2003 Speech
 

12/17/2003
Address by Minister of Petroleum and Mineral Resources Ali Al-Naimi at the conference ‘International Energy Industry: Challenges and Prospects’
The two-day conference in Washington DC focused on Liquid Natural Gas (LNG) and was hosted by U.S. Secretary of Energy Spencer Abraham

Good morning ladies and gentlemen.
I am very happy to be back in Washington in order to participate in this LNG Ministerial Summit. First, let me thank the U.S. Secretary of Energy, the Honorable Spencer Abraham for his kind invitation to address this distinguished gathering. I would like also to express my profound appreciation to the United States Energy Association for organizing this timely conference.
I am speaking today, not from the perspective of a current or prospective participant in the global LNG market, but as an energy producer. My remarks will not focus exclusively on any one fuel, but on the challenges we all face as energy producers and consumers.
Whether it is natural gas, oil, coal or nuclear power, we in the energy industry face a common challenge. We are at a significant point in history, confronted with the daunting task of providing the raw materials to fulfill the world’s rapidly growing aspirations for a better way of life.


A look at history shows us that the economic development and increasing standards of living achieved over the past century were fuelled by plentiful supplies of reasonably-priced energy. We appreciate the important role energy plays and our consequent responsibility as energy producers in providing mankind with a better way of life. Time and again, faced with seemingly insurmountable challenges - wars, depressions, extreme price fluctuations, shortages, gluts - the energy industry has responded, achieving the twin goals of plentiful and reasonably-priced energy. It has not been easy, nor has the path always been smooth, but the industry has risen to the challenge.
Looking forward to the next twenty-five years, I can say with confidence that we in the energy business face challenges of a scope unrivalled in our past experiences. I say this for four reasons. The first is the sheer magnitude of the amount of new energy that we will be required to develop and bring to market. According to the U.S. Department of Energy’s own projections, annual global demand for energy will grow from about 404 quadrillion BTUs in 2001 to 640 quadrillion BTUs in 2025, an unprecedented 236 quadrillion BTU, or 58 per cent, increase. Energy producers will have to find and develop almost three thousand quadrillion BTUs of new energy over this period to meet expected growth in energy demand. This is equivalent to adding the oil production of 15 new producers like that of Saudi Arabia by 2025.
Second, this task is made all the more difficult by the fact that the world’s hydrocarbon reserve base is mature, with some of the largest basins having reached their peak production and already in decline. However, there is no doubt that sufficient reserves remain to meet projected future demands. It is not a question of running out of energy. The reserves in Saudi Arabia and the Gulf are massive and can be called upon to meet the world’s growing need for energy. However, finding and developing new reserves, especially in regions outside the Gulf, will be more difficult and more expensive than in the past. The chances of finding new super giant and giant oil and gas fields are diminishing, with remaining undiscovered reserves likely to be found in smaller fields in isolated locations.
The third reason the industry faces unrivalled challenges is that supplying vast quantities of new energy will be made more difficult by rising concern about the impact of energy production and consumption on the environment.
The adoption of increasingly stringent government mandates that give preferential treatment to certain favored energy sources and that govern where and how energy is produced and consumed presents major challenges for the energy industry.
Finally, the development of such sizeable new energy resources will require large capital investments. The International Energy Agency has recently estimated that we will need to invest $16 trillion from 2001-2030 to develop the energy supply infrastructure necessary to meet projected global energy demand. We believe financial markets will respond to these needs and that sufficient capital will be available to develop the required energy resources.
However, investors crave stability and predictability. A steady flow of investment capital to the energy industry depends in large part on the degree to which these conditions prevail. If prices do not offer a sufficient return to producers, then investments will not be made and the potential for shortages and price spikes will increase. With a steady stream of investment, the road to the future can be a smooth one. Without the proper incentives, the road is likely to be rough, with energy markets lurching forward in boom and bust cycles.
