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Edited Transcript of 2222 earnings conference call or presentation 16-Mar-20 12:00pm GMT

Q4 2019 Saudi Arabian Oil Co Earnings Call

DHAHRAN Mar 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Saudi Arabian Oil Co earnings conference call or presentation Monday, March 16, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amin H. Nasser

Saudi Arabian Oil Company - CEO, President & Director

* Fergus MacLeod

Saudi Arabian Oil Company - Head of IR

* Khalid H. Al-Dabbagh

Saudi Arabian Oil Company - SVP of Finance, Strategy & Development

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Conference Call Participants

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* Alastair R Syme

Citigroup Inc, Research Division - MD and Global Head of Oil and Gas Research

* Biraj Borkhataria

RBC Capital Markets, Research Division - Director, Co-Head of European Energy Research Team & Lead Analyst

* Christyan Fawzi Malek

JP Morgan Chase & Co, Research Division - MD and Head of the EMEA Oil & Gas Equity Research

* Douglas George Blyth Leggate

BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research

* Gordon M. Gray

HSBC, Research Division - Global Head of Oil and Gas Equity Research

* Henri Jerome Dieudonne Marie Patricot

UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst

* Jason Gammel

Jefferies LLC, Research Division - MD & Senior Equity Research Analyst

* Karen Kostanian

BofA Merrill Lynch, Research Division - Head of EEMEA Energy Research & Head of the Russian Research Department

* Lydia Rose Emma Rainforth

Barclays Bank PLC, Research Division - Director & Equity Analyst

* Martijn Rats

Morgan Stanley, Research Division - MD and Head of Oil Research

* Michele Della Vigna

Goldman Sachs Group Inc., Research Division - Co-Head of European Equity Research & MD

* Thomas Yoichi Adolff

Crédit Suisse AG, Research Division - Head of European Oil & Gas Equity Research and Director

* Vladimir Dorokhov;AIG;Senior Credit Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Saudi Aramco's Full Year 2019 Results Presentation Webcast. My name is Jordan, and I'll be your operator for this call. (Operator Instructions) I will now hand over to today's host, Mr. Fergus MacLeod to begin. Mr. MacLeod, please go ahead.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [2]

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Hello, and welcome to this audio webcast discussing Saudi Aramco's Full Year 2019 Results. I'm Fergus MacLeod, Saudi Aramco's Head of Investor Relations. 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. And we anticipate the entire call lasting around an hour. And just as a reminder, this webcast and conference call are being recorded.

Before we start, I'd 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. 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, Amin Nasser.

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [3]

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Thank you, Fergus. Welcome, ladies and gentlemen, and thank you for joining us from all around the world. This is our first earnings call as a publicly listed company, and it is a great pleasure to be with you today. I will provide some reflections and start by outlining why 2019 was a historic year for Saudi Aramco. Khalid will then take us through the results, and then I will conclude before we take your questions.

Before going on further, I would like to spend a moment to discuss the impact of coronavirus. The situation, as you know, is rapidly evolving. The impact on growth remains uncertain. However, we will ensure that we maintain the strength of our operations and finances, and we have already taken steps to rationalize our planned 2020 capital spending. I am sure many of you have lots of questions on this subject, and we will address them in the Q&A segment.

Moving on, I want to stress that our vision is clear, as shown in this slide. Our unique scale, low cost, low carbon intensity and resilience, deliver growth and outstanding returns while maintaining our position as the most reliable energy company. For example, we have more than 5 decades of reserves life. In other words, we don't face the same production question marks others may do. These trends are combined with a strong balance sheet and a disciplined and flexible approach to capital allocation. Together, they allow us to deliver our goal of growing free cash flow and dividends over time despite the volatility of markets.

2019 was an exceptional year for Saudi Aramco in many ways. The world saw what the company is made of, the spirit of our people, our guiding principles and what Saudi Aramco means to the future of energy. Saudi Aramco reserves were certified for the first time by one of the industry-leading auditors, DeGolyer & MacNaughton. We were especially pleased that their audit showed that the company's oil and gas reserves are even larger than our previous estimates.

Our chemical strategy took a major step forward with the purchase agreement to acquire the public investment fund, 70% equity interest in SABIC. Upon closing of the transaction expected in the first half of this year, we expect to become a major petrochemical producer globally. We have been at the forefront of environmental performance for many years and continue to expand our disclosures and transparency in this area.

For example, with the audited data showing we have one of the lowest upstream carbon footprints per unit of hydrocarbons produced. We have built further on that track record with the inclusion of a sustainability chapter in our annual report. I will touch more upon this important subject later.

Safety, reliability and resilience are and always have been core to our DNA. We saw a powerful demonstration of this when our facilities at Abqaiq and Khurais were attacked in September. Our workforce demonstrated great resilience, team spirit, and we restored production to pre-attack levels within 11 days restoring stability to energy markets. Our rapid response and restoration after those attacks showed our commitment to meeting the world's energy needs safely, responsibly and reliably.

The crowning achievement of the year was the success of our IPO, the largest the world has ever seen. The global visibility from the successful bond issuance and the IPO represent a historic transformation and gives investors an appreciation for the first time of the strength of our company, our people and our operations. Today's earnings call is another step in that journey.

Since the end of 2019, we passed another major milestone with regulatory approval for the development of Jafurah, the largest unconventional gas field in the Kingdom to date. Jafurah contains an estimated 200 trillion cubic feet of gas resources, which will provide valuable feedstock for the petrochemical and metallic industry. It underpins the growth of our gas business for decades to come. The field will be gradually developed in phases. The start of production of the first phase will be in early 2024.

