed us to adapt to a new normal, putting our people's health and safety first by implementing wide-ranging precautions to limit the spread of COVID-19 wherever we operate and supporting communities and aid agencies around the world through donations and contributions. Our resilience and reliability has allowed us to maintain our preeminence in oil and gas production and as a reliable supplier of energy to the world. We temporarily achieved a historic peak in daily crude oil production of 12.1 million barrels per day on April 2, without the need for additional capital expenditures.
I will now turn over to Khalid to provide more details on our financials.
Thank you, Amin, and good afternoon, ladies and gentlemen. Turning now to some key highlights of our performance in the first half of '20. Despite difficult conditions, Saudi Aramco has demonstrated once again its operational resilience in the face of unprecedented adversity and challenges. Saudi Aramco has also maintained its strong financial position through disciplined capital allocation and resource optimization.
As Amin described, COVID-19 led to great volatility in crude oil prices and continued pressure on refining and chemicals margin. Crude oil prices and demand both weakened significantly during the first half of 2020. Despite all of this, we have successfully delivered robust earnings. This is due to our low production cost, unrivaled operational and financial strength, our unique scale and our agile workforce. We were able to produce net income of $23.2 billion for the first half of 2020, and our free cash flow was $21.1 billion for the first half of 2020. This robust free cash flow allowed us to deliver on our plan to maintain a dividend payment of $18.75 billion in the second quarter, which followed a declaration of similar amount of dividends in the first quarter of 2020.
Focusing now on the balance between the sources and usage of cash, this slide compares half year 2020 with 2019. Sources largely met usage in 2020, as shown above, despite the impact of one of the worst economic crises in a century. Balance sheet gearing at the end of the second quarter was 20% with the increase compared to the first quarter level, mainly reflecting the deferred consideration of $69.1 billion for the SABIC acquisition and the consolidation of SABIC's net debt onto Saudi Aramco's balance sheet. The company is still committed to maintaining our target gearing in a range between 5% and 15% across cycles. This strategy and the strength of our balance sheet has immensely helped us in a period during which we executed one of the largest acquisition in the energy industry's history while simultaneously dealing with one of the worst economic crisis in history. And we did all of this while continuing to pay the largest amount of dividend of any listed company on the planet during the first half of a very challenging 2020.
Ladies and gentlemen, please let me very briefly reflect and share with you some of the major aspects of the SABIC acquisition, which was completed on June 16, 2020. SABIC is a globally leading and diversified chemical company with manufacturing in the Americas, Europe, Middle East and Asia Pacific. Following the SABIC transaction, Saudi Aramco's Chemical business now operates in over 50 countries. The completion of this transaction enhances Saudi Aramco's presence in global petrochemical industry, a sector expected to record the fastest growth in the oil demand in the years ahead. The acquisition transforms Aramco into one of the major global petrochemical player, enhancing synergies and procurement. It also optimizes supply chain, manufacturing, marketing and sales. In addition, it also delivers a complementary presence in terms of geography, projects and partners and increases the resilience of cash flow generation. Saudi Aramco has fully consolidated SABIC financial results into the financial statement with the completion of this transaction, and we have negotiated with the Public Investment Fund, a mutually win-win sellers financing arrangement.
I would now like to review our future capital spending plan, where we are demonstrating both our discipline and flexibility. Saudi Aramco continues to scrutinize its capital spending and efficiency programs and expects capital expenditures to be within the lower end of a $25 billion to $30 billion range for 2020. As yet, no one knows the precise impact on economic activities and energy demand from the coronavirus pandemic especially in the longer term. Our CapEx, therefore, remain under review. However, our 2021 capital spending is expected to be significantly lower than our previously provided guidance of $40 billion to $45 billion. It is worth highlighting that our low capital intensity is a great advantage in facing the current challenges. Our upstream capital expenditures of only $4.7 per barrel of oil equivalent produced is the lowest in the industry.
Turning to shareholder distribution, solid earnings built on low production cost unrivaled operational strength, unique scale and our agile workforce meant that despite continued global economic disruption, Saudi Aramco was able to maintain its planned dividend level by declaring dividends of $18.75 billion for the second quarter on top of a similar amount declared for the first quarter of 2020. As previously committed, for the 5 years following our IPO, a dividend prioritization mechanism continues to support public shareholders. I hope you will agree that our results show the robustness of our financial framework, a disciplined and flexible approach to capital and our commitments to value creation.
Before I hand back to Amin, I would like to recap the ways in which we are committed to value creation. We have demonstrated resilient financial performance. And you can remain assured that it is our ambition to maintain this going forward. We have shown an agile response to an unprecedented and sudden collapse in market conditions. We have delivered on our dividend commitment. Our teams work hard every day and are committed to what makes Saudi Aramco a great and differentiated company. These results, ladies and gentlemen, set us apart from every other major IOC, showing our ability to continue to deliver performance even in the face of unprecedented adversity and are a powerful testament to the value of resilience.
