2005 Speech

Oil minister's speech in San Francisco on globalization
Address by Minister of Petroleum and Mineral Resources Ali Al-Naimi at the World Affairs Council in San Francisco, California on May 24, 2005, on ‘Globalization and the Future of the Oil Market’

Good afternoon ladies and gentlemen. It is good to be back in the Bay Area. Returning always brings back fond memories of the time I spent during my graduate studies at Stanford University. I would like to thank the World Affairs Council of Northern California, the Council on Foreign Relation, and Chevron for inviting me to speak here today. Saudi Arabia's ties to the United States, and in particular, California, go back over seventy years. In fact, it was the Standard Oil Company of California - the predecessor of today's Chevron - which took the pioneering step of signing a concession agreement with the Kingdom of Saudi Arabia to explore for oil. I wonder what those early geologists and engineers would say if they could see the vast Saudi Arabian oil industry that exists today - an industry which their early efforts helped to create.

The story of our relationship involves much more than oil. For over 70 years, our two countries have worked together on all levels for regional and international peace and economic prosperity. The relationship, particularly in the fields of trade and investment, have expanded and diversified since the early days. While relations between the United States and Saudi Arabia are often defined narrowly in terms of dollars, barrels per day, and the fight against terrorism, these terms do not adequately reflect the depth of our relationship.

The real story is about two peoples, who, joined by common pursuits and goals, have worked together not only for their mutual benefit, but for the benefit of the world at large. Tens of thousands of Americans have worked in Saudi Arabia and contributed to our country and its prosperity. At the same time, tens of thousands of Saudis have studied in the U.S. and many of them have returned to take positions of leadership in the oil sector and other industries in Saudi Arabia.

While our ties encompass much more than just oil, I am at heart an oilman, and I am here today to talk to you about our shared energy future. We are transitioning to a global marketplace where traditional national borders are increasingly meaningless for the transfer of capital and ideas. The operative word for the future is inter-dependence. We are being drawn closer together by expanding global trade and investment. Those attempting to “go-it-alone” in this new global economy will risk being left behind.

Globalization holds the promise of a better way of life for the world's people. But realizing this promise will not always be easy. We will be faced with tradeoffs as we try to balance economic growth, quality of life, the environment, culture and tradition. When we speak of the promise of globalization, we must remember the essential role of energy. Economic activity requires energy – energy to produce goods, to move them to markets and to sell them to consumers. Energy also provides us with many of the conveniences of modern life. Without energy, economic progress is not possible. The world’s demand for energy will grow because of globalization. The good news is that we are becoming more efficient in our use of energy, which means we won’t need as much energy to grow our economy in the future as we did in the past. And, I am confident that we will produce and deliver more energy than ever before. We have technology and technological innovation to thank for that.

Recognizing the central role of energy for the global economy, let me address several key points about our energy future. First, given the state of technology there are currently no viable substitutes for oil, particularly in the transportation sector where oil accounts for 95.0 percent of the energy consumed globally. Oil will remain the fuel of choice in transportation, both from the standpoints of economics and ease of use, for at least the next 30 years.

There are alternative technologies, like fuels cells and battery-powered vehicles, that hold promise for the future. But the reality is none are currently close to being commercially competitive with gasoline- and diesel-powered vehicles based on the internal combustion engine. Some new fuel-saving technologies, like hybrid vehicles, are commercial today and increasingly competitive in the market place. They are examples of how technological advances will enable us to more efficiently utilize our oil resources and minimize the impact on the environment.

Let me clarify a popular misconception. We in Saudi Arabia are not opposed to energy conservation, efficiency gains or even alternative fuels. The reality is that we will need a lot of BTUs in the future and that means there will be a role for all forms of energy and technologies. Energy conservation and efficiency are important because they allow us to do more with the resources we have.

Second, there is no need for panic - the world is not running out of oil any time soon. Talk of shortages is not new. In fact, claims that the world is just about to run out of oil are as old as the industry itself. I am certain there is plenty of oil left to be found and produced. My optimism springs from what history has shown us and because of what knowledgeable experts tell us about the available resource base.