Turning now to some key highlights of our 2019 performance. Operationally, the business continues to perform well. We delivered robust profitability and strong cash flow despite lower oil prices and challenging refining and chemicals margins. Our full year 2019 net income was around $88 billion, and our free cash flow was more than $78 billion. CapEx for the year was around $33 billion, lower than last year due to optimization of activities and certain projects nearing completion. Khalid will further cover our future CapEx plans in a moment.

Our solid 2019 performance enabled us to distribute more than $73 billion in dividends. Our environmental performance in both carbon and flaring intensity of our upstream operations improved. Our focus on technology and innovation is demonstrated by a record 524 patents granted. I will now turn over to Khalid to provide more details on our financials.

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Khalid H. Al-Dabbagh, Saudi Arabian Oil Company - SVP of Finance, Strategy & Development [4]

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Thank you, Amin, and good afternoon, ladies and gentlemen. I am pleased to share with you some financial metrics that clearly show how truly and uniquely differentiated Saudi Aramco is, not only from our peers but even when compared to the leading global icons.

In all 4 key 2019 financial metrics, $88.2 billion net income, $78.3 billion free cash flow, 28.4% return on average capital employed, and $73.2 billion dividend. Our performance surpassed all of the 5 largest international oil companies combined. Whilst these numbers are impressive, we never rely on past success and push to drive further value from every molecule of hydrocarbons.

Let me now discuss net income which was unparalleled and resilient despite a weaker environment. Our net income for 2019 was $88 billion versus $111 billion in 2018. Compared to the previous year, financial performance was impacted by lower oil prices of $5.40 per barrel and lower crude production of 400,000 barrels per day. The entire industry experienced a weaker downstream environment with refining and chemical margins, both under pressure as the year progressed. Our resilience during 2019 is underscored by the effect of external macroeconomic factors beyond our direct control, including crude oil prices, volumes and margins. In total, these accounted for over 80% of the reduction in our year-on-year net income.

Turning to the balance between the sources and uses of cash. This slide compares full year 2019 with 2018. Sources largely met uses in 2019 despite a combined impact of $25 billion from lower operating cash flow and higher dividends. Net cash inflows from operations declined year-on-year by less than the fall in net income, principally due to favorable working capital movements compared to 2018. Capital expenditures of $33 billion were lower than a year ago and lower than the guidance we provided during the IPO process due to continued optimization activities. Free cash flow of $78 billion was further helped by lower capital spending than last year and was, therefore, down by only 9% compared to last year despite the weaker environment.

Balance sheet gearing at the end of 2019 was negative, highlighting our strong and prudent financial framework. We are proud of our strong stand-alone AAA-rated balance sheet. All in all, this robust financial performance proves the resilience of our business model and financial framework, with commitment to shareholders underpinned by the total dividends paid in 2019 of $73 billion.

I would now like to discuss our future capital spending plans, which demonstrate both our discipline and flexibility. With our strong financial framework and a disciplined CapEx governance process, we are able to successfully invest to meet the vision and strategies that Amin described earlier. We have launched a dynamic CapEx review in response to prevailing market conditions. As you may remember, at the time of the IPO, we indicated that our expected 2020 organic CapEx to be in the $35 billion to $40 billion range. We have now optimized our spending plan, and I can today confirm that our 2020 organic CapEx is expected to be in the $25 billion to $30 billion range. As yet, no one knows the precise impact on economic activity and energy demand from the coronavirus outbreak, especially in the longer term, and additional efficiencies may be required. Our CapEx budget for 2021 and beyond are therefore currently under review.

Furthermore, for the longer term, we are examining plans to increase our maximum sustainable capacity to 13 million barrels per day. It is worth highlighting that our low-cost structure is a great advantage in facing the current challenge. Our upstream lifting cost in 2019 was only $2.8 per BOE produced, and our upstream capital expenditures only $4.7 per BOE produced, both being the lowest in the industry. Given our low-cost, our flexibility and our low sustaining Capex, the company can sustain a low breakeven oil price.

Turning to shareholder distributions, which I touched upon earlier. We remain committed to deliver affordable base dividends through crude oil price cycles in addition to any potential special dividends. When upside emerges, we have a strong track record of distributing excess free cash flow as oil market circumstances permit. For the next 5 years, a dividend prioritization mechanism supports nongovernment shareholders. If annual dividends declared are less than $75 billion, dividends to nongovernment shareholders are intended to be prioritized so that they receive the pro rata shares of a $75 billion equivalent dividend.

I hope you will agree that 2019 shows the robustness of our financial framework, a strong balance sheet, a disciplined and flexible approach to capital and our commitment 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 strong financial performance, and can you rest assure it is our ambition to maintain this going forward. With our revised 2020 CapEx guidance, we have shown our agile response to weaker market conditions. And if needed, we have flexibility for further action. Our teams work hard every day and are committed to what makes Saudi Aramco a great and differentiated company.

As Amin said earlier, 2019 was a landmark year. It was a year in which we truly showed our ability to create value, one in which we paid the largest dividend by any listed company in the world.

Thank you very much, ladies and gentlemen, for being a vital part of our entry into the capital markets. Now Amin will provide his concluding remarks.

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [5]

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Thank you, Khalid. Our goal is to deliver sustainable growth in our free cash flow to support dividends to shareholders. 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.

Turning to our ESG performance. We have included sustainability chapter in our forthcoming annual report containing expanded disclosure on these vital issues. Among the new disclosure, is a further reduction in our upstream carbon intensity, which was already one of the lowest in the world. Our 2019 upstream carbon intensity of 10.1 kilogram of CO2 equivalent per barrel of oil equivalent is down from 10.2 kilogram in 2018. Our Scope 1 & 2 greenhouse gas emissions and our energy intensity also improved. Our corporate values of excellence, safety, citizenship, integrity and accountability include treating all people with fairness and respect and embracing diversity.