This gathering of such distinguished audience is an important one, given the significant role natural gas is expected to play in meeting future energy needs. Over the past 2 years, the U.S. gas market has been a model for challenges facing the energy industry as we move into the future. U.S. natural gas demand was growing, while at the same time there was insufficient investment to ensure that supply would keep pace. The task of balancing supply with rising demand was made more difficult by the nature of U.S. gas reserves and the lack of readily available alternative supplies. As a result, there were spot shortages and price spikes whenever demand surges.
It served as a wake up call, focusing the attention of the energy industry and policy makers, sending the message that this was not a passing problem, and business as usual was no longer a desirable option. I believe this is why we are here today.
Oil and gas share many similarities, including the fact that major consuming markets are geographically far removed from reserve base. The relative geographic isolation of reserves has not been a major impediment for oil markets. When reserves near the major consuming markets became inadequate to meet demand, there was relatively easy transition to more distant resources.
This is because oil’s physical characteristics allow it to be transported safely and relatively cheaply over great distances.
With natural gas, this has not been the case. The distance between reserves and consuming markets has been a serious impediment to its penetration of consuming markets. The global gas market has tended to be more fragmented, with only limited linkages between different geographical regions. The development of gas markets has been more closely tied to the development and exploitation of “local reserves”. As a result, a significant portion of the global reserve base for natural gas lies underdeveloped due to the high cost of moving gas to consuming markets.
However, now this is changing. U.S. gas prices have risen in response to limitations in the traditional reserve base, while advances in technology have lowered costs of transporting distant gas. Encouraged by the prospect of attractive returns, countries with significant gas reserves are developing a number of projects to bring liquefied natural gas to the U.S. and worldwide. It appears inevitable that international trade in natural gas will grow.
I cannot say with any certainty - nor can anyone else - whether the road ahead will be smooth or rough for trading natural gas internationally. As I said previously, stability, predictability and an adequate return for producers are vital to ensuring a healthy and steady stream of investment capital necessary to expand supply.
In this regard, I believe that oil markets have a distinct advantage over gas markets. That advantage arises out of the existence of spare capacity that can be called on to help maintain reasonable prices by ensuring that supply meets demand.
Demand surges and supply disruptions are a fact of life in commodity markets and oil is no exception. Left unchecked, they can lead to wild price swings and supply shortfalls that destabilize markets. We in Saudi Arabia are convinced that consumers, producers, the industry and the world economy all benefit from stable and predictable oil markets. That is why we are committed to maintaining spare production capacity - at a great cost to ourselves - that can be called upon when additional supplies are needed.
Over the years, this spare capacity has been instrumental in maintaining global energy supply in times of disruption. It has also provided a necessary cushion, allowing markets to smoothly accommodate growth in demand. In effect, spare capacity allows us to help smooth out the inevitable “bumps” in the road. While Saudi Arabia’s spare production capacity is a necessary component for maintaining stability in oil markets, it alone is not sufficient to achieving that goal. We believe that to achieve better stability, we must cooperate closely with other OPEC and non-OPEC producers, not only to insure that we do not oversupply markets, but to also make additional supplies available in times of shortage.
This combination of spare capacity and cooperation among producers has worked well over the years. There is no better example of this than early this year, when we faced six different crises. The first was when political problems in Venezuela caused oil production to drop from about three million barrels per day to about one million. The second was an unexpected spike in oil demand caused by the colder-than-normal weather in the northern hemisphere last winter. The third was the natural gas crisis in the U.S. which created shortages, a huge jump in prices and increased demand for oil due to fuel switching. Fourth, problems in Japan’s nuclear power industry caused a significant rise in oil imports. Fifth, Nigerian oil output dropped 40 per cent because of political unrest. And finally, the cut-off of 2.5 million barrels per day of Iraqi production due to the war. As a result of the rapid corrective actions of OPEC, with the major contribution from Saudi Arabia, there were no shortages of oil in 2003 despite this multitude of problems.
Saudi Arabia prefers to play a quietly constructive role in maintaining stable oil markets, one which is often overlooked by the media and some opinion leaders. It is not in our nature to publicly trumpet our successes.