Thank you very much, ladies and gentlemen. Amin will now provide his concluding remarks.
Thank you, Khalid. In closing, I would like to remind you of our goal to deliver sustainable growth in our free cash flow to support dividends to shareholders over the long term. The 3 pillars of free cash flow growth are shown on this slide: liquids, gas and the downstream. We aim to deliver that growth sustainably by leveraging technology and innovation to optimize our crude and gas production unit costs and by integrating our refining and chemical activities, while at the same time, maintaining our low carbon intensity. Our results for the first half of 2020 are a testament to the value of resilience.
In the face of powerful headwinds created by the COVID-19 pandemic, 2020 has seen communities, abundant economies and industries devastated and each of us forced to adapt to new ways of living and working. These challenging times have only reinforced our determination to make further progress on our long-term strategic journey and this is where resilience across oil price cycles is so important. Saudi Aramco is navigating these rough seas with confidence, and we believe we are on course to emerge in calmer waters stronger than ever before.
Thank you very much, ladies and gentlemen. And I and Khalid look forward to answering your questions, which will be moderated by Fergus.
[Operator Instructions] I will now hand you back to Fergus MacLeod.
Thank you very much, operator. And I'd like to take our first question, which comes from Karen Kostanian at Bank of America Merrill Lynch.
Congratulations on extraordinary resilience in such tough conditions. I had 2 questions. My first question is on the gearing targets. You obviously clarified that you are going to maintain those gearing targets of 5% to 15% in the midterm. I was wondering if there is -- if you could expand upon that on how you plan to achieve that, whether it's going to be through lower CapEx, postponing projects or perhaps maybe cut in the dividend payments to the sovereign? And my question -- my second question is about production. Could you, by any chance, guide us as to what portion of the August production increase is going to go towards the domestic market consumption and what portion is going to be hitting the export markets?
Well, thank you, Karen. Thank you very much indeed for those kind opening words. So if I understand it, you've really got 2 questions. First one is that given that we've got a gearing target of 5% to 15% across cycles, what levers are open to us during a more challenging period, such as the one at the moment, in order to manage that gearing target. And what over the last -- it was extremely low cost, what are the levers that we could pull.
Then as I understood it, your second question is really about the balance between domestic sales and exports during the third quarter.
Let me -- I'll try to go through first question and give Khalid more opportunity to talk about the gearing ratio. Our plan for gearing ratio is to be at 5% to 15% across cycle and returning to this range over time. Right now, we are higher than that at 20.1%. Our plan, as also mentioned in Khalid's remarks, is to continue to visit our capital program. We had given a guidance before of $40 billion to $45 billion for next year. And we are intending to significantly be lower than that. So we will be looking at our flexible capital and our plan going forward to get back to that target of 5% to 15%.
Of course, with regard to our production, do you need to say anything about -- before I go into production, Khalid, about the gearing?
Thank you, Karen. Nice talking to you. As Amin said, we are committed to meet the 5% to 15%. As I said, as I have -- we have always said since 2018 across cycles and across time. And as you have correctly pointed out, Karen, we have different tools in our toolbox. We have a very low-cost production to start with. We have a very flexible CapEx compared with IOCs, and I have mentioned in my presentation, the low CapEx intensity. And as a result, the company has a massive engine to produce free cash flow. We hope during time, we will go back to the 5%-15% percent range. And as you are all aware, the main reason for us exceeding the 5% to 15% range is twofold: one is the acquisition of SABIC at $69.1 billion and the other is what happened in the COVID-19, we have already planned to pay much higher amount in the first year and reduced the debt associated with that acquisition. But given the COVID-19, we have negotiated with PIF, a win-win arrangement to finance -- to have a seller financing for that acquisition over 8 years. Actually having the balance sheet that we had, has allowed us to weather a perfect storm of the impact of the havoc that COVID-19 wreaks on demand and prices, and at the same time, execute one of the largest acquisition in the industry's history. Back to Amin.
Okay. With regard to production, like everybody else around the world, there was an impact on demand in the Kingdom. The areas that were not impacted that much is the industry and the utility. We've seen an impact on transportation. Approximately 20% of the domestic demand was impacted because of COVID-19, mainly gasoline, that fell by about 25%. In certain markets, fell more that. And like in April -- and jet fuel, of course, is still lower by 50%. We are seeing a pickup on demand in the Kingdom. August is -- in particular, we are seeing big demand on transportation. Jet fuel is also picking up. So basically, if you look at it in barrel oil equivalent, we were hovering before around 4.7 million barrels of oil equivalent. Now we are picking up -- and between 4.3 million and 4.5 million barrel oil equivalent. So it's picking up. And August is -- we're seeing big demand on transportation and also a pickup on jet fuel. Still lower than last year, but there is a pickup.