The company is committed to gender diversity, special needs and generational inclusion in our workforce. Female workforce participation has been steadily increasing. It includes engineers in the field, inventors in our laboratories, lawyer, chartered accountants and finance specialists as well as traders selling our products around the world. We will maintain ambitious target for these important metrics.

On governance, this last slide shows the set of KPIs to which the management of the company, including myself, are held accountable by the Board. We understand and believe in the importance of good governance as a critical measure in achieving stakeholders' expectations. Our metrics represent a balanced scorecard across measures of operational efficiency, business sustainability, health, safety and environment and, of course, value creation. Our interests are aligned with the interest of our shareholders.

Thank you very much, ladies and gentlemen. And I and my team look forward to answering your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [2]

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Thank you, operator. And our first question comes from Karen Kostanian of Bank of American -- Bank of America.

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Karen Kostanian, BofA Merrill Lynch, Research Division - Head of EEMEA Energy Research & Head of the Russian Research Department [3]

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Congratulations on the robust results, and thank you for an opportunity to ask a question. Now my question relates to the Capex. My first question relates to the CapEx, the release of the new Capex. I remember that you provided the CapEx split of liquids 35%, gas 40%, and downstream 25%. I was just wondering in the new CapEx guidance, which part of this will be reduced and sacrificed perhaps? And my second question relates to the maximum sustainable capacity of 13 million barrels per day. How fast do you think you will be able to achieve that level and whether expenditures to expand that capacity are included in that CapEx number that you provided?

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [4]

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Thank you, Karen. Thank you, first of all, for your kind words. But first of all, your question about CapEx and the split that you mentioned between liquids, gas and the downstream. I'd just point out to you, Karen that, that split actually referred to the medium-term guidance that was given at the time of the IPO. So post 2021, it's a really good question for 2020 as well, although that wasn't the year that original guidance was given for. Then your second question is whether the guidance for 2020 of $25 billion to $30 billion includes anything for the expansion in maximum sustainable capacity towards the new goal of 13 million barrels a day.

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [5]

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Okay. Thank you, Karen. I think for CapEx the reduction is basically as a result of -- and our -- between $35 billion to $40 billion and going down to $25 billion to $30 billion is based on optimizing our spending plans and increasing our oil production, which means we will be increasing our associated gas significantly because we are going from almost 9.7 million barrels to 12.3 million barrels expected in April and staying at that through the year. And based on that, there is a lot of associated gas. And with that, we can optimize our spending on gas. And also, we can cut further, given our unique low sustaining Capex. We have a lot of flexibility in that. With -- the second question is with regard to our...

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [6]

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The expenditure to increase MSCs, does that include 2020?

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [7]

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The 13 million barrels, we have just got a request to expand our capacity, a maximum sustain capacity from 12 million barrels to 13 million barrels. We are doing that on an accelerated basis, and our 2020 spending or capital does not include any of that as of yet.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [8]

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Thank you, Karen, for that question. The next question comes from Christyan Malek at JPMorgan.

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Christyan Fawzi Malek, JP Morgan Chase & Co, Research Division - MD and Head of the EMEA Oil & Gas Equity Research [9]

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Appreciate the questions. Amin and Khalid, congratulations on what proven a very strong set of results, and particularly given the reiteration of the dividend target in 2020 despite the unprecedented macro backdrop. As we think about that, and I guess, the intention to move above 12 million barrels of supply, a few questions. First, can you talk about what is the actual level of production you plan to deliver? And can you comment on perhaps, you can quantify the amount of inventory you plan to use to deliver 12.3 million barrels as per the Kingdom's recent announcement?

The second question sort of comes back to sort of the call on CapEx in terms of the additional, given it's not within the $25 billion to $30 billion, what are you prepared to lose in terms of other parts of the portfolio spend, be it downstream or gas to basically fund that incremental upstream Capex? And can you quantify what that CapEx would be to sustain 13 million?

And finally, what levels of oil price are you planning in the worst-case scenario sustaining negative demand? I mean given your pre-dividend breakeven is around $15 a barrel, would it be fair to say that's a pain threshold we should be looking to?

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [10]

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Thanks, Christyan, three good questions. So the first one, 12.3 million for April, are we prepared to say if any of that would be coming from inventory. The second one is if we were to complete our studies on expansion of maximum sustainable capacity, would that have to be the spending at the expense of anything else? I think that's sort of your question was. And then the third one is, what's our oil price worst case? How low an oil price could we sustain...

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [11]

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I'll take the first and second question with regard to expanding the 12.3 million barrels. Our maximum sustained capacity is 12 million barrel. We announced that we will be, in April, at 12.3 million barrels, 300,000 will be coming from our inventory. As you know, we are keeping significant inventory in the Kingdom, and in the Netherlands, and in Japan, and in Soviet and different enclaves in terms of -- so the 300,000 will be coming from our inventory.

The second question's with regard to sustaining whether it is -- that MSC, whether it is going to impact our capital? No. I think our maximum sustaining capacity when it is -- when it's still based on -- it is sustained for 1 year without the need for any additional spending. So basically, the minute we get the, "go ahead," to produce at 12 million MSC, we don't need any additional capital. As it is to be sustained further, we're talking about the addition of maintained potential that would be required after 12 months, and that should not be very significant. But it does not require any additional capital spending to maintain the 12 million barrels, and that's reflected in our lower CapEx forecast for 2020, going to $25 billion to $30 billion instead of $35 billion to $40 billion. Khalid will take the third question.