However, I believe that when you ask our customers, they will attest to the fact that Saudi Arabia, in conjunction with other major oil exporters, played a crucial role in preventing a major supply crisis. Not just in the last year, but over the past 30 years.
We in Saudi Arabia believe stability in oil markets is also greatly enhanced by close cooperation between both producing and consuming nations. That is why we have an active policy of maintaining a close dialogue with major consuming countries through bilateral and multilateral arrangements and with relevant international organizations.
We believe that it is important that a strong dialogue between producers and consumers should not be limited to times of crisis. That is why we are strong supporters of the International Energy Forum and its efforts to promote dialogue; and, as a result of His Royal Highness Crown Prince Abdullah’s initiative, we now host the new Secretariat for the Forum in Riyadh.
And lastly, we believe that achieving stability in oil markets requires close cooperation with the international oil industry. We therefore work closely with many oil companies at different levels. We have trading relationships with over 50 companies. We have entered into seven major joint ventures with international oil companies and we are looking to conclude additional ventures in the future.
Let me say a few words about our own plans for natural gas. In recent years, the Government of Saudi Arabia has launched an ambitious program of economic reforms. The underlying goals of these reforms are to realize the country’s vast economic potential; to create new investment opportunities which will benefit both investors and the Kingdom; to expand and diversify the Saudi economy; and to create new jobs for a growing population.
Saudi Arabia’s current Economic Plan sets aggressive targets for the economy and for individual industries. Private sector annual growth is expected to exceed five per cent, while foreign investment is anticipated to grow at a rate of almost seven per cent per year. The industrial sector is set to growing excess of five per cent per year; electricity and water demand at four-and-a-half and five-and-a-half per cent respectively; petrochemicals and other downstream industries at more than eight per cent; and the energy-intensive mining sector is forecast to grow more than nine per cent annually.
These growth targets, which are expected to continue into the future, are indicative of strong growth in gas demand. In fact, the latest Kingdom Gas Strategy forecasts domestic gas demand to exceed 12 billion cubic feet per day by 2025. With demand for gas rising rapidly, and an extensive gas-infrastructure already available in the form of the Master Gas System, the stage is set to economically expand the supplies of natural gas resources, we are inviting foreign companies to participate. We believe that the historic opening of our upstream natural gas sector to direct foreign investment represents a tangible expression of Saudi Arabia’s commitment to building long-lasting, mutually beneficial partnerships.
We currently expect new natural gas resources discovered as a part of our new initiatives to be consumed locally to provide energy and feedstock for an expanding Saudi economy. There are no plans currently to enter the LNG export market. However, these plans could change if our efforts, in combination with our foreign partners, find sufficient reserves in excess of our local needs. At that point, we would evaluate all options - including LNG exports, in order to maximize the benefits to Saudi Arabia’s economy.
In closing, I would like to echo my previous comments by stressing that we in the energy industry face enormous challenges in the future. The degree to which we are successful in meeting the world’s needs for vast new quantities of reasonably priced energy will have a major impact on the ability of the world’s people to fulfil their aspirations for a better life. I am confident that, working together, producers, consumers and industry can meet the challenges that lie ahead.
Ladies and gentlemen, that the challenges we face are momentous. But I can assure you that we are up to the task, The recipe for success includes that ingredients of stability, reasonable prices, cooperation, trust and avoidance of casting doubt on the reliability of the major producing regions. Together, these ingredients will aid us in our quest to meet the growing energy needs of this new century. Rest assured that the world can count on Saudi Arabia to continue being the most reliable and moderate energy supplier.
In closing, I would like to echo my previous comments by stressing that we in the energy industry face enormous challenges in the future. The degree to which we are successful in meeting the world’s needs for vast new quantities of reasonably priced energy will have a major impact on the ability of the world’s people to fulfil their aspirations for a better life. I am confident that, working together, producers, consumers and industry can meet the challenges that lie ahead.
Thank you again, ladies and gentlemen, for the opportunity to share my thoughts with you today.

 

 

 

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