Thank you, Karen. And then we will now move on to the next question, which comes from Martijn Rats at Morgan Stanley.
It's Martijn here. I've got 2 questions that I hope I'll [be able] to ask you. First, on the CapEx guidance, where you're saying that plans are still under review. Earlier in the year, you spoke about increasing capacity by another 1 million barrel a day on the crude production side. And I was wondering in the context of sort of your CapEx -- ongoing CapEx review, whether that plus-1, million-barrel-a-day capacity increase was still there? Or whether that might sort of -- also need to be reviewed? And also within that -- within the CapEx guidance, whether most of the revisions would likely be on the upstream or on the downstream side? So that's one question broadly about CapEx.
And the second thing I wanted to ask you relate to the OSPs. Normally, at least the crude price realizations that are very close to data, Brent and benchmark crude prices, but the OSPs were all over the place during the second quarter. And I was -- I wanted to ask you if you could remind us sort of how do you set the OSPs? What considerations go in there? What's the process behind it? And also perhaps cast a little bit of a shadow forward. What do you expect we will see in coming months and quarters when it comes to your crude price realizations and the benchmarks that we observed? Can we expect them to convert again?
Okay, Martijn. So 2 very interesting questions. So the first one, as I understood, it was about CapEx guidance, particularly not so much this year, but for 2021 and beyond, where we said it'd be significantly below the prior guidance. But could we provide some more color there, particularly about whether the revisions might come focused on the upstream or on the downstream. And also how they interact with the potential increase in our maximum sustainable capacity to 13 million barrels a day.
And then your second question, I think, was a more general question about official selling prices and the process and the criteria that go into making those decisions on a month-by-month basis and any views that we might be able to share with you on the outlook there and the relationship between OSPs and realizations. Because as you point out quite correctly, in the second quarter, there was a very unusual disconnection between our realizations and the markets.
Thank you, Martijn. With regard to the MSC, yes, we are proceeding with increasing our MSC from 12 million to 15 million barrels. There is no impact -- significant impact on 2021 because, as you know, when you start with an MSC, you start with design and engineering, and that's a gradual build up on capital. So it should not have a major impact on our capital in 2021.
With regard to your question about OSP. OSP ensure we are competitive in pricing to customers worldwide and to pace our production. They are based on our assessment of the market, driven by demand and supply fundamentals. The feedback -- we get some feedback from buyers and so we take that into also consideration. And Saudi Aramco determine the price that it charges for its crude oil based on multiple market factors, which differs in each region. But the main aim is to price our crude oil competitively in each market in order to meet our sales targets.
If I may add -- thank you, Martijn, for the question. That -- maybe it's a bit difficult for the analysts to compare the realization with the movement in Brent, but it's worthy to highlight that 60%, 70% of our sales are based on our Far East formula, Far East benchmarks, which have also gyrated, if you take the average of Oman and Dubai in '18 and '19 and you take that average in the first half of 2020, you see them declining at a much more steeper rate. Therefore, the realization was, accordingly, impacted with a lower Oman and Dubai, which represents 70% of our sales.
Also, we -- just to affirm that we do not provide any forward views on our OSPs or on market prices per gallon.
I'm sure you'll understand that, Martijn. Okay. The next question is from Christyan…
Yes.
That's awesome. Next question from Christyan Malek at JPMorgan.
A few questions, if I may. And [Foreign Language] Amin and Khalid on the SABIC acquisition especially through these times. First question is sort of -- just sort of a big picture is regarding energy transition. You obviously have one of the lowest carbon intensity metrics in the world. With that sort of strong platform and given what seems to be like a bit of a divergence amongst the oil majors in terms of moving towards new energies, would love to hear some color from you around whether there's a strategic focus to invest in more renewables, more new energies as a key pillar to sort of providing low carbon or low-carbon energy in the future?
I appreciate there are some activities within Aramco, but you've seen some of the major moves by some of your competitors over the last 6 months. I wanted to know whether there is a review as to whether you want to be more aggressive around energy transition or potentially move more akin with the U.S. sort of strategy, which is focused on carbon and oil and gas? That's my first question.
The second question is regarding your outlook on demand. Clearly, the dividend is the focus, and you've managed to sort of defend it through one of the worst periods in the world in its history. But is it contingent in terms of maintaining that dividend on a certain demand outlook? I know you had comments around demand being back to sort of pre -- almost back to pre-COVID levels. Are you -- [do most of the] demand going into next year, is that driving your view around the dividend being protected? And I just want to understand the relationship between your view on the dividend and your macro outlook and whether there are sort of certain contingencies or if conditions [indiscernible] scenario out there.
Okay. So thank you, Christyan. So yes, 2 very -- again, 2 very interesting questions. So the first one is really, given that we've already got very low carbon intensity hydrocarbons, would we choose to supplement those in a more, I think, you used the word, "aggressive" way, by investing in new energies and in renewables to reduce the overall carbon intensity of our energy mix rather than some of the others are seeking to do to go beyond having low carbon intensity hydrocarbons.