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Khalid H. Al-Dabbagh, Saudi Arabian Oil Company - SVP of Finance, Strategy & Development [12]

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Thank you, Christyan, for the question. Basically, this is to confirm, and as you're all aware, that Saudi Aramco enjoys most ample resources. It has the lowest cost, and it has a tremendous ability to flex its Capex. So in a nutshell, Saudi Aramco can sustain a very low oil prices and can sustain it for a long time, and that is especially the case compared to others in the sector.

Thank you, Christyan.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [13]

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Thank you very much, indeed, for that question, Christyan. I think the next question, I think, is coming from Martijn Rats at Morgan Stanley.

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Martijn Rats, Morgan Stanley, Research Division - MD and Head of Oil Research [14]

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I had a few. First of all, I wanted to ask you about the OSPs. Because, of course, we've dropped OSPs very, very significantly about a week ago. And I was wondering if you see those normalizing in the coming months?

And also, I wanted to ask you about the expansion of the MSC to 13 million barrels a day. Over what kind of time frame would you think that is likely? How long does that take?

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [15]

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Those are the 2 questions. Then, just the first one, how do we set OSP? I think if I could summarize your questions, Martijn, and how does that -- is that changing anyway? Or is that going to carry on as it has in the past? Then the second, your question was going ahead with the 13 million barrels a day objective for maximum sustainable capacity, what time frame might we be looking at for that?

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [16]

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With regard to our OSPs, it's always put as a response to our market condition. Basically, we look at the supply-demand fundamentals each month. And based on that and based on the feedback that we get from our customers, we decide on our OSPs. So it takes into consideration what is the supply and what is the demand and what is the customers' feedback and which enclaves we would like to lease our crude in.

With regard to your question about the 12 million to 13 million, we are currently assessing that. And hopefully, we will be coming back later with the time frame for delivering the 13 million barrels of maximum sustained capacity. We are doing the pre-engineering right now in preparation for that acceleration of MSC.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [17]

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I think the next one is coming from Michele Della Vigna at Goldman Sachs.

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Michele Della Vigna, Goldman Sachs Group Inc., Research Division - Co-Head of European Equity Research & MD [18]

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Thank you very much for taking my questions. And again, congratulations on the strong results, but also on the cost positioning and balance sheet flexibility that enables you to navigate such difficult times. I had 2 questions, if I may. First of all, could you update us on the timing of the SABIC and Reliance deals? And secondly, more of a strategic question. With the development of the giant low-cost Jafurah field, I was wondering, does this, to some extent, make your global LNG expansion less relevant because you've got such a large low-cost domestic development? Or on the other side, are you making it more relevant because having an asset like this one, you want to have a bigger role in the global gas market, particularly thinking about the flexibility, your CapEx budget, I was wondering how the global LNG expansion figures there in terms of priority.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [19]

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Great. Okay, Michele. So the 2 questions, I think, I have is, they were, first of all, is anything changing in terms of the guidance we've given for the timing of the completion of SABIC? And what's the update on the potential transaction with Reliance?

And then secondly, would the, "go ahead," for the Jafurah, the largest unconventional gas field developed so far in the Kingdom, would that impact our views about the gas strategy? Could it support gas exports, possibly? How does it interact with our thoughts about an international gas strategy?

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [20]

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Thank you. With regard to the SABIC deal, we completed the antitrust regulatory requirements. We are doing a few things, and we are hoping that we will be able to close that transaction in the second quarter this year. With regard to the Jafurah and LNG, global LNG is a potential growth area we continue to monitor. It is very important, and Jafurah, as you know, will start coming on production in early 2024, and will continue to come in phases through 2036.

We are -- gas is very important and critical for Saudi Aramco. It is going to be an important part of our energy mix over the long term. The growth is almost 3% per year. So we will continue to look for opportunities outside Saudi Arabia, if any, to expand our position, not only in Saudi Arabia but also globally.

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Khalid H. Al-Dabbagh, Saudi Arabian Oil Company - SVP of Finance, Strategy & Development [21]

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Good afternoon, Michele, just on the Reliance bit, it is ongoing, the discussions. It's still under due diligence phase. And whenever the teams complete their evaluation, then it will go for the next gate within Saudi Aramco's approval process. Thank you.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [22]

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Thank you, Michele. Next one comes, I think from Alastair Syme at Citi. Alastair, are you there?

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Alastair R Syme, Citigroup Inc, Research Division - MD and Global Head of Oil and Gas Research [23]

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I just wanted to come back, apologies, just on the question of CapEx revision because I still don't quite understand. You had some large future developments that were sort of planned through the next couple of years. So I guess, is the message that we're starting to mothball some of this activity? Are we going slow on that? Or is the revision of CapEx mainly coming from the more shorter-term drilling side of the business?

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [24]

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Yes. So just again, your question is another question really, I think, about CapEx flexibility, how we manage to exercise the degree of flexibility because we have a very low level of sustaining Capex. But what were the levers within that? Does it impact on any of the major projects that we've talked for the next increments?

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [25]

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As I said earlier, we are optimizing all elements, including the phases that these projects are coming in. We are ensuring that our strategy continue to come as planned with regard to our maintaining our MSC, expanding our gas.