In the early 1970s, some people predicted that the world was fast approaching an era of oil scarcity. 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. This increase is all the more remarkable given the fact that the world consumed over 800 billion barrels during this period. In the case of Saudi Arabia, our proven reserves were estimated to be about 88 billion barrels in 1970. Today, we conservatively estimate them at more than 264 billion barrels, despite the intervening 35 years of production. Last year alone we added more than 1.5 billion barrels to reserves, despite having produced over 3 billion barrels during this period.

How can this be? The explanation can be found in the nature of estimates of petroleum reserves. Reserve estimates are a function of the available knowledge of the formations and their characteristics. They are, in effect, snapshots in time, reflecting the best available knowledge. Estimates of reserves have increased over the years because we have improved our knowledge of the subsurface. Technological advances in such areas as 3-D and 4-D seismic, well logging, smart wells, directional wells and steerable drill bits have allowed us to increase our understanding of what is happening deep underground. Our knowledge has also been greatly enhanced by a quantum leap in computing power, which has allowed the oil industry to develop large complex computer models. These models help us to better understand the on-going processes within the reservoir which are essential to understanding the size of recoverable reserves.

We in Saudi Arabia have long appreciated the importance of technology to our understanding of our reservoirs and how they operate. This is why we have invested heavily in cutting edge technology. Each year, we drill evaluation wells, not to produce oil, but to better understand what is happening below the surface. We have also assembled world class computing capabilities. For comparison, we process four times more data than NASA. An alternative metric shows that Saudi Aramco’s database of information about our reservoirs is three times as large as Google’s database. We are industry leaders when it comes to understanding the reservoirs we manage.

The world has vast quantities of conventional and unconventional oil resources remaining. I have no doubt that future advances in technology will allow us to economically recover an even greater portion of the resource base than we currently estimate. For example, increasing the recovery rate by only one percent provides an additional 70 billion barrels of recoverable reserves, which is equivalent to adding more than two years worth of production to supply. I also believe that through technological innovations we will become more efficient in the way we consume oil, extending the life of the world’s reserve base. As we become more efficient in our use of energy, we are, in effect, adding to our energy supplies.

My third point is that consuming and producing countries, as well as the oil industry, benefit from stable and predictable prices that ensure an adequate return to the industry while protecting economic growth. However, achieving stable prices is complicated by several factors, including cyclical volatility, regulatory actions, oil’s new role as a financial investment asset, and a lack of market transparency.

Past experience teaches us that very low prices and very high prices are not sustainable. Investment capital follows opportunity. During periods of low oil prices, capital tends to move out of energy to sectors offering higher returns. The result is underinvestment in new capacity across the spectrum of the industry - including production, transportation, refining, distribution and marketing. In such an environment, demand grows due to “cheap” energy while supply capacity either stagnates or contracts due to lack of investment. Inevitably, prices must rise to restore balance by reducing demand and encouraging additional investment in supply capacity.

We are seeing this dynamic played out today. From the mid-1980s to the end of the 1990s, the oil industry operated in an environment of surplus upstream and downstream capacity. Overcapacity all along the supply chain kept prices low, contributing to complacency about the adequacy of existing capacity to meet future requirements. At the same time, low prices boosted demand.

The result has been a growing anxiety in oil markets about the ability of supply to meet future demand increases. The higher price environment, we now see is a direct result of this past period of overcapacity and low oil prices. The cycle of alternating low and high price periods creates uncertainty for the oil industry, which is required to make massive capital investments with long lead times and extended payback periods. The lack of predictability increases the risk that companies face, thereby discouraging investment in new capacity.