And then second, do we see a direct linkage between the demand outlook and our dividend policy?
Okay. I'll take the first questions, and then Khalid will take the second one. With regard to energy -- thank you, Christyan. With regard to energy question, Aramco will play an active role in the transition to cleaner energy. We still expect a strong long-term energy demand growth with oil and gas and petrochemicals. Demand continuing to increase for decades to come. The world will need to find a way to meet this growing demand, while transitioning to a lower carbon energy system to counter climate change. Therefore, I am confident that with the right technology and measures in place, we can address the dual challenge of meeting greater energy needs while lowering emissions. And you will see by our -- hopefully, when we announce our investment plans in the future, there's a lot based on crude to chemical, which will definitely help us to support reducing our emissions. And at the same time, we are looking at opportunities in renewable and crude to hydrogen as well. So all of that is part of what we are doing. Technology is a game changer. For us, we are putting a lot of emphasis on technology, either to turn CO2 to useful products, carbon capture and sequestration, better fuel utilization and more engine efficiencies. All of these things will help us to drive our emissions. Above all, I am committed to maintaining my upstream carbon intensity at the lowest level compared to all our competitors in the market, because as you have seen, as we have announced for Scope 1 and 2, we are at the equivalent. And this is for 2019. This is Scope 1 and 2, and we will continue to drive it down going forward. Khalid?
Yes. Thank you, Amin. Thank you, Christyan, and I understand you're enjoying your vacation somewhere very nice. With regard to your dividend's question, we have committed to pay the $18.75 billion in the first quarter and in the second quarter, despite the damage that the COVID-19 pandemic have caused to the global demand and prices.
Going forward, the company have the intention to pay 75 -- declare $75 billion for each calendar year. Of course, this is subject to the Board's approval. And as you would imagine, the Board take into consideration so many variables, one of which is market conditions. However, the company is intending to pay the $75 billion for 2020, and we hope to do the same going forward.
I have to say and I have to remind that the public shareholders are guaranteed their share of the dividends that corresponds to $75 billion per year, irrespective of market conditions.
And now the next question is from Michele Della Vigna from Goldman Sachs.
Congratulations on a very resilient delivery in a challenging quarter. Two questions, if I may. My first one is about the competitive environment. At the time when your competitors are retrenching from hydrocarbon investments on a global basis and actually targeting a material decline in production on a 10-year's view, do you see new opportunities emerging? I'm thinking, particularly about your intention to become a global gas leader, and whether perhaps this becomes a better market to build that position?
And then secondly, on your Downstream business, you have already transformed it with the SABIC acquisition towards the lower carbon future. But one of the interesting emerging fuels for a lower carbon world is hydrogen. Saudi could be one of the lowest cost hydrogen producers in the world? Is this a business that potentially interests you for the long term?
Yes. Great. Thank you. Again, thank you for those kind words, Michele, about the results. But the 2 questions, I think, are really in the transition when others are really making quite explicit statements about seeing the hydrocarbon production decline, could that exit strategy that some of them have got create opportunities for us, particularly, I think you mentioned gas?
And then secondly, given our compact operational footprint and our 100% operatorship, does that give us a competitive advantage, potentially, as moving into delivering energy in the form of hydrogen?
Yes. Thank you. Definitely, yes, we will grow our business. We'll grow sustainably. Our approach is to address climate-related risks and opportunities based on the key commitments to maintain our weighted average crude oil upstream carbon intensity to be among the lowest globally. And that will help us to add to our production based on demand. As others decline, we have the opportunity to increase our production sustainably and this is an opportunity. And I think increasing our MSC to 13 million barrels per day also will give us more opportunities in the future. While at the same time, we will drive our greenhouse gas emissions lower, and we will target high-impact solution to address the climate change.
Crude to hydrogen or gas to hydrogen is definitely opportunities that we are interested in at Saudi Aramco. We are looking at technology that will help us to reduce the cost for gas conversion going forward. And it is part of our future plans to look at crude-to-hydrogen investment.
Hydrogen is certainly among the long-term business opportunities that we are expending a lot of R&D money, and we remain optimistic on the long-term demand for oil, particularly with the competitive CO2 position we enjoy.
If I may add that still the company believes in the long-term growth of all forms of energy including oil and gas. In addition, we saw commitment by the company to invest in technology in hydrogen as well as work to further improve its position on the carbon intensity of all what it limits.
So as you can see, this area under very active study. Our next question comes from Gordon Gray, I believe at HSBC.
A couple of quick ones, if I could. Firstly, if you can give us an update on progress with the Reliance deal. And to any degree by which the weakness in downstream markets has altered your [indiscernible] [sights] through international assets?
