Minister of Petroleum and Mineral Resources Ali Al-Naimi gave a speech on April 27, 2004 at the conference in Washington DC of the Center for Strategic and International Studies, titled:
‘The Global Energy Market and U.S.-Saudi Petroleum Relations’
Ladies and gentlemen,
I am very happy to be back in Washington to participate in this second conference on the U.S. - Saudi Arabia economic and energy relationship. I would like to thank John Hamre, the President of the Center for Strategic and International Studies, for organizing this timely conference and for his kind invitation to address this distinguished gathering.
Much has been said recently about the two issues of great importance to Saudi Arabia. The first is the U.S.-Saudi relationship. The second is the future of oil. My remarks today will address both issues.
It would be incorrect to say that the history of U.S.-Saudi relations is only about oil. The relationship between our two countries is more complex and extensive than that, and examples of cooperation in areas of mutual benefit are numerous. Nevertheless, there is no denying that a key pillar of our relationship is a shared commitment to ensuring the availability and security of adequate supplies of petroleum to meet world needs at fair prices that are conducive to world economic growth.
We have witnessed during our lifetimes an unprecedented growth in the global economy that has produced better lives for many of the world's peoples. There is no doubt in my mind that the economic progress of the 20th century, and now the 21st century, was made possible by the availability of plentiful supplies of reasonably-priced energy, and, in particular, petroleum.
It is an impressive story, but not one that often grabs headlines. In fact, it has been easy to become complacent about something as quietly consistent and reliable as the availability of petroleum and the products we derive from it. One flips on the switch and the light comes on. When you need to go to the market to buy food, you jump in your car, turn the key, and off you go. When you need the plastics that are an integral part of modem life, they are there.
Something as reliable and readily available as petroleum, however impressive, is often taken for granted, only drawing attention when something goes wrong. And, undeniably, we have faced numerous challenges over the past 30 years.
But the one thing that has not wavered -- that has worked with quiet consistency, efficiency and reliability -- is the supply of petroleum from Saudi Arabia to the United States and the rest of the world. Over the past 30 years, through both the normal times and during times of upheaval, there have been few things more reliable than petroleum exports from Saudi Arabia.
Saudi Arabia is blessed with a magnificent endowment of petroleum resources unequalled anywhere. We believe that we have a responsibility to use this endowment in a constructive manner to bring stability to world markets whenever we can. Our approach is one of moderation, with the aim of ensuring security of supply for customers and stability of prices in the world oil market.
The reliability of supplies from Saudi Arabia is not just the product of good fortune. Rather it is the direct result of Saudi Arabia's commitment to ensuring oil market stability. We work at it day in and day out, investing huge sums in the latest technologies, searching the world for the best talent and then continuously training our workforce to meet the challenges of the new millennium.
It comes from our commitment to maintain spare production capacity at a significant cost to ourselves, to provide an insurance policy for world oil markets. And it comes from our commitment to maintain relationships in all major markets even when it is contrary to our short-term economic interests to do so. We do all this so that we can maintain the reliability upon which the world has come to depend.
During times of turmoil, when the world has needed more crude oil, Saudi Arabia has worked without fanfare to promote stability in world markets. One has to look no further back than early 2003 -- which was a particularly difficult time for world oil markets. A cold winter in the northern hemisphere, nuclear power problems in Japan, soaring natural gas prices in the U.S., political unrest in Venezuela, a strike in Nigeria, and war in Iraq -- all threatened to destabilize world markets. But Saudi Arabia was able to respond quickly with additional supplies to restore equilibrium to world markets by utilizing its spare production capacity.
We believe that stability in world oil markets depends on having adequate spare production capacity for maintaining balance in the market. Saudi Arabia is committed to providing a major portion of the world's spare capacity. We do it because we understand the importance of having a "cushion" for those times in the future when, for whatever reason, supplies from other sources are insufficient to meet demand. Our spare capacity has paid great dividends over the years by helping to minimize disruptions to the world economy.
Let me shift my focus, ladies and gentlemen, to the future. We have heard recently a number of analysts declare that the end of the Age of Oil is upon us. These nay-sayers maintain that the world is running out of oil. They say that we need to find alternatives quickly if we are to avoid a calamity of historic proportions. They are drawn to this conclusion by their pessimistic assumptions about remaining oil reserves and the degree to which this oil is recoverable. Unlike these pessimists, I am quite optimistic about the future.
Will there be challenges to overcome? My answer is yes, there are always challenges.
Are we up to the task? Most certainly. We have faced many challenges before and by exercising our will, skills and intelligence we overcame them. And we will continue to do so in the future.
Will it cost more in the future to find and produce oil? Probably, yes. New discoveries are likely to be smaller, in more isolated locations and possibly more challenging to produce. Some older fields will require the application of enhanced recovery technologies to maintain production levels. However, history shows that technical advances have steadily lowered costs over time and, incidentally, have enabled producers to increase their proven reserves. Even if costs do rise, we are confident that they will not be an insurmountable barrier to the development of future petroleum reserves.