As, for example, our gas plant, Fadhili Gas Plant came on stream -- started to come on stream late last year and it's rounding up. Hopefully by next month, we will be at capacity, which is 2.5 billion standard cubic feet per day. So basically, there are certain phases of certain projects that extending them a little bit because of the additional gas that we have, we will have additional gas, additional condensate, additional NGL, and we can afford to phase them out without having an impact on these projects in terms of significant impact on the time frame for these projects while meeting our commitments for the different grades in terms of oil, gas or petrochemical.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [26]

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The next one come -- yes, please go ahead.

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Alastair R Syme, Citigroup Inc, Research Division - MD and Global Head of Oil and Gas Research [27]

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Sorry, just to clarify on the 2020 budget. So that, that does include a half year of CapEx related to SABIC, is that right? To the business on a consolidated basis.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [28]

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That's correct. That's absolutely correct. Yes. So -- in fact, the reduction is slightly bigger on a like-for-like basis, 2019.

Next one comes from Gordon Gray at HSBC. Gordon?

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Gordon M. Gray, HSBC, Research Division - Global Head of Oil and Gas Equity Research [29]

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A couple of quick ones, please. Firstly, if you could let us know any detail you can on the cost of repairs for the September attacks and maybe what went through as OpEx, what is CapEx? And secondly, if you can just clarify that despite the macro environment, there's no intended change to your balance sheet gearing targets?

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [30]

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Okay. So 2 questions were any update on the costs of the remediations of the attacks on Abqaiq and Khurais last year. Yes. That was the first part. And the second one was, just remind me what you just asked if you don't mind, Gordon?

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Gordon M. Gray, HSBC, Research Division - Global Head of Oil and Gas Equity Research [31]

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It was just a point of clarification that there's no change to the balance sheet gearing targets.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [32]

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Oh, yes, the balance sheet, the 5% to 15% gearing target. Yes.

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Gordon M. Gray, HSBC, Research Division - Global Head of Oil and Gas Equity Research [33]

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Correct.

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [34]

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Okay. With regard to cost for the repair of that happened in Khurais and Abqaiq, we said before, it is insignificant and it's not material. Actually, when we said that, it peaked -- it came out when we finalized, it's much lower than what we even estimated at that time when we said it is immaterial. With regard to the gearing ratio the 5% to 15%, it's still our plan to maintain a gearing ratio of 5% to 15%, and that is the plan.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [35]

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Across cycles, obviously, 12 million would be, it could go out, lap that a little bit, but the goal is to return to that through time.

Next question, I think, is from Jason Gammel.

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Jason Gammel, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [36]

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Well done on results today. How long do you think you will produce 12.3 million barrels a day? Is it something we should assume from April for the second quarter? Or is it something we should assume for the foreseeable future in terms of crude oil production?

And then secondly, can you give any detail or insights on how refined product volumes have shifted or might shift and utilization rates in the downstream as well, if at all possible?

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [37]

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Jason. I'll just clarify your second question. Is that about our own system or what we're observing on sort of the global picture?

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Jason Gammel, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [38]

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Your own system if possible.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [39]

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Okay. The first one then is about how sustainable is the 12.3 million for April. And then the second question is what's happening to our own downstream system as a result of the changes that have taken place.

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [40]

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We will produce -- our maximum sustained capacity is 12 million barrels, as I said; 300,000 is coming from our inventory, whether in Kingdom or out of Kingdom. We are looking at how long we can maintain that additional 300,000, as I said. It is definitely for sure in April, and we're looking at other months maintaining higher production above our maximum sustained capacity of 12 million. We can sustain that, as I say, for 1 year without any additional CapEx or OpEx. And then after that, it can be sustained, and definitely if required.

With regard to your second question with regard to the projects, we are -- there is definitely an impact on jet fuel. And for us, we can -- there's always -- you can look at jet fuel and mixing it with diesel, if required. And that should maintain our requirements in terms because they will accelerate. Yes, Khalid will have -- would like to say more -- something more.

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Khalid H. Al-Dabbagh, Saudi Arabian Oil Company - SVP of Finance, Strategy & Development [41]

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Yes. Thank you, Jason. We have obligation to meet our domestic demand, and this is a part of the -- how we run our local refining systems. However, in doing that, we also optimize the LP for each refinery to maximize products that provides higher ease of margins. Beyond that, as you would appreciate, we would not necessarily give details or comment on our own operations. Thank you, Jason.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [42]

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The next one -- the next question is from Lydia Rainforth with Barclays.

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Lydia Rose Emma Rainforth, Barclays Bank PLC, Research Division - Director & Equity Analyst [43]

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Two if I could. The first one, is just coming back to the question on volumes. With the press release that came out, it has said that the company expects that this will have a positive long-term financial effect. And what I'm trying to understand is, is that purely a volume effect? Or is it also about optimizing the cost base as well for that?

And then the second one was, clearly, when it was (inaudible) [it's easy to forget] what those long-term ambitions. I'm just wondering if you could talk a little bit more about the low carbon side of things. Particularly, what you're thinking about in terms of maybe the U.S. and hydrogen events that you held recently.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [44]

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Lydia your line is a little bit bad. So I'm going to try to summarize what you said. And if I get it wrong, then maybe you could step back in and tell me that I've misheard you. I think your first question was the increase in production and we made a comment in the statement when that was announcing, we expected that to have a positive financial effect on the company. Was that just a statement about the impact of higher volumes or was there anything else behind that statement, I think.

And then your second question, I think related to low-carbon intensity, with the further reduction that we've identified today in 2019 versus 2018 from the 10.2 kilograms of CO2 equivalent per barrel of oil equivalent and the upstream is down to 10.1. Is that right Lydia? Those are your 2 questions.

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Lydia Rose Emma Rainforth, Barclays Bank PLC, Research Division - Director & Equity Analyst [45]

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Yes, it is. Yes. Thank you. Yes.

