Good morning ladies and gentlemen. I will be sharing with you today some Saudi views of the world oil market. But I must first warn you: I speak not as an oil man. So I will be giving you a broad overview, and will not delve into very specific details.
To begin with, given the size of Saudi Arabia’s reserves and the length of time they will last, I think we can all agree that the Kingdom is perhaps the single most important producer of oil in the world. And, as a result of the growing level of demand for oil across the globe, it is likely only to become more so as time goes on. So our perspective necessarily is over the long term.
Unlike other producers, we have a lasting interest in ensuring that demand continues to be healthy, but not excessive, decades down the road. Energy security as defined by a stable market, a healthy market, an affordable market, is what we desire. It is in the best interest of the consumers and it is in our national interest. But energy security cannot be achieved unilaterally. Cooperation between consumers and producers is critical. Let me tell you about some of the things we are doing to contribute to global energy security:
First, as you know, Saudi Arabia has a record of unmatched reliability as a supplier of energy to the US and to the rest of the world. We are committed to maintaining our role as an important and reliable supplier to all of the world’s major consuming nations.
Secondly, we are moving aggressively to expand capacity on many fronts.
We have stepped up our oil and gas exploration program, and we continue to expand our reserve base. We are increasing the number of active rigs in the Kingdom by 400% from what is required to maintain our production. We have been expanding our production capacity, with half a dozen new mega-projects in various stages of development. These will add some 3 million barrels of oil per day by 2009. In total, when accounting for natural declines, this is intended to bring our maximum sustainable production capacity to about 12.5 million barrels per day. We have an enviable record of planning and executing oil and gas mega-projects on time and within budget, while meeting the highest standards of worker and environmental safety.
Moreover, these initiatives are designed to allow Saudi Arabia to maintain its long-standing policy of having a surplus capacity of one-and-a-half to two million barrels a day. This is expensive to develop and maintain, but has proven its worth on numerous occasions during past decades. For example, in the fall of 1990, the Kingdom used its spare capacity to make up for the drop in Kuwait and Iraqi production following Iraq’s invasion of Kuwait. Most recently in the spring of 2003, this spare capacity helped compensate for supply shortages during the invasion of Iraq, the oil worker strikes in Venezuela, and civil unrest in Nigeria, which combined to create a perfect storm in oil markets.
In the downstream sector of the market, we are expanding our refining capacity with partners, both in the Kingdom and in consuming countries to bring balance back to the market. We are working with ConocoPhillips and Total to build two major new export refineries in Saudi Arabia that are designed to process 800,000 barrels a day of heavier crudes into products that meet increasingly strict environmental standards around the world. Many of these products will be destined for US markets. We are also looking to expand refining capacity in China, Korea, and the Philippines with our partners in those countries. Here in the US, we are looking to expand one of the three refineries we operate in our Motiva joint venture with Shell. This may actually make it the largest refinery in the United States.
These efforts will help address the critical global deficit of heavy crude refining capability which is so necessary since most of the world’s current spare capacity is in heavy crude.
We have also instituted a large domestic program to substitute some of our crude oil consumption in the utility and industrial sectors with our large natural gas reserves. This will also free up more crude oil for global consumers.
Building capacity, addressing infrastructure needs: this is what Saudi Arabia is doing to meet the challenges of today’s global energy market. However, Saudi Arabia cannot solve the world’s energy problems by itself. Other producers need to invest to increase their production capacities and consuming nations need to invest in additional refining capacity as well. Consumers must also do their part by consuming energy as efficiently as possible. A BTU saved through conservation and improved efficiency is equivalent to a BTU produced.
So where does that put us today, and do we believe that oil today is overpriced? Well, yes, we do believe prices are too high. But our oil experts, who know the industry as well as anyone, also believe the markets are being well supplied.
So it is clear that geopolitical concerns have heightened fears over energy security and put upward pressure on prices. Some of these political concerns are far from our region, such as the poor state of US-Venezuelan relations and problems in Nigeria. Addressing these issues would clearly enhance the world’s energy security.
Other concerns are in the midst of our region, most notably Iraq and Iran. When oil traders look at the situation in Iraq and see continued violence and instability, it affects the decisions they make regarding the price of oil. The same can be said about the tensions between Iran and the international community regarding Iran’s nuclear program.
Further, conflicts that may not be directly related to oil have an impact on its price. Added tensions between Palestinians and Israelis and terrorism add to the fears of oil traders about instability in an important region and cause upward pressure on prices.
Thus whatever we, as Saudis, do to build a stronger energy industry, it can only be complemented by our continued cooperation with the United States and other countries, as we work to reduce tensions – and prospective conflicts – in the Middle East.
This is the job of leaders and diplomats, not oil men. And it is where my job comes in to play – as the oil industry is not my focus. Now, if you have any questions, please bear that in mind. But I would be glad to provide you with answers.