And secondly, one of the key features of the European IOCs at 2Q was the very large trading oil -- trading gains on the oil side. Maybe you could just speak a little bit to the role of trading in Aramco and whether there were any significant gains in the period as well?
Great, Gordon. So Reliance, what's the -- is there anything we can say about the status of that potential transaction, and indeed, has it been impacted by the much weaker environment we've seen for downstream as a result of the pandemic in 2020.
And secondly, as quite a lot of people have drawn attention to the strength of trading contango plays and so on and so forth in the second quarter, is there anything that we can say about that?
With regard to the Reliance deal, all I can say at this stage, it is going through the due diligence. So depending on the due diligence, we will make our decision after we complete the due diligence on that deal. This is a big deal, so we need to take our time to review and then decide based on the outcome of the due diligence study.
With regard to trading, the results were healthy like -- comparable to our peers and compared to last year, and however, we don't disclose detail of trading performance, but it is very healthy.
So I think nobody actually gives the numbers for trading. So we are not going to break that tradition. The next question, I think we're going to cross the Atlantic and hopefully, good morning to you, David Havens at SMBC Nikko in New York.
I wanted to build on Martijn's OSP question, and you touched on this a bit. But during the IPO process, you all disclosed the mix of international crude oil deliveries to Asia, Europe and North America. But obviously, given the extraordinary volatility in oil demand during the second quarter, can you provide us any kind of guidance of how that mixed international crude oil deliveries to Asia, Europe and North America has evolved for Aramco?
And then second, just a quick update, if you could, on capital allocation plans on conventional gas in the north. And how those -- how the timing of those expenditures have changed from the downshift from capital expenditures?
Okay. Great, David. So the first question is, how is our mix of export destinations evolving with the changing global economic situation? I believe that was your question.
And then your second question was really given the capital discipline that we've introduced in 2020, how has that affected the plans that we've previously communicated for unconventional gas? And I think you particularly were asking about the North that there's obviously significant activity elsewhere in the Kingdom.
I think our -- we are on all in place. Definitely, we are more in Asia, almost 70% to 75% of our crude is placed on Asia. There is, as I said before, we are seeing much better demand, and it's picking up, especially in China, where we are seeing gasoline and diesel picking up to peak of its level. Also in Tokyo, Korea and India, healthy demand that we are seeing as we are getting into the third quarter. And we are expecting better by year end. We -- our expectation -- the demand currently is around 90 million barrels compared to prior to COVID-19, we're looking at 100 million barrels. We are expectation by year-end, it will be in the mid-90s. Asia will always continue to be our main market because more demand in that area. If you look at it, if you want to split approximately, Europe 15%; North America, in general, hovering around 10%. So that's the split of our placement of crude and this had increased.
With regard to unconventional gas, the Northern part of the Kingdom, we are almost -- we are only doing -- maintain potential. We are done with the increment steps required in terms of the unconventional gas in the northern part of the Kingdom. We are doing a lot of work on the Jafurah Basin, which is in the Eastern province. That work is still ongoing in terms of piloting and development tools in the Jafurah Basin. And progress is continuing on that and might not be -- if you look at the split on our investment, it's around 40% for accrued, 30% for gas and 30% for downstream. So gas still is considerable between conventional gas and unconventional gas. But Northern area is declining and more pickup on the Eastern province and the Jafurah Basin and South Ghawar in the unconventional gas.
If I may add, gas is a growth area for us, especially given the growth in gas demand within the Kingdom. And gas plays a major role in our growth story going forward. In terms of allocation, it is subjected to all typical screening and [there] are testing -- [gas] testing process in terms of projects and capital to be approved for projects. Gas is a unique area where we have another -- we are compelled to provide all of the gas as part of our concession, all of the gas requirements within the country. But at the same time, any projects need to be done at a commercially based -- with the commercially based returns.
It's healthy -- if we put it that way, for any gas development in the Kingdom, it's very healthy return. We're looking at double digits in terms of returns when we develop our gas in the Kingdom. The other part of the gas element that Khalid alluded to is, it helps us allow to cut our emissions. Because we are also relying on the grids -- 2 things that will help us to cut emissions, especially in Scope 2: the gas that we are providing to the utility sector, where we are reducing their liquid burning and the national program in the Kingdom of renewable. That is also -- will help the company because we are -- offtake from the grid and any reduction on the grid in terms of gas -- greenhouse gas emissions would definitely help the company to reduce the emission. So gas is a good story and a very -- a win-win from commercial basis and from climate change in terms of reducing emissions for the Kingdom and for the company.
And we'll stay in the U.S. with a question here from Doug Leggate at Bank of America.
My question is -- 2, if I may, though. The first one is, with all the moving parts on capital, I realize you're not giving guidance yet, but with the obvious continued commitment for the dividend under the expectation that you will improve the balance sheet, where do you think your cash breakeven oil price sits in the second half of this year? Can you give a range around that?
Khalid?