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Khalid H. Al-Dabbagh, Saudi Arabian Oil Company - SVP of Finance, Strategy & Development [46]

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Okay. I'll take the first question, Lydia. Yes, definitely, we see the increased level of production having a positive impact on our financials on the long term.

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [47]

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And with regard to our low production, I mean, low carbon intensity, we'll continue to drive it down, the drop from 2018 to 2019, from 10.2 kilograms per barrel of oil equivalent to 10.1, is a -- something -- a step in the right direction. The company is focused on reducing its carbon emission and carbon intensity, and we will continue to drive it down with regard to Scope 1, not only Scope 1 but Scope 2 which comes from the utility sector that provide -- that comes to our facilities. We are also looking at -- through our R&D centers, 2 of our centers, globally, the 1 in Detroit and 1 in Paris is focused also in Scope 3 emission by working with the auto industry in Europe and in the U.S., trying to reduce carbon emission by either better fuel formulation or more efficient car or carbon capture on top of car and then getting rid of that carbon. And we are looking at crude to hydrogen. So carbon and carbon emission and climate change issues, we have a leading position globally, and we'll continue to put that as a priority for Saudi Aramco and we'll continue to drive it down.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [48]

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I'm sure you noted, Lydia, that Mr. Nasser mentioned that there would be a sustainability chapter in our forthcoming annual report and there is significant incremental disclosure in that. You'll have noted on the slide that we showed that the Scope 1, Scope 2 emissions, for example, are quantified as part of that. So we look forward to your feedback on that in due course.

The next question is from Henri Patricot at UBS.

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Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [49]

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Three questions, please. The first one, just on your plans for production from April. As you mentioned earlier, the situation globally is evolving very, very, very quickly. It looks like we could have a very weak global oil demand. So I was just wondering whether at this point, in terms of either oil demand or oil crisis at which you would perhaps slow down that increase in production and sales from inventories?

And then secondly, on the CapEx side and the increase in the MSC to 13 million barrel per day. Can you give us a sense of the split between onshore/offshore projects, greenfield/brownfield that you'd expect to see at this stage? And looking also at CapEx for 2021 and beyond, is it fair to expect a substantial increase from the $25 billion to $30 billion guidance you provided for 2020? Or do you have more efficiencies to put through after that as well?

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [50]

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Okay. So the first one, Henri, was on production plan. As you know, the government determines our maximum permitted level of production, and the government has now raised that. So now that's, therefore, the reason why we're moving to maximum production. You are asking whether we might choose to produce at a different level as we move forward.

The second question, I think was about as we assess the options for expanding maximum sustainable capacity, how we're thinking about the balance in offshore and onshore? What's required in order to achieve that? And given the flexibility we have to achieve further efficiencies, how does that balance against whatever might be required in order to implement the plans to increase maximum sustainable capacity, I think.

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [51]

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Okay, Fergus. I'll take question 1 and 2 and Khalid will take -- will address question number 3. With regard to our production in April and beyond, as I said, we always decide early in the month with regard for the next month on differentials to different markets, and we look at the supply-demand fundamentals. And based on that and the guidance that we received from the Ministry of Energy with regard to up -- to what production level, they would like the company to produce, and we take our customers' field with regard to their demand for different type of crudes. And since we have 5 grades and we have wide customer base and the decision for April is 12.3 million and I doubt if May will be any different, but we will evaluate it. Each month, we will be looking and deciding accordingly. And going beyond that, that will be the case.

As I say, the maximum sustained capacity, 12 million can be sustained for 1 year without any additional OpEx or CapEx requirement. Beyond that, it is only assembling and gain potential to maintain it. With regard to the -- going on our maximum sustained capacity from 12 million to 13 million and the split between onshore and offshore, as I said, this is currently under evaluation. And we're doing our pre-engineering, and then we will be announcing our plans at a later date.

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Khalid H. Al-Dabbagh, Saudi Arabian Oil Company - SVP of Finance, Strategy & Development [52]

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Thank you, Henri. Regarding your question related to the '21 guidance. As you are aware, given the rapid changes in the markets in the last few months, we have internally put together a plan to flex our 2020 CapEx, and we were able to reduce it as were seen in our presentation.

This is also a result of putting our proprietary technology to good use in terms of how we take advantage of our differentiated cost structure. When it comes to 2021, as you are all aware, there are so many moving variables, as we speak, that affect supply-demand and pricing. And the company is, in earnest, going through a process to develop a guidance for 2021, and we will share it with the market when it's confirmed. Thank you.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [53]

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Next question comes from Thomas Adolff with Crédit Suisse.

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Thomas Yoichi Adolff, Crédit Suisse AG, Research Division - Head of European Oil & Gas Equity Research and Director [54]

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I've got 3 questions, please. Just firstly, going back to the MSC and I understand it's still in the early stages. Correct me if I'm wrong, the last time you expanded the MSC, it took you some 6 years from 2004 to 2010. So is 6 years the kind of right time frame to think about for the next expansion?

Secondly, just on Capex. Can you comment whether this $25 billion to $30 billion is now largely committed for 2020? Or whether you can still go down further?

And then just finally, on gearing, and I know you mentioned that you're sticking to the gearing target range, but you're also okay to be above that for a short period of time. Perhaps you can give us some guidance in a $30 or $40 Brent scenario with SABIC fully consolidated from mid-2020, where you see gearing ending the year in 2020?