Is technology the problem as some of the pessimists maintain? Certainly not. The proper application of technology will raise output while holding down costs.
Now let me elaborate a little further on these points.
With regard to recent claims that the world is rapidly running out of oil, I would like to point out that this is not the first time we have heard warnings of impending scarcity. In fact, dire Malthusian predictions about oil and other natural resources have been voiced now and again for at least the last 100 years. The most commonly heard argument is that mankind faces the imminent exhaustion of the world's natural resources, including petroleum, due to growing population and the profligate lifestyles of wealthy nations.
How did past predictions of doom and gloom fare? Not very well. During this period when we were supposed to be running out of oil, world oil reserves continued to grow, from about 550 billion barrels in 1970 to more than 1.2 trillion barrels today. What is all the more remarkable is that this increase occurred despite the fact that the world consumed over 800 billion barrels during this period.
In the case of Saudi Arabia, our proved reserves were estimated to be about 88 billion barrels in 1970. Today, we conservatively estimate them at 261 billion barrels, despite the intervening 35 years of production. Saudi Aramco President and CEO Abdallah Jum'ah will provide greater detail on Saudi Arabia's reserves and future production potential in the conference's second session.
Some skeptics express disbelief at the nearly three-fold increase in our reserves number over the past 30 years. There is nothing magical about these numbers. Our years of experience gained from producing our fields, along with advances in technology have provided us with invaluable new knowledge about our petroleum resources. This knowledge has helped us to better appreciate their size and enhanced our ability to recover these resources. I would like to emphasize that all of our reserve estimates are extremely conservative and you can rest assured that our booked reserves are very real.
But what about the future, you may ask. We take the issue of oil production peaking seriously and are constantly monitoring and assessing the latest data and trends. I am happy to report to you that our analysis gives us reason to be optimistic about the future. Current world proven reserves are estimated at 1.2 trillion barrels. The United States Geological Survey estimates that another 1.3 trillion barrels of oil and natural gas liquids will become available in the future. This will come from undiscovered resources and more accurate assessments of reserves located in existing fields. The additional oil raises the conventional liquid reserves and resources to over 2.5 trillion barrels.
But that's not all. There are vast amounts of unconventional heavy oil and bitumen. The in-place volume of these two resources is estimated at about 3.7 trillion barrels; 570 billion barrels of these resources are expected to be recoverable. Based on the current global oil consumption rate, these conventional and unconventional oil resources would last for more than 100 years.
Some pessimists are even suggesting that output from Saudi Arabia's own fields is set to decline sharply in the next few years. Let me reassure you; this is not the case. As I stated previously, the reserves we report are there. In fact, the estimates are quite conservative and there is considerable upside potential to book additional reserves. None of our booked reserves require enhanced recovery techniques.
We are confident there is more oil to be found in Saudi Arabia. There are vast areas of Saudi Arabia yet to be explored. They present great opportunities for new discoveries. We expect the cumulative impact of these new finds to be quite significant.
On this point I want to be clear, ladies and gentlemen. We have more than sufficient reserves to increase production capacity and are committed to do so in line with demand growth. We also possess the human, financial and technical resources to do the job.
Our technical experts in a previous presentation here have shown clearly that Saudi Arabia could without much difficulty raise output from 10.5 million bpd to 12-15 million bpd and maintain that level of output for 50 years or more. How can we do this? We can do this because of our vast resources and because we are extremely careful in producing our fields. We produce them slowly with the aim of maximizing overall recovery. Where other companies may look at a 20-year production profile, we are looking to produce our fields for 70-100 years. This is our guiding principle, a principle we will not compromise for short-term expediencies.
Let me say a quick word about technology. History has shown that technology has dramatically lowered the cost of finding and producing oil. New technologies like 3-D and 4-D seismic, horizontal drilling and sophisticated computer modeling have all had a dramatic impact on our industry. Granted, when used incorrectly, technology can be detrimental. But I firmly believe that with careful application, future technologies will provide us even more effective tools to find and produce more oil, while reducing costs from what they might have been.
It is undeniable that the world will eventually run out of oil. Demand is projected to increase, and, to the best of my knowledge oil continues to be a depletable resource. The relevant question is not if, but when. On this we feel fairly confident. We believe that there will be no shortage of oil for at least the next 50 years, perhaps much longer.
As I stated previously, based only on our knowledge of our currently proved reserves, we believe that Saudi Arabia could produce at substantially higher levels for the next 50 years. We believe that reserve additions will enhance our future production capabilities over and above what they are currently.
We are able to state confidently that sufficient quantities remain to make oil an important source of energy for many years to come. We believe there are sufficient reserves in Saudi Arabia and the rest of the world to last until there is an inevitable transition from the age of oil to the next great source of energy.
I remind the audience that the shift from coal to oil which occurred in late 19th and early 20th centuries did not occur because the world ran out of coal. It occurred because oil proved to be the superior energy resource.