Yes. Thank you, Doug. We basically look at cash breakeven in a different way than typical -- other typical IOCs, because if we use that, our cash breakeven for crude production is very, very, very low given the nature of our reserves. So that is not a metric in terms of how we approve or evaluate upstream projects. I know the analysts would always like to look at cash breakeven. In terms of free cash flow that is required to sustain our dividends, as I mentioned earlier, the company enjoys a very low cost production and is able, because of that, to generate a large amount of free cash flow. And also, we can respond very promptly to increases in demand as stipulated by additional cap set by the government. So we take advantage of that increase in production.
So when you roll it all together, Khalid, your spending plans haven't been disclosed yet, obviously, but you are committed to the dividend and lowering the debt. So when you include the capital plan, and that's the number I was looking for is what oil price do you need to start contributing back to the balance sheet?
Yes. We don't -- as you would imagine, no one declared what is the oil price that will match certain amount of dividend payment. But as Amin and myself said earlier, the company intends to declare $75 billion of dividends, subject to Board approvals. Having said that, the public shareholders, other than the government, are guaranteed their share of a $75 billion of dividend payout irrespective of market conditions.
And just to be clear, Doug. It's a follow-up on what Mr. Al-Dabbagh was saying. We have given explicit capital guidance for 2020. But for 2021, we haven't yet given you guys a number. We've said it will be significantly below the previous guidance provided at the time of IPO, and I'm sure you can do the math as to what various resident numbers would amass especially on that.
That's what I was kind of driving on.
The next question -- I think we got another question. We're running a little bit short of time actually. The next question we're coming back across the Atlantic, I think to France, to Henri Patricot with UBS.
I have a couple of questions. The first one is a bit of a follow-up on the CapEx questions to help us do the math. Perhaps you can give us a sense of your -- the latest thinking on timing of the next key upstream project or increments [on kind of] when you plan to take FID and then have these projects start up?
And then secondly, I was wondering if you could give us an update on the Jazan refinery and the latest [guides around]. One follow-up after this one.
Thanks, Henri. So I think your questions were, could we give you any specific update on individual projects in terms of any of the major kind of building blocks and -- that we talked about for the next few years? And in particular, in the downstream -- that was about the upstream. And in the downstream, what's the latest on the Jazan Refinery commissioning process?
Yes. With regards to Jazan, we are supposed to -- we started the utility, and we are expecting crude in, in the first quarter of next year. We'll start with 200,000 and then ramp up to 400,000 barrels.
For the second part of your question is about when are we -- with regard to different increments that we have in our plans, we are going through a review. We should be coming with the capital program for 2021 by year end. And based on that, we will be giving our numbers with regard to how much capital we're looking at 2021. There is a stretching definitely in some of the programs that we have. We are stretching some of these programs, the timing for these programs. We do have a number of increments that in Zuluf and Marjan and Berri. We do have also a number of gas increments that are coming. We're looking at all of these things. And by year end, we will give the guidance with regard to our capital for 2021.
And of course, Henri, you all have seen in the release that we did achieve a 12.1 million barrel a day production rate in early April, which is an all-time record for the company.
In 20 days.
In 20 days without any additional capital. You can understand that's a sort of great pride to the company. So we do have significant spare capacity at the moment. So there's scope for flexibility in some of these projects.
The next question, I think, comes from [ Jason Kenney ].
And on that 12.1 million barrels a day, truly impressive, and well done with that. I was wondering if you see a chance of reaching that 12.1 million barrels a day at any point in the next 12, 18 months again or at any point before 2025? Is it a one-off for now do you think? Is it all demand-related? Or is it a competitive capability that you just keep in your armory should you need it?
And my second question is, if you could confirm the financial support from SABIC in the second half of '20, as far as you see, petrochemicals businesses playing out. I'm looking for a kind of an earnings cash flow kind of guidance as a contribution bulked on second half, if possible?
So -- great, Jason. So the first question is, obviously, we've got the capability. We've demonstrated the capability to produce 12.1 million barrels a day. Under what circumstances would you see that being brought into play again? I think that's your first question.
And then your second question is, can we give you any specific guidance on SABIC?
I have to remind you SABIC is an accredited company. We own 70%, but 30% is in the hands of the public. So I'd say all that -- I'll just say that as a precursor to anything that Mr. Al-Dabbagh or Mr. Nasser would like to add to that.
I will just talk about the MSC. MSC, we reached 12.1 million barrels, and as highlighted, we reached it in 20 days. We demonstrated that the MSC is solid. Whenever it needs to be utilized, it's available not only from the upstream side, even from export side, from terminals and all of that. When we reached the 12 million, we reached it with a reliability of 99.8%. So it's not like reaching the MSC and then your reliability will be impacted, no. We reached the MSC, and we maintained the highest reliability anywhere else. Now production -- and MSC is the government. When we are going to 15 million barrels, I likely got the instructions from the government as per the hydrocarbon law and the concession agreement. MSC and production comes from the government in -- for production, it's been a monthly basis, we get [indiscernible] targets of how much we need to produce. But bottom line from our -- from Aramco side, it's readily available. We processed, as I said, in 20 days, for the first time. The highest we reached before is 11.4 million for only a couple of days. First time, we sustained it. And if required, the MSC is available for 1 year, and we can -- without any increase in capital. And then we sustain it with some slight addition in capital going forward.
