CERAWeek ’17: Saudi minister says preparing for the future: the imperative of investment

HOUSTON -- On Tuesday morning, Saudi Arabian Energy Minister Khalid Al-Falih delivered the following keynote address to the CERAWeek audience in Houston. This address contained a number of strategies and forwarding-looking initiatives.

Long-term outlook. Falih said that if the industry looks at global demographic and economic trends there is little doubt that global energy demand will grow significantly, despite advances in technology and gains in energy efficiency leading to lower energy intensity.

“As for the evolution of the global energy mix, the costs of alternatives like renewables and electric vehicles are declining, as their technologies and performance improve,” said Falih.  “In the future, they will claim a greater share of a growing global energy market—and we welcome their contributions.  But we all know that energy transformations are complex phenomena that take considerable time to unfold.

“Whether I’m in China, India, Indonesia or Malaysia, as I was last week, I find that neither climate change policies nor technology shifts have quenched their insatiable thirst for oil. Indeed, demand for petroleum imports will continue to grow steadily in the developing world, especially with the decline in their indigenous oil and gas production.”

Falih continued by saying that he is concerned that misguided projections of peak demand and stranded petroleum resources may discourage the trillions of dollars in investments needed to underpin essential oil and gas supplies, during the long transformation of our global energy system. He said that the risks of under-investment driven by such theories amount to nothing less than compromising the world’s energy security, by squandering staggering quantities of the planet’s natural energy endowment. That, in turn, he said, would create heightened market volatility, including damaging price spikes, and more acute energy poverty in the developing world.

“So, for some time, I’ve been concerned about worldwide investments falling behind supply development needs,” added Falih. “I’m most troubled by lagging progress of long-cycle development projects, which are needed to provide the ‘base load’ of future global supplies. The imperative of adequate future supplies is also why we welcome the return of investors to U.S. shale—regardless of what you may hear.

“Saudi government policy has always taken the long view of the petroleum sector, whether it’s investing in the Kingdom’s infrastructure; optimizing the productive life of our reservoirs; developing our industry professionals and new technologies; or strengthening the relationships we enjoy with our partners, customers, suppliers and other stakeholders.

“And that’s why despite the recent downturn, we’ve kept up our capital spending. That has resulted in our drilling rig count remaining near an all-time record, as we maintain our maximum sustainable capacity for crude oil, and work to double our gas capacity, while also building the world’s largest downstream portfolio.

Falih then said that the more industry professionals embrace this approach of continuing to prudently invest across the petroleum value chain, regardless of short-term volatility, the better equipped the industry will be—individually and collectively—to survive the inevitable market cycles in the long run.

At the same time, he said that he wants the industry to invest more, to minimize the environmental impact and carbon footprint of fossil fuels.  Such investments, he said, will make petroleum usage more acceptable and more sustainable in a period of significant technology shifts and growing concern over climate change.

Short-term market. Turning to short-term market conditions, Falih said there is also cause for cautious optimism, as the industry sees the “green shoots” of the recovery, driven by a better outlook on fundamentals, coupled with the historic production agreement of three months ago.

Looking at the fundamentals first, Falih said, “It is true, that uncertainty may continue until the trend of inventory drawdowns further asserts itself, and the market becomes more comfortable with its capacity to absorb additional marginal supplies. OECD commercial inventories are still about 300 MMbbl above the five-year average, but have been declining in recent months.”

Looking at oil demand growth this year, Falih expects it to remain fairly healthy, in the range of about 1.5 MMbpd, which is higher than last year’s growth. And on the supply side, while production might increase somewhat in major non-OPEC producers like the U.S., Brazil and Canada