Eventually, technological advances will usher in a new energy resource to replace oil. Oil will not cede its position as the pre-eminent fuel because the world runs dry, but because technology has rendered it less desirable. We in Saudi Arabia believe that there are sufficient quantities of oil left to make the transition to the next great energy source a smooth one.
Turning to a subject which is on the mind of many of you in the audience - I would like to say something about current oil prices. We have heard some commentators question Saudi Arabia's commitment to the $25 OPEC basket price and to the $22-$28 price range.
Let me set the record straight on this issue. Saudi Arabia continues to be committed to OPEC's $22-$28 price bands and believes that an OPEC basket price of $25 is a fair one for both consumers and producers. However, oil markets are complex and not subject to control by anyone. Even Saudi Arabia and other members of OPEC, with their vast reserves, have only a limited ability to keep prices in their preferred range. This is particularly true when the primary factors driving prices are things other than the supply and demand of crude oil in international markets. This is the case today.
Let me expand on this point. There is no general shortage of crude oil in today's market - supplies are readily available. Any buyer or seller of crude oil will tell you this. Rather, prices are being driven by other factors, including fears of instability in key oil producing countries and regions, the movement of large investment funds into commodities like oil, just-in-time inventory practices, refining bottlenecks and the industry's struggle to produce sufficient quantities of spec gasoline in the U.S. that meets currently mandated environmental standards. In the U.S., a plethora of state and local regulations have "Balkanized" gasoline markets, placing increasing strains on refiners to meet local demands. On this occasion, let me state emphatically, that Saudi Arabia is willing and ready to invest in two new refineries and their associated marketing facilities in the U.S. to help alleviate some of the bottlenecks in product availability.
Some place the blame on OPEC, saying that the organization is purposely pushing prices higher. They cite as evidence OPEC's decision to cut output. I would like to correct this misunderstanding. When OPEC decided to cut output, the decision was based on the best information from the world's leading industry experts, including the LEA and the EIA, who were all saying that crude supply was running ahead of demand which indicates that the stage was set for a significant deterioration in oil prices in the second quarter of this year. OPEC's goal in taking this action was to maintain a balance between demand and supply based on what the best information available was telling us. It was not a move to abandon the $22-$28 price band for higher prices.
In retrospect, demand was much stronger in the first quarter than the experts anticipated. Projection of world-wide demand for 2004 increased from 1 million in November 2003 to 1.7 million bpd recently. Five upward revisions of demand in five consecutive months. What will the second quarter look like? Will the experts' original expectations for downward price pressure prove to be correct? There are signs that worldwide inventories have begun to build. But, no one really knows for sure.
However, I promise you that we and our counterparts in OPEC will continue to monitor developments very closely and will take appropriate action to maintain stability in oil markets. I must caution you that OPEC is only one factor that impacts oil prices and that higher crude oil production does not guarantee that there is more gasoline available for U.S. consumers.
Ladies and gentlemen, I would like to leave you with the following points:
First, the U.S. and Saudi Arabia have shared for many decades a commitment to ensuring the availability of sufficient supplies of energy to meet the needs of the world's growing economies. We share an appreciation of energy's role as the raw material for fulfilling the aspirations of mankind.
Both of our countries also understand the importance of stability in the oil market, security of supply and reliability of deliveries. That is why Saudi Arabia has committed itself to be the world's most reliable supplier of energy. We back up this commitment by having developed and nurtured an oil industry whose capabilities, I am proud to say, are second to none. We do it through a massive commitment of financial resources to acquire the latest technologies, to attract the brightest minds, and to train a modem workforce able to meet the challenges of the 21st century. We do it by maintaining spare production capacity and regional supply relationships even when they run contrary to our short-term economic interests.
Second, the future for oil and the oil industry is a bright one. This is not the end of the Age of Oil as some pessimists have been saying. There is plenty of oil left to be found and produced and petroleum will remain the dominant energy source for years to come. I assure you that Saudi Arabia's reserves are real and that we have the potential to produce at much higher rates in line with growing demand for many years.
Yes, the Age of Oil will eventually come to an end. But we see no shortages on the horizon. There is no reason for pessimism or panic. Pessimism and panic undermine oil market stability. There is time for progressive research and development and I see no reason that we should not experience a smooth transition to the next great energy source.
Finally, ladies and gentlemen, we will continue to face many challenges in the future, as we have in the past. Perhaps the greatest challenge we face is to meet the world's growing appetite for energy.
The U.S. and Saudi Arabia share a long history. Working side by side we have achieved much. Working together in the early days, we overcame harsh conditions and extreme hardships and brought Saudi Arabia's vast petroleum resources to world markets. We continue to share a strong interest in stable and secure oil markets, and we both understand that stability and reliability are not achievable without demand and supply security. We have much to build on and I believe, working together, we can pave the way for a better future for the world and its people.
Ladies and gentlemen: thank you.