2005 Speech

Oil Minister address to the 18th World Petroleum Congress
Address by His Excellency Minister of Petroleum and Mineral Resources Ali Al-Naimi at the 18th World Petroleum Congress in Johannesburg, South Africa, September 27, 2005. Topic: Shaping the Energy Future: The Role of Saudi Arabia.

Excellencies, ladies and gentlemen, Good morning.

I would like to begin by expressing my appreciation to the organizers of the World Petroleum Congress here in Johannesburg, and to Dr. Eivald Roren for inviting me to speak to this prestigious gathering.  I’m especially delighted to be among such distinguished colleagues and friends.

It is very appropriate that the World Petroleum Congress is being held this year in Africa -- a continent that is making a significant and growing contribution to world energy supplies. We are seeing exciting new developments here both offshore and onshore. Africa’s dynamic oil industry will play a critical role in enabling the continent to achieve its economical ambitions, while at the same time helping to meet the world’s growing energy needs. 

Oil markets are experiencing turbulent times.  Prices are under various pressures and the petroleum industry’s infrastructures are stretched thin.  There is tightness across the supply chain and our ability to meet unforeseen problems today has eroded as most of the spare production capacity of the 1980s and 1990s has disappeared, resulting in a system that has a much smaller margin for error. 

This situation is happening, in parallel, with the rising demand, insufficient investment in production capacity, a mismatch between crude type and the existing refining facilities, and the effects of various and local legislated petroleum product specifications that result in fractionalized product markets.  Hurricanes Katrina and Rita and their aftermath are the most recent and visible examples of the fragility of the energy supply system. 

Is there any reason to be panic and pessimistic about the petroleum industry and its future?  Is the future for the industry bleak?  I want to assure you today that nothing could be further from the truth.  Yes, there are challenges.  But our industry has been built on the basis to overcome challenges.  These challenges we currently face are not insurmountable.  Cooperation between producers and consumers can assure a bright energy future for the betterment of mankind. 

For that, I would like to talk today about the challenges that the oil industry faces and what we in Saudi Arabia are doing to fulfill our commitment and our efforts to achieve a stable and reliable energy future.
The oil industry must be prepared to operate in a global environment with continuous growing demand. Hence, there will be a need for industry developmental projects and substantial upgrading and expansion of the petroleum supply chain; the environmental demands on the industry will be greater; and, the geopolitical environment will remain uncertain. 

A popular theory receiving much attention in the press these days, says that the current tightness in the petroleum supply chain is proof that we are rapidly reaching the peaks of our ability to produce oil.  The core message of this theory is that there is not enough oil left to fuel a growing world economy in the coming decades.  In other words: “The end of the age of oil is at hand.”  

Such talk is not productive because it diverts attention from the real problems ahead.  The problem we face is not the oil availability; it is a problem of oil deliverability to consumers. 

There is an important distinction between availability and deliverability. There is no shortage of petroleum resources left to be developed and produced.  This is what I call availability.  The resources are more than sufficient to meet expected demand. 

To put the current concerns about the availability of oil into perspective, we only have to look back to the past. The oil scarcity was also a popular topic during the 1970s.  But, in the intervening years when we were supposed to face a precipitous decline, the world oil reserves increased more than the double -- from about 550 billion barrels in 1970 to more than 1.2 trillion barrels today. No doubt, an increase of this size is noteworthy, given the fact that the world consumed over 800 billion barrels during this period. 

In the case of Saudi Arabia, our proved reserves were estimated at about 88 billion barrels in 1970.  Today, they are conservatively estimated at more than 264 billion barrels despite having produced over 91 billion barrels over the intervening 35 years.   

What’s behind this impressive growth in reserves?  Reserve estimates are a function of both the resource base and economics.  Technological advances have improved our knowledge of the underlying geological formations and their characteristics.  They have also enabled us to economically recover a greater portion of the resource base, thus adding to recoverable reserve estimates.  For example, achieving only a one percent improvement in recovery rates in Saudi Arabia, would provide an additional one-year’s worth of production. 