Regulatory actions, no matter how well-meaning, may negatively impact investments in the energy supply chain and, therefore, result in higher product prices for the consumer. Multiple jurisdictions and inconsistent standards have fractionalized product markets, reducing flexibility and making it more difficult for the industry to ensure stable markets. Like cyclical volatility, these regulatory actions tend to increase risks for the oil industry, discouraging new investment. Oil has become a financial investment asset, similar to currencies, equities and bonds. Oil futures and over-the-counter markets are now attracting vast sums of money from hedge funds and institutional investors seeking to maximize returns. Their investment decisions are not necessarily made on the basis of prevailing market fundamentals, but rather on expected returns relative to alternative investments. The massive funds involved have made it more difficult to stabilize markets.

Transparency is a key condition for oil market stability. Energy data collection and forecasting are areas where cooperation between producers and consumers can improve transparency. We must strive to do a better job in estimating demand. Efforts are already underway and are beginning to bear fruit. The International Energy Forum, dedicated to dialogue between producing and consuming countries, has been closely involved in encouraging cooperative efforts. The IEF Secretariat, based in Riyadh, can serve a useful and productive role in fostering greater dialogue and cooperation between producers and consumers of oil. The Joint Oil Data Initiative (or JODI) is now working to complete its global database of oil statistics. When it is released this summer, the JODI database will help improve oil market data transparency where we need it most - in fast growing, developing economies.

Fourth, despite the challenges, Saudi Arabia remains committed to achieving price stability. The Kingdom has long played a stabilizing role in oil markets. We have been there in times of disruption and shortage to provide additional supplies to the market. As the world’s pre-eminent supplier of energy, it has been our policy to maintain spare capacity and to use it to help stabilize the market in times of crisis.

Spare capacity remains a cornerstone of world oil market stability – both for the upstream and the downstream. With regard to the upstream, I would like to stress that it is very expensive to develop and maintain spare production capacity, but the Kingdom has chosen to do so in the interest of maintaining market stability. Going forward, I can assure you that our policy is to maintain 1.5 to 2.0 million barrels per day (bpd) of spare capacity. Now, I would like to give you some specifics on what Saudi Arabia is doing to help meet the world’s future oil needs. The Kingdom currently has sustainable crude production capacity of about 11 million mpd, which includes a spare capacity cushion of about 1.5 million mpd.

In addition, Saudi Arabia has initiated a number of mega oil projects which will significantly increase its production capacity to both meet demand and maintain spare capacity. These projects represent a combined production capacity of more than 3 million bpd, part of which will be utilized to offset natural decline and the rest to expand capacity. By 2009, we expect our maximum sustainable capacity to rise from the current 11.0 million bpd to 12.5 million bpd.

Additional projects have been identified and can be advanced, as needed, to meet any new supply requirements. In fact, the Kingdom has evaluated a production capacity scenario of 15 million barrels per day, which can be implemented when dictated by market demand.

Our efforts to increase world energy supplies extend to the downstream. Saudi Arabia is increasing its capacity and upgrading capabilities at its existing refineries in the Kingdom and in other major markets where we have a presence.

In addition, we are considering construction of new refineries inside the Kingdom. We are also looking at building new refineries in other countries, which would be configured to handle sour and heavy crudes. Globalization will expand the world’s economy creating unprecedented additional demand for oil. While demand growth is expected to be large, remaining oil resources are significant. I believe that technological innovations will provide the key to achieving balanced markets by improving the efficiency of producing and consuming oil.

It is clear that both producers and consumers benefit from stable and predictable prices. However, we must be mindful that strong cyclical forces, regulatory actions, oil’s new role as an investment asset and the lack of market transparency all complicate the task of achieving stability. In closing, I would like to state that Saudi Arabia remains undaunted by the difficulties ahead. We will continue to be the world’s most reliable supplier of energy. As evidence of this commitment, we are implementing a massive investment program that encompasses both the upstream and downstream sectors. We understand that a cushion of spare capacity is critical to maintaining price stability in markets during times of difficulty. Saudi Arabia is therefore committed to maintaining spare production capacity of 1.5 to 2.0 million bpd in the future, just as we have in the past. We do this because we know the health of the global economy, and our hopes for a bright future, require it.

Thank you ladies and gentlemen.