With regard to the -- your second question, Khalid will…
Yes. Thank you, Jason. Yes. I just want to add that we have increased our production by almost 30% without thinking -- almost nothing from a capital perspective. And this does not happen very often in any industry in the world. That's a testament of the resilience and the strength of the company. With regard to SABIC, as Fergus alluded to earlier, or clearly said that SABIC is a stand-alone company that it listed -- it's a listed company. It has its own management and Board, and they would probably better -- care well of providing guidance on the free cash flow or dividends. However, having said that, SABIC is one of the largest petrochemical companies in the world. Its financials have historically been extremely positive. It may be the most profitable chemical company in the world. That -- financial returns goes up and down with the cycles. That is very typical with the chemical industry, in particular. As far as we are concerned, we -- when the decision was made to purchase 70% of SABIC shares from PIF, we had a very long-term view as part of our strategy to become the top chemical company and to use that to make Aramco the #1 energy company in the world. And indeed, with that acquisition, we have become the leading energy company in the world. Over the long term, as you are all aware, demand for chemical products outstrips that of growth in GDP. It is higher than growth in the transportation fuels. We are a strong believer of growth in demand for chemical products, and that's why we have purchased SABIC and we have very high expectations and hopes that SABIC will provide the strategic intentions that we have for that acquisition.
Thank you very much. Yes, SABIC do have a very good investor relations team.
[Technical Difficulty]
if that's helpful.
The next question is from Biraj Borkhataria from RBC Capital Markets.
I had a couple of things. First one is on the capital framework. I'm just -- I just want to get a sense, as you sit here today and you look into 2021, how much of your capital budget is committed to CapEx? Just trying to get a sense of that number.
And then the second question is back to the MSC and the 12 million barrels a day production. You've mentioned a few times that it didn't cost too much capital to reach that level of production. But can you talk about whether there will be any capital to sustain that level of production for, let's say, 6 to 9 months? Would that be a different case?
Thanks, Biraj. So yes, just to be clear, your first question is how much flexibility do we have in the capital budget for 2021? How quickly can we vary capital spending plans, I think, in light of changing circumstances.
And then the second one is, to hold MSC at the 12 million barrels a day for a period of longer than a few months, for up to a year, does that require any incremental spending? I think that was something that was actually addressed in our prospectus. But -- those are 2 questions.
Yes. I'll take that second -- so Khalid will take the second question, I'll take the MSC. The capital to sustain our MSC is built into our upstream capital program. So there is no -- for 1 year, there's no need for any additional capital. If we are to sustain it, the full year at 12 million barrels per day. And that was -- when we put the MSC, this is a whole business of maximum sustained capacity is to sustain a 12 million barrels without the need for any additional capital for 1 full year.
The second question is in regard to how much of your capital is committed in 2021?
Yes. I don't think that we can disclose this publicly, but we have long-term relations with all of our contractors. We make sure that they also weather the storm and at the end, it's going to be a win-win situation, but what we can say is that whatever the 2021 CapEx end up to be, it will be significantly lower than the previous guidance of $40 billion to $45 billion.
And we did already, by the way. It's not something that we are going to do it by the end of the year and surprise our partners. It's something that's already on the works. We have already established programs and what we need to do in each of our increments or -- and that capital replaces each of our capital program. So timing and scale are levers that we capitalize on. So the work is already started since the early -- since March, February this year. So by end of the year, we would have established all the requirements and what we will be executing in 2021.
And hopefully you saw, Biraj, in terms of how quickly we adjusted the 2020 capital program after the downturn at the start of this year. There is -- I think, the word we'd like to use is "agility" in the capital program. And so that holds true for next year as well.
I'm conscious that we've gone beyond the hour that we've said that we would try and keep to, but I do have 2 further questions.
The penultimate question is from Kay Hope at Bank of America.
My question is about your sense of [indiscernible] of debt. While we obviously had a very large increase in total debt during the second quarter, and I understand what that was from. But you're going from a position of net cost to LTM net debt of about 0.5. You've got ongoing dividends coming and some other cash outlays and potential acquisitions. Can you talk about where you think the net debt will possibly to go in 2020, 2021 and 2022?
So if I -- the line's a little bit difficult, Kay, but if I -- I want to just test that we've heard you correctly, that it's really a sort of credit metrics question, I think. And it's to do with what's the outlook for the balance sheet into next year and the year beyond. And we've talked about this a little bit already. And obviously, it's very dependent on the assumptions you make in any forward-looking look at credit metrics such as I think you're asking us to make. But did I understand you correctly, Kay? Is that the question that you're asking?
