Minister Al-Naimi addess at the U.S. Saudi Business Opportunities Forum in Chicago

April 28, 2010

Address by H.E. Ali Al-Naimi, Minister of Petroleum and Mineral Resources
The Role of Oil in Saudi Arabia’s Economy and Its Global and U.S. Relations
At the U.S. Saudi Business Opportunities Forum
Chicago, Illinois
Wednesday, April 28, 2010

Good morning, ladies and gentlemen.

I would like to thank my colleague, the Minister of Commerce and Industry, Mr. Abdullah Zainal and Mr. William Daley, Chairman of the U.S Saudi Business Opportunities Forum, as well as the organizers of this Forum for inviting me to share with this distinguished audience of officials and business leaders from Saudi Arabia and the United States my perspective on three main themes: the contribution of oil to the longstanding economic and political relations between Saudi Arabia and the U.S.; the responses of Saudi Arabia and its oil industry to challenges facing the global energy scene; and lastly , the main drivers of the Saudi oil and gas production, investment and R&D decisions.

Historically, oil has played an important role in relations between our two countries since the 1933 signing of the first oil exploration concession agreement in the Kingdom of Saudi Arabia with Standard Oil Company of California – the predecessor of today's Chevron – and Standard Oil’s subsequent evolution into the U.S. Aramco Four. Since the discovery of oil in Saudi Arabia and the realization of its potential, the world oil landscape has changed considerably – and so have investment and trade relations between our two countries.

The Saudi and American people, joined by common pursuits and goals, have worked together not only for their mutual benefit, but for the benefit of the world at large. Thousands of Americans worked in our country and contributed to setting the foundation for an efficient oil industry; likewise, the continuous, reliable Saudi oil flows into the U.S. contributed to America’s energy balance and economic prosperity. At the same time, tens of thousands of Saudis studied in the U.S. and returned to build an effective government, an accountable oil industry, and a flourishing private sector.

It is noteworthy that when our government negotiated the takeover of Aramco with the U.S four majors, it found a strong oil industry with an efficient Saudi workforce, and chose to maintain the inherited, corporate culture. Indeed, this oil industry relationship between legacy Aramco and the U.S. majors did not end with the turnover. The U.S. oil companies, along with others, continued their active presence in the refining, petrochemical and energy services sectors in the Kingdom. The old Aramco Four, reduced to two after the U.S. mergers and acquisitions of the late nineties, contributed significantly in vertically integrating the Saudi oil industry and capturing the value added down the oil and gas value chain within the Kingdom.

Many joint ventures among Saudi Aramco, Sabic and private Saudi concerns on the one hand, and major U.S companies on the other, are contributing to the Kingdom’s continued industrial development and economic diversification. However, alliances between Saudi oil and petrochemical industries and those of the U.S. have not been confined to Saudi Arabia, but have in fact extended around the world. Saudi Aramco’s Motiva joint venture with Shell here in the U.S., and its joint venture in China with ExxonMobil, as well as Sabic’s acquisition of GE plastics in the U.S., are examples of the depth of these bilateral relationships, and the growing potential for further collaboration within our petroleum businesses.

The oil trade relationship is just as important. For decades, Saudi Arabia has ranked in the top three main foreign oil suppliers to the United States, and the U.S., on the other hand, maintained its role as trading partner and the main foreign provider of direct investment to the Kingdom. We expect such relations to flourish in the coming years, as I will touch on later.

Ladies and gentlemen:

The past few years have been critical to the world economy and to the world energy systems. The five years preceding the financial crisis of 2008 witnessed remarkable world economic growth of 4.8 percent, led by the emerging economies. Along with such growth, energy and oil demand increased by an annual average rate of 3.2 percent and 1.8 percent, respectively. During this period of growth, oil prices increased from an average of $31 per barrel for WTI crude in 2003 to $100 in 2008. The period also witnessed the highest price volatility in the history of oil, whereby prices jumped from a low of around $25 dollars during April 2003 to a high of $147 during July 2008. While the contribution of fundamentals vis-à-vis financial factors to such price behavior was the subject of debate then, the financial crisis opened the eyes of regulators in the main exchanges, and compelled them to exercise some control over the financial and commodity markets to make them more efficient and transparent.

The global energy industry in general, and the oil industry in particular, responded to the fundamental issues of supply and demand and to the consensus forecast of the continuity of growth by increasing investment to develop conventional and non-conventional oil and gas resources, renewable energy, and many other energy resources. The conventional wisdom then was (and I believe still is the case) that the world needs all forms of viable, environmentally friendly energy supplies to fuel economic and social development, and to combat energy poverty.