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [55]

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Very good, Thomas. So the first one is, are there any sort of historical precedence to how long it takes to expand the MSE. Second one, how much further flexibility would be in the $25 billion to $30 billion guidance for 2020, imagine, for example, if prices stay very low for an extended period of time? And thirdly, is there sort of boundaries in terms of how high gearing might go in a lower price environment, assuming completion of SABIC around the midyear by the end of 2020?

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [56]

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I will take question #1. Khalid will take question #2 and 3. With regards to our MSC. Yes, it took us number of years to bring MSC, depending at that time. It's a different time frame and depends on the capital availability at that time when it was decided to increase the MSC. We do have the flexibility to accelerate if required. And we are currently looking at that. It depends whether it's a cleave within existing fields or it's the grassroot increments that we will be bringing in. All of that is being evaluated right now. And based on that decision, we will be deciding the time frame. And as I said, it is going to be done on an accelerated basis.

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Khalid H. Al-Dabbagh, Saudi Arabian Oil Company - SVP of Finance, Strategy & Development [57]

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Thank you, Thomas. With regard to your second question, and I believe it was with the $25 billion to $30 billion be final for the 2020 CapEx? To a large extent, yes, not, of course, barring any massive, aggressive, violent change in the market that may or may not take place. We remain ready at Saudi Aramco, to respond to whatever market conditions that prevail out there to deliver on our commitment to our shareholders.

Going forward, I believe your third question relates to the gearing after we consolidate SABIC and at a $30 to $40 price range, yes, it will definitely -- irrespective of what price range, the gearing would increase because we will consolidate SABIC, and with that, the amount of payment would be considered in our gearing calculation. It will increase definitely, but it will increase, as we said, the 5% to 15% is a target that we aspire to preserve across cycles. There could be some time, whether it's weeks or few months where it reaches the top end of that range. It could exceed it, but given our extensive amount of production and extensive extent of revenue, the cash coming in into the company will rapidly erode that yield. Thank you, Thomas.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [58]

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Thank you. Next one is from Biraj Borkhataria at RBC.

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Biraj Borkhataria, RBC Capital Markets, Research Division - Director, Co-Head of European Energy Research Team & Lead Analyst [59]

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Apologies if this has already been asked, I was cut off for a little bit. Just one quick one. As you're ramping up oil production, can you just talk about what you expect your output to be on gas and condensate for the year?

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [60]

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So the question, I think, Biraj, was we've talked about liquids production, our liquid sales for 12.3 million for April. So is there any guidance we're prepared to offer for going beyond oil into NGLs and condensate?

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [61]

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Yes. Thank you, Biraj. Definitely, if you look at 2019, our total barrel oil equivalent were 15.2 billion -- million barrel of oil equivalent for 2019. For 2000 -- for April, I'm only -- basically I'm talking about April, it depends on how we go further there. For April, we are talking about 16 million -- almost approximately 16 million barrels of oil equivalent because -- our gas will be much more, our NGL will be much more, our condensate will be much more. So I'm talking about almost 16 million barrels of oil equivalent in April. That's just to give you the range between this particular month, next month and the average for 2019.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [62]

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And next question, I think, comes from Doug Leggate of Bank of America.

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Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [63]

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I wonder if I could ask you about the sustaining capital, the $13 billion that you laid out at the time of the IPO, that was for the sustaining -- for the maximum sustainable capacity. How does that evolve after 12 months? And what are the issues you have to address to maintain that capacity in terms of incremental activity? Is it just the incremental wells? Or is it new facilities? Just give us some idea how that $13 billion evolves?

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [64]

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Yes. So Doug, just to be clear then. We talked about, during the IPO process, sustaining capital for liquids business, exploration and development spend with an average of $13 billion to $14 billion over the last 2 years. And your question really is, how does that evolve moving forward? And perhaps you want to ask about how it goes from, not just the liquids business, but the gas business as well if I heard you.

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Khalid H. Al-Dabbagh, Saudi Arabian Oil Company - SVP of Finance, Strategy & Development [65]

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Yes. Thank you, Doug, for the question. And you're right. We have stated that the actual bill that we have paid for sustaining CapEx in 2018 based on 2018 production and prices was $13 billion. That was for exploration and development. Now this is for crude only. The -- going forward, as production would increase and as gas would come into play, we expect that sustaining CapEx to increase but not dramatically, because, again, the nature of the resources that we have, it's ample.

The cost, the low-cost structure of our production and how the -- methodology that upstream adopt in optimizing their reservoir management. And as I mentioned earlier, the proprietary technology that the company has and how the company puts it to good use. So in summary, yes, it will go up, but it will not go up dramatically. Thank you, Doug.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [66]

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You next question comes from Vladimir Dorokhov with AIG.

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Vladimir Dorokhov;AIG;Senior Credit Research Analyst, [67]

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I have 3 questions. Could you please comment, if you can, on the size of the reserves which you have from which you are going to cover 0.3 million barrels per day? Second question is, as you ramp up production to 15 million barrels per day, how would you expect your all-in cost to, I guess, increase? My understanding, that they are currently at $15 per barrel? And the third question is if oil Brent averages $30 per barrel for 2020, where would you expect your gearing to be at the end of this year?

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [68]

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Okay. So your first question is about reserves. Obviously, you all have seen in the press release yesterday that our reserves have actually increased in 2019 over 2018. The second, I think you said that our all-in costs were $15 a barrel, which I'm not sure, Vladimir, I know the basis of your calculation. I mean our production costs are less than $3, and our capital costs are less than $5 a barrel of oil equivalent. So I'm not quite sure. Perhaps you can explain what you meant by the $15?