Ongoing analysis of Saudi Arabia’s oil reservoirs indicate that we will be able to boost our proved oil reserves by 200 billion barrels using the latest technology.  We are further encouraged by the fact that there are vast areas that have not yet been explored. This leads us to say with confidence that Saudi Arabia’s proved reserves will expand significantly in the years and decades ahead.  

The positive impact of technology is not confined to Saudi Arabia.  The same trends will be at work in the world’s other major producing regions.  In short, we believe that there will be plenty of oil available to meet future demand. 

Next, I want to address oil’s future competitiveness in the energy market place.  The forecasts indicate that we will need more energy in the decades ahead.   That means there will be a room for greater contributions from coal, nuclear, solar, wind power, natural gas, and other alternatives. 

Will these alternatives replace or significantly diminish the role of oil?  My answer is absolutely no.  Let us look at the facts.   

In the transportation sector, where oil accounts for 95 percent of the energy consumed globally, there are currently no competitive alternatives to petroleum-derived fuels. 

Is this situation likely to change in the future?  No, I do not believe so.  As I have already said, there will be no scarcity of oil in the foreseeable future: Availability is not a problem.  Given this reality, we believe that oil will remain the fuel of choice for transportation. 

In fact, new technologies, like hybrid vehicles and turbo diesel engines are likely to enhance oil competitiveness in the transportation sector. 

Is the desire for a cleaner environment a threat to oil’s dominance?  I do not believe so.  Our industry is responding to consumers’ desires for cleaner energy through the development and distribution of cleaner transportation fuels like Ultra Low Sulfur Diesel.  Technological advances will enable us to more efficiently utilize oil resources and minimize the impact on the environment. 

Now, I would like to turn to the real problem at hand.  This is what I call deliverability to consumers.  Let me emphasize again that the challenges ahead of us are not challenges of resources, or what I call “availability.”  Rather, the world is facing today the challenge of “deliverability.” What do I mean by that?  Deliverability is a measure of the industry ability of boosting the production capacity, oil transportation and refining, and delivery of petroleum products to end consumers for their daily lives. 

Currently, from the upstream to the downstream – all along the supply chain – the petroleum industry faces infrastructure constraints and bottlenecks that are causing market price fluctuation and restricting the industry ability to bring oil from the underground to the consumer.  We should not confuse this very real “deliverability” challenge with resource “availability”, which is not a problem.  

How did our current deliverability difficulties arise?  There are many contributing factors to consider, such as increasing regulatory complexity and growing public opposition to the siting and construction of infrastructure in proximity to population centers.  But, the biggest factor has been the inadequate return on investment caused by a prolonged period of low oil prices and low product refining profit margins from the mid-1980s to the late-1990s. 

Past experience has tought us that very low prices and very high prices are not sustainable.  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.  At the same time, “low-priced” energy encourages greater consumption.  By reducing investment and increasing demand, periods of low prices set the stage for an inevitable corrective rise in prices. 

Conversely, we have also seen that when prices rise too high, global economic growth suffers, and, ultimately the oil industry suffers from the ensuing demand destruction.  Clearly, we all have a stake in encouraging a stable price environment.  

The cycle of alternating low and high price periods we have seen over the past 30 years has complicated the decision-making process of both consumers and producers -- making it harder to plan and implement massive capital investments with long lead return times. 

The vibrant global economy and the increasing oil demand have diminished the world production spare capacity that existed for decades and reached as high as 15 million b/d. As a result, there is very little spare crude production capacity available outside of Saudi Arabia to help in balancing the market. 

The biggest problem, I believe, is the downstream sector (refining and distribution) where we have seen a similar trend of diminishing spare capacity and flexibility.  Refinery upgrading capacity worldwide has not kept pace with the growth in demand for high-quality, environmentally friendly transportation fuels.  As a result, a mismatch currently exists between refinery upgrading capabilities and the basket of crudes produced.  This mismatch is critical because it limits the industry’s ability to fully utilize existing spare crude capacity which is heavy and sour in nature.