We in Saudi Arabia responded to these global oil market developments in different directions. We continued along our longstanding policy of moderation and keeping the markets well supplied at all times. When prices reached unsustainable levels detrimental to both world economic growth and the development potentials of the developing countries, the Custodian of the Two Holy Mosques, King Abdullah bin Abdulaziz, convened a landmark meeting in Jeddah in June 2008, inviting producing and consuming countries as well as the industry to find global solutions to the global issue of price volatility. The Jeddah summit, and a subsequent meeting in London, culminated in setting up an international High Level Steering Group to study the architectures of producer consumer relations and price volatility. This group’s report was presented to the energy ministerial meeting of the International Energy Forum in Cancun the end of last month.

Our other response was to embark on a series of crude oil production capacity increments totaling 2.8 million barrels per day between 2004 and 2009, lifting our capacity to 12.5 million barrels per day. We continued our policy of maintaining at least 1.5 to 2 million barrels per day of excess production capacity at all times to respond to market needs and to be tapped in times of market turmoil or supply interruptions elsewhere, and I must say that no other country is either technically capable nor willing to continually exercise such policy . Such capacity increases and excess capacity contributed to keeping the market well supplied and balanced throughout this interim.

Although the per-barrel cost to maintain and add to production capacity in Saudi Arabia is by far the lowest worldwide, the total investment costs are high considering our large existing capacity and the size of the increments themselves. Furthermore, underlying capital costs have been rising worldwide, including Saudi Arabia. Back in 1998 when the Shaybah field was first developed in the heart of the Kingdom’s Empty Quarter, it cost us around $5000 per barrel of daily capacity, in 2009 it cost double that much to bring in an addtitional barrel of daily capacity from the producing field of Khurais, and it will cost three times as much to bring in that capacity barrel from the offshore field of Manifa. We have long realized that our standing in the global energy scene as the major oil reserve holder, producer and exporter entails responsibilities, to which we have responded in an effective and timely manner.

We continue to utilize our resources and our relationships with our fellow producers for energy market stability and sustainability despite mounting economic, political and environmental uncertainties. Although the financial crisis put some strain on energy investments in some parts of the world due to the climate of uncertainty, the initial price collapse in the wake of the crisis and the subsequent credit squeeze, Saudi Arabia’s oil and gas investments have continued unabated. The huge 1.2 million barrel per day Khurais field expansion came on stream amid the crisis mid -2009, and our Manifa field expansion is underway. The Kingdom invested over $63 billion in capital expenditures over the past five years, primarily to lift its production capacity to its current level, and will be spending another $107 billion over the next four years, in the upstream and downstream oil and gas sectors.

We are embarking on the most ambitious downstream program in the history of the Saudi oil industry, a slate of refinery expansion, modernization and integration with petrochemical facilities that entails investments in tens of billions of dollars over the next five years. We are moving ahead on our own or with international partners to build three refineries in Kingdom in Jubail, Yanbu and the south-western city of Jizan. We have also in partnership with the Japanese company Somitomo modernized and integrated the Rabigh refinery with petrochemical complex and are proceeding with plans to build a mega petrochemical project in partnership with U.S Dow Chemical. We always plan with a long-range horizon, and this forward-looking strategy reflects our belief that the world economy will recover – and along with it, energy and oil demand – the signs of which we are already witnessing.

The uncertainties impacting energy investments that I mentioned earlier are not insurmountable. You will most likely be discussing throughout this Forum the prospects of economic recovery and its uncertainties. Here I want to touch upon the other two uncertainties impacting energy markets and investments: these are the responses to climate change and consuming governments’ energy policies.

On the issue of responses to climate change, I believe that the full potential of technology options has not received enough emphasis in either the national or international arenas. As consensus holds that the world will be needing fossil fuels for the foreseeable future to satisfy the bulk of its energy needs, it is incumbent upon us to promote and invest in technologies that deal with CO2 emissions, rather than go through costly solutions to curb fossil fuels use. Carbon Capture and Sequestration (CCS) is a proven win–win technology. If applied in oil producing regions, it will reduce global emissions, and through the enhanced oil recovery, will contribute to the availability and longevity of oil resources. We in Saudi Arabia have been active in this area by starting a pilot CCS project in one of our fields, and by participating in and initiating international cooperation efforts with other countries.

On the issue of consuming governments’ energy policies, one has to differentiate between political statements made to satisfy this or that constituency and actual policies enacted to address some actual or perceived concern. It is my sincere hope that often-repeated political statements like reducing oil imports from this or that region are not translated into political actions. But for enacted policies to address energy security or climate change, I believe they have to pass the consistency, feasibility and long-term efficiency tests. There is nothing wrong with diversifying energy sources and developing renewable sources; even we in Saudi Arabia, despite our large hydrocarbon resources, are embarking on developing our own renewable potentials through solar energy.