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Vladimir Dorokhov;AIG;Senior Credit Research Analyst, [69]

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Exploration and development.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [70]

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Yes. And then I think your last question is about the gearing at a $30 environment, which I think was also covered in the previous question. But yes, perhaps we'll probably talk to you offline about the second question because, as I mentioned, if you do the math on our barrel of oil equivalent capital costs and our production costs, I think you'll find that the all-in cost is more like less than $8 than $15. But your question on the...

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Vladimir Dorokhov;AIG;Senior Credit Research Analyst, [71]

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But I'm talking about the start-up...

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [72]

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We have handled the reserves...

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [73]

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Yes, I mean, those are there. But we'll come back, I think, maybe to deal with that offline, Vladimir. I think we've got a definitional issue there.

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [74]

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But thank you, Fergus. Thank you, Vladimir. Now we have ample reserves and as Fergus mentioned, it is increasing. The Kingdom has even more than that, but what we can book under the concession agreement, which is 40 plus 20, 60 years is limiting us. But there's ample reserves, and we are adding to it.

Actually, what we have added in 2019 in terms of oil match what we have produced in terms of gas. It's much more than what we have produced, which facilitate for us to bring new increments when it comes to gas. Gas is very important for growth, and we will continue to, if the government identify more gas reserves to bring more on stream.

With regard to our future increments, we do have in the plan over the next 5 years, a number of increments, Fadhili at 250,000, Zuluf, at 600,000 barrels per day, Arabian Heavy, and we have Marjan, Arabian Medium at 300,000 barrels per day. We don't disclose the cost per barrel for each of our increments. Khalid will answer the remaining.

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Khalid H. Al-Dabbagh, Saudi Arabian Oil Company - SVP of Finance, Strategy & Development [75]

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Yes. Just to follow-up on the second question related to the cost. As Fergus said, he elaborated on what is the cost that we have per barrel. But just a point to keep in mind that as production increases, our unit cost would significantly go down. So the figures that we have shared with the industry -- with the market, with the investors earlier on during our bond and IPO meetings would definitely be favorably adjusted to reflect higher denominator, higher production level.

I believe, Vladimir your third question relates to gearing with Brent being at $30. We are very comfortable with $30 price in terms of our gearing. We are very comfortable that we can meet our dividends commitment and we are very comfortable that we can meet our shareholder expectation at $30 and even lower. The gearing will not necessarily be impacted with the $30. It's the accounting aspect of consolidating SABIC with an arrangement that we have alluded to in our share purchase agreement with the PIF, where the SABIC purchase will be financed. That will impact our gearing given the absolute amount of the purchase being $69.1 billion. And this arrangement takes the payment over a period of 5 years. And however, like I mentioned earlier, while the gearing will increase, given the massive free cash flow generation capacity, the engine that the company has with the amount of production that it puts on a daily basis into the market will rapidly erode that gearing going forward. Thank you, Vladimir.

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [76]

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Thank you, Vladimir. And I think we've already gone beyond the hour that I think we said that this call is going to last.

So we're going to take one last question, which I think comes from Daniel [Dashkovitz] with Barclays.

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Unidentified Analyst, [77]

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I just want to ask a question on the funding side. So we're still paying the large dividend and the lower oil prices. How are you thinking about your funding plans? Do you expect that you can just potentially run down cash holdings if you need to and you don't need any additional borrowings? How are you thinking on that side?

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Khalid H. Al-Dabbagh, Saudi Arabian Oil Company - SVP of Finance, Strategy & Development [78]

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Yes. Thank you, [Daniel]. As I alluded to earlier, we have committed and we are -- we continue to commit for the amount of dividends of at least $75 billion during 2020, and for the 5 years starting from 2020. We are very comfortable with the current market prices, we would be able to meet our commitment to the shareholders, whether it's the majority shareholder or the public shareholders going forward.

Our balance sheet is robust, it's resilient. As you may have seen from our 2019 financials, our gearing is almost -- there's no -- the gearing is minus 0.2% in our financials. We have massive capacity to borrow, but we don't necessarily aspire to increase our debt unless we have to. And as we speak now, we don't see a need for additional debt.

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Amin H. Nasser, Saudi Arabian Oil Company - CEO, President & Director [79]

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I would like to just add that we are different than other companies. We are very comfortable meeting our commitment in 2020 and beyond. What is helping us other than our strength in the upstream and our integration in the downstream is that we are able to increase our production significantly. Just last month, we were at $9.7 million. In April, will be at $12.3 million. So the lower prices, yes, it will have an impact, but we will be benefiting from the additional barrels that we will put into the market, the additional NGL, the additional gas, the additional ethane and the additional condensate. As I said, you have to look at it, 13.2 million going to 16 million-barrel of oil equivalent.

The other thing that is helping us to meet our commitment going forward is that we are able to reduce doing all of that and increasing our production significantly, and at the same time, reduce our capital going from $35 billion to $40 billion to $25 billion to $30 billion. So these 2 things happening at the same time will allow us to comfortably meet our commitment in 2020 and beyond.

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Khalid H. Al-Dabbagh, Saudi Arabian Oil Company - SVP of Finance, Strategy & Development [80]

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I really don't know of any company that can increase its production by 20%, 30% without increasing cost. And that increase in production will directly translate to higher revenue and higher free cash flow. Hence, as Amin, said, our financial posture is extremely robust and cannot be compared with others.

Thank you, [Daniel].

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Fergus MacLeod, Saudi Arabian Oil Company - Head of IR [81]

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So I just want to say that brings our first ever full year results earnings call to a close. Thank you very much, indeed, everybody, for your participation, your insightful questions. Investor Relations team of Saudi Aramco are available to follow-up any questions if required. And thank you, operator, you can now close the call. Have a very good day, everybody.