2003 Speech

Address by Minister of Petroleum and Mineral Resources Ali Al-Naimi at the 10th International Caspian Oil and Gas Exhibition and Conference Baku, Azerbaijan

Good Morning, everyone.

I would like first to express my appreciation and gratitude to H.E. Dr Medjid Kerimov, Minister for Fuel and Energy of the Azerbaijan Republic, for inviting me to take part in this special 10th anniversary of the International Caspian Oil and Gas Exhibition and Conference. It is a great pleasure to be with you here in Baku City, which we all recognize as one of the world's first notable oil cities. As many of you know, oil was used in Baku since time immemorial and oil as we know it today was discovered in Azerbaijan more than 150 years ago. At one point Azerbaijan supplied fully half of the world's petroleum needs. Everyone in the petroleum business has tremendous respect and appreciation for the achievements of this great city. Today, the world is seeing a rebirth of the Azeri oil industry and expects it to resume its former place of prominence.

Before I begin my generally upbeat view of the future for oil, let me first mention some thoughts on the recent past. When Azerbaijan and the other Caspian states obtained their independence over ten years ago, they began opening their doors to international investment. As a result, petroleum production and exports began to rise. We, in Saudi Arabia, were delighted to see the Caspian countries resume a prominent role among exporting countries. Some so-called oil market pundits at the time said the emergence of the Caspian producers was a threat to the Arabian Gulf producers. Others even proclaimed that a radically different structure of the global oil market was in the making. Caspian production was to replace the Middle East region, thus diminishing the importance of OPEC and its market stabilization policies. They further claimed that a period of intensive conflict among oil producers was coming. Oil investments would flow into the Caspian and dry up everywhere else.

As we all know, this did not happen. I am happy to say that today the roles of all producers are on a sound footing, as are the relationships among them. Oil is still the indispensable fuel for today's ever-industrializing world and it will certainly not relinquish its primary position over the next three decades at a minimum. From now to 2020, oil demand is forecast to grow an average of one and a half million barrels per day annually. By then, worldwide demand growth will require some additional 30 million barrels daily of oil production, a figure equal to a full 40 percent of today's production. This additional supply will only develop in an environment of stable oil prices, and will require large and continuing investments in all parts of the world and at all levels of the industry.

Ladies and gentlemen:

To anticipate and plan for the world's energy future, we need to see clearly the two options we have. The first option is to face our common future in an uncoordinated way - which some may call 'free market environment'. The second option is to carefully coordinate policy among major producers to ensure that worldwide stocks are maintained at a comfortable level for everyone - producers and consumers - so that demand and supply are in balance. Under the 'free market' option, with its tendency for boom and bust cycles, there is a greater probability of prices falling back to near $10 per barrel matching the so-called marginal cost. At these low prices marginal fields - i.e. fields that are either expensive-to-produce or reside in remote and difficult environs - disappear from the market. Experts estimate that under a ten-dollar-a-barrel scenario, some 5 to 10 million barrels of daily production would be lost.

Their loss would trigger a new round of price run-ups and frantic attempts to cash in on higher prices, which, in turn, would lead to another round of $10-a-barrel oil and restrained supply growth. Under the 'free market' scenario, it is also important to note that investments required to add new capacity, or even to maintain existing capacity, would dry up. Economies racing ahead on cheap oil will come to a speedy halt. Two or three years of low oil prices can lead to economic and financial crises in the 30-plus countries, which have a population of about one billion and whose economies are highly dependent on the petroleum sector. Such crises have been known to trigger political and social unrest as well. Low investment and shortage of supply could trigger significantly higher prices than the current OPEC basket price of $22-28, increasing the potential for a global economic crisis.

Under the option of cooperation and coordination, producers work jointly for the stability of the international oil market. The coordination ensures that worldwide supply and stocks levels are maintained at a comfortable level for consumers and producers. This approach allows the market to play its customary role, but at the same time ensures that oil prices stay within an acceptable range, such as the OPEC Basket of $22-28. We believe a target range is the preferred guideline, based not on daily or monthly fluctuations, but on an expected and desired annual average. This option leads to a reasonable income for the oil producers and at the same time keeps marginal field and hard-to-produce oil flowing to the market. "Flowing" is the key word. Investment capital needs to move freely and smoothly into petroleum-related infrastructure in order to maintain current capacity and to add new and incremental capacity needed to stay up with growth in demand.

Keeping in mind the anticipated 30 million barrels daily of increased global demand by 2020, the investment capital needed to achieve and maintain this level of production amounts to some 120 billion dollars annually. This money will be hard to find if markets are not sending the right price signals. Another aim of this cooperation and coordination option is to develop spare production capacity of between 3 to 7 million barrels per day among the most proficient producers. In another way, this provides a cushion of between 5 to 10 percent of total worldwide crude oil consumption. This is the only way, in my view, to avoid the shock of tight supplies and attendant price spikes that result from labor unrest, natural disasters, wars or other unexpected events that appear - as they inevitably do from time to time. My friends, I believe the choice is clear and easy to make. It is a folly of the highest order for producers, or even consumers, to choose a path that inevitably leads to chaotic conditions under which planning is impossible.

Whenever cooperation is lacking it is impossible to plan for a stable oil market. Petroleum producers and consumers both miss out on the benefits of balanced supply and demand. Lack of cooperation also makes it very difficult to achieve a smooth transition to a future where demand is some 40 percent higher than it is today. We in Saudi Arabia have chosen the road of cooperation and coordination in all our dealings with both producers and consumers. Our commitment to this strategy is well known and our achievements are widely recognized. This emphasis on cooperation does not deny the role of competition in the market place among all producers, whether inside or outside OPEC. There is a plenty of room for everyone and a plenty of work to be done.

While OPEC continues to take the leading role and responsibility to balance the market, as it has often done in the past, it works closely with other producers, especially in times of unusual need or under difficult circumstances. This has been done with great success over the last five years. The cooperation of a number of the non-OPEC countries such as Mexico, Norway, Russia, Oman and Angola, has been noteworthy and has greatly contributed to the benefit of both suppliers and consumers.

My friends, the prospective and future oil production from the Caspian countries is welcome. I anticipate that it will make a considerable contribution toward meeting future global energy needs and the countries' economic prosperity. Growth in the region can only enhance oil's prominence as the world's preferred energy source. Already the world has absorbed approximately 18 million barrels per day of non-OPEC production over the past 25 years and can almost certainly be counted on to accommodate any new increment from the region, as well as from other regions.

The prospects are especially encouraging as OPEC and non-OPEC producers work together going forward to avert market volatility and assure stability. Let me say it loud and clear: New reserves and production from the Caspian area are not seen as a threat but as a welcome hope that abundant supplies of oil will be available to ensure the future health of the world economy. I believe that as time goes by, cooperation between and among oil producers will grow, not diminish. There is too much at stake. For our part, we in Saudi Arabia will continue to consult and coordinate our actions, which impact the international oil market, with non-OPEC producers. The future looks bright to me for a good and growing relationship between Saudi Arabia and the Republic of Azerbaijan. We share common goals and aspirations: an industry that will benefit our people and contribute to world peace, stability and economic growth. Thank you again for inviting me and offering me this chance to share ideas with such a distinguished audience. Thank you.