Our concern, however, is about these changing policies and their unpredictable nature, as well as the risk in setting strict timetables and targets to develop sources that are still in their infancy or face too many sustainability obstacles, which might divert needed resources from the already viable ones. If these supplemental resources on which such great hopes for energy security are based do not fulfill their high expectations, and the investment in traditional resources is scaled back to make room for them, an energy supply crunch might occur to the detriment of energy security and market stability. Just as the oil industry needs a long-term horizon, so do many alternatives. It took the world generations to develop the full potential of fossil fuels and build their required infrastructure from the wellhead to the final consumer – and so will these other sources require ample time and massive investments.

Ladies and gentlemen:

The third important subject I would like to touch upon in the presence of such distinguished business leaders is the future of the Saudi economy and the role the oil sector is playing in shaping that future. Since the start of development planning in the Kingdom some 40 years ago, human resource development and economic diversification have been the top objectives of our successive development plans. While we have had some success in achieving these objectives, as exemplified in many indicators, more still needs to be done. In the just-approved ninth development plan, particular emphasis is placed on science and technology as the drivers and the embodiment of those two main objectives.

Besides ongoing research and development by the leading Saudi companies and scientific research by existing universities and institutions, we have been working to fulfill King Abdullah’s vision of expanding the scope and investment in science and technology to new highs. Realizing that the future well-being of the Kingdom will reside in the creativity of its people and its ability to adapt to scientific and technological changes, as well as the efficient and full utilization of its natural resources, we established the recently inaugurated King Abdullah University of Science and Technology (KAUST) in Thul in the Red Sea coast as a world-class university that will serve as an international beacon of knowledge and a center of learning. We are also in the process of establishing the King Abdullah Center for Petroleum Research (KAPSARC) in Riyadh to lead the Kingdom’s energy and environmental research and policy studies, and to provide future-oriented research and analysis on a global scale. These new institutions are envisioned to lead research in solar energy, biotechnology, water, environmental systems, material science and other areas that will contribute to those two main objectives of human resource development and economic diversification.

The oil sector is in the midst of this economic diversification and technological innovation drive. Our objective of diversifying the economy does not mean the end of, or the scaling down, of oil investment and operations. On the contrary, oil has been and will continue to be an important source of income leveraged toward the objective of economic and social development. The investments I cited earlier, both already-executed and planned for oil upstream and downstream, will remain parallel to our investments to diversify our economy.

Such is the case in our investment in gas exploration, development, production and processing to make it available as fuel and feedstock to the Kingdom’s utilities and toward the industrial sectors’ growth and expansion. Our investment in the exploration, production and processing of our gas resources has led to a 27 percent increase in its reserves, and 60 percent increase in its production from 5.3 to 8.5 billion cubic feet per day between 2000 and 2009. Today, more than half of our gas production is non-associated. Saudi Aramco’s gas program continues, and with the completion of the Karan, Manifa, and Arabiah and Hasbah fields, its processing capacity will be more than 15.5 billion cubic feet per day by 2015).

We are also entering a new phase of integration between the Kingdom’s oil and industrial sectors. The early phase of developing basic petrochemicals is behind us, and we are promoting intermediate and specialty chemicals either by integrating the refineries with petrochemical facilities or investing to capture the full value added from our petrochemical potentials. The Industrial Clusters Program approved by the Council of Ministers is working toward this goal. The integration between the oil and mining sectors is yet another milestone. The near completion of the north-south railroad to transport phosphate and bauxite deposits to the newly developed industrial mining city of Ras Zur in the Gulf for processing into Diammonium and Monammonium phosphates and aluminum is yet another element of this industrialization strategy.

We have long realized that all our oil- and gas-related investments, as well as investments in power and water desalination; entail the provision of goods and services in tens of billions of dollars annually. We, along with the private sector, have been working to further develop and expand the scope of the energy services and manufacturing sectors. We call upon all international businesses, including our traditional partners in the U.S., to join with us, as they have done before in the development of our oil, gas and petrochemical industries, in achieving this promising sector which we envision it to be an economic leader in the region, and indeed, worldwide.

Ladies and gentlemen:

As the worst financial and economic crisis in decades is slowly fading and the world is entering a new growth trajectory, and as the oil prices are back to their more sustainable levels, I am more optimistic about the future of energy and oil demand, and that of the energy industry. I am also optimistic about the prospects of the Saudi economy, which likewise is entering a new phase of its development.

This new phase is centered on developing the full potential of a knowledge economy emphasizing the role of science and technology in developing and capturing the full array of value added from our natural resources. And as was the development pattern of the Kingdom for the past 50 years, this new era is undertaken with the full cooperation of the government and the private sector, and the participation of Saudi businesses and their partners all around the world – among which U.S. business is a major ally. As we embark on this phase, I encourage our long-time partners to join us in a new era of Saudi-U.S. collaboration for shared, far-reaching benefit.

Thank you for your kind attention.