Yes. That's correct. And I'm wondering if you have a range in mind going ahead where you would feel comfortable with the leverage going?
Gearing.
Yes. Thank you, Kay, for your question. First of all, in terms of debt, it's -- we have a very complex model that we put together various elements that results in free cash flow and uses and sources and current debt and interest payment, our existing cash and cash equivalents. And we manage this through a very a rigorous process to forecast what we need, not only for use 2 years from now, but 2 months, 2 weeks as well. We have continuous stream of payments going to the governments, whether through royalty or for tax payments or payments to contractors. And of course, there is an onslaught of payment coming in. So it's a very complex model that we execute here. I think your second question about the gearing ratio. As I mentioned earlier, Kay, our planned gearing range is to move -- designed to preserve the -- an investment -- a high investment-grade quality of our balance sheet and have that balance sheet -- have enough resilience in that balance sheet to deal with situations like we just -- we're still going through as a result of the COVID-19. And as I mentioned before, that strong balance sheet have availed to us the capability to deal not only with a pandemic but also with having to complete one of the largest acquisition in the history of the industry. Going forward, as Amin and myself mentioned, we plan to stick to the target over time and oversight. Thank you, Kay.
And I'd like to go to our final question, which goes to Vladimir Dorokhov at AIG.
I actually have 2 questions. First, could you comment on buying from China in the recent weeks?
So could you just clarify, Vladimir? Did you say buying from China?
Yes, buying by the Chinese buyers?
Oh, I see. You're saying…
In crude -- you mean the crude oil? What…
Do you mean in crude -- you mean purchases from Saudi Aramco by Chinese buyers? So what's been the trend in our sales into China? Is that your question?
Exactly.
Okay. And did you say you had a second question?
Yes. And the second question is more technical. So when you are saying that about 10% of your crude to North America, does that include what you sell to Motiva?
Okay. Yes. Very clear.
Yes. With regard to the second question, yes, it includes Motiva, for sure, when we say about 10%. And for China, as I said, China is one of the biggest markets for Saudi Aramco and we place close to approximately 1.6 million barrels in China, approximately. We were higher than that earlier in the year. But currently, we're around 1.6 million barrels in placement in China currently.
I'm asking because there have been some headlines that the Chinese have substantially reduced their buying because of the flood and also because their storage is nearly full. Just wanted to see what is the view from your side.
Not -- we have an excellent customer base in China. We were not impacted in terms of demand from China. As I see, for us, China, Japan, Korea and India, very significant markets, and we have been maintaining our supply to these markets. And we have the best customer base in each of these countries.
And if I may add, given the fact of our high level of reliability, most of these major importing countries consider Saudi crude as baseload. So there is a minimum requirement of such crude to go into the refining system, and then they may optimize other spot purchases and -- based on prices of that crude freight and/or run through their own inventory.
Yes. The other question was about Motiva, I think.
Yes, it's included. I said that, that includes Motiva.
Well, I'd just like to thank everybody for an excellent set of questions. So I'll just hand over back to Mr. Nasser for any concluding remarks you might like to make, Mr. Nasser.
Thank you, Fergus. Ladies and gentlemen, thank you very much for your insightful questions. Before we end the call, I would just like to say a few words in closing. Aramco has successfully navigated many challenges in its 87-year history. In recent history, the financial crisis and the Asian financial crisis stand out. But this current crisis, which has caused the worst economic downturn since The Great Depression of the 1930s, is by far the toughest challenge the world has ever faced. And it comes after a year of challenges from the attacks on our Abqaiq and Khurais facilities last September to the worst pandemic in a century. Despite these challenges, Aramco has kept going and defied the odds. We have continued to safely and reliably provide the world with the low-carbon energy it needs.
We completed the largest IPO in history. We completed one of the largest ever acquisitions in our industry as well. And now we have delivered resilient financial performance and met our dividend commitments. We have been tested like never before, and we have delivered. I am confident that we will continue to deliver and come out even stronger after the pandemic is over. At its heart, the confidence is built on the back of our incredibly talented team of people who ensure that our operations remain safe and reliable, no matter what challenge is thrown at them. This coupled with leveraging our cutting-edge technology and prudent financial stewardship, will lead to better and more prosperous future for the company and its investors. I am optimistic about the company's future, especially as and when the impact of the pandemic fades away and the global economy recovers. Thank you.
And thank you, Mr. Nasser, and thank you, Mr. Al-Dabbagh, and thank you to everybody who joined us today for your questions. And of course, the Investor Relations team at Saudi Aramco remain available to follow up, if required, following this call. Thank you.
Thank you, everyone, and be safe.
Thank you.
Appreciate it. Thank you for the time.
Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.