The current price level is providing the returns needed to attract adequate investment and over the next several years significant new capacity will begin to come on-stream.  We believe spare crude oil production capacity will grow sufficiently in the next 3-4 years to restore some margin of security to world crude markets. 

But higher prices alone are not sufficient to assure that the necessary investments will be made to upgrade and expand the entire petroleum supply system.  For example, the bottlenecks facing the downstream are more problematic, and the issues of infrastructure locations and environmental impact will make it more difficult to overcome these bottlenecks in the system.

Investors in any industry, and the petroleum industry is no different, need stability and predictability.  As we all know too well, price volatility is not conducive to either stability or predictability.  Only speculators benefit from oil price volatility. We therefore need to address the ongoing price volatility that continues to impact oil markets and often delays investment decisions. 

A factor clouding the oil market future is government intervention via various regulations. The investment environment is further distorted by an uncoordinated proliferation of regulations mandating refined product specifications.  Multiple jurisdictions and inconsistent standards have fractionalized product markets, reducing flexibility in petroleum products’ trading and making it more difficult for the industry to ensure stable markets. 

Certainty and predictability of oil future are also undermined by a lack of reliable oil supply and demand data which adds further uncertainty to oil markets.  These factors all complicate investment decisions and restrict the oil industry’s task of meeting future energy needs.

Now, I want to address more directly Saudi Arabia’s role in world oil markets as we look to the future.  I am often asked, “How does Saudi Arabia intend to meet the challenges of the future?”  My response is, we are holding fast to our core belief that both consumers and producers benefit from stable and reliable oil markets.  But holding fast doesn’t mean accepting the status quo.  In fact, we believe that we must proactively confront the deliverability challenge to ensure the goal of stable and reliable markets.   

Building on our long track record as the world’s preeminent reliable supplier of energy, Saudi Arabia is at the forefront of efforts to expand capacity across the supply chain.  These efforts include: 

Spare capacity remains a cornerstone of world oil market stability – both for the upstream and the downstream.  With regard to the upstream, Saudi Arabia has long made it a policy to maintain significant spare capacity in an effort to promote oil market stability.  Our spare capacity has paid great dividends over the years by helping to minimize disruptions to the world economy. The Kingdom’s ongoing policy is to maintain 1.5-2.0 million b/d of spare capacity. 

The upstream expansion projects now underway in Saudi Arabia represent a combined production capacity addition of around 3 million barrels per day, part of which will be utilized to offset natural decline and the rest to expand capacity.  By 2009, Saudi Arabia’s maximum sustainable capacity will reach 12.5 million barrels per day. 

Other projects have been identified and can be advanced, if necessary, to meet additional supply requirements.  Saudi Arabia has prepared a production capacity scenario of 15 million barrels per day, which can be implemented in response to growing market demand.

While Saudi Arabia is the world’s largest oil producer and exporter, it cannot meet the “deliverability” challenges of tomorrow alone.  All the countries and companies present today here at the World Petroleum Congress have a critical role to play. 

As I discussed, the challenges ahead are not related to a lack of resources, but rather to a variety of hurdles that often delay or defer the necessary investments needed to expand the global oil supply system on a timely basis.

Saudi Arabia is working to help in facing these challenges, but I believe that there is more we can do internationally to find ways to remove the bottlenecks that constrain our ability to achieve greater market stability.  We must enhance the dialogue between producers and consumers and find acceptable ways to remove impediments to growth.  After all, a growing global economy is going to demand significantly more petroleum products in the future.  We must begin today to remove constraints and prepare the way for better future. 

With this in mind, I would like to propose that the international community, under the auspices of the International Energy Forum, undertake a study of the global oil supply system, identifying bottlenecks and proposing possible solutions.  This would result in specific recommendations for strategies to address the issues which constrain our ability to deliver petroleum at reasonable prices to the world.
 In conclusion, the more we can do to understand and remove the factors which constrain the global oil supply system and lead to increased market volatility, the better positioned we will be to meet the future energy requirements of a dynamic and growing global economy.  We all have a stake in ensuring that the continuity of petroleum products’ supply at a reasonable price will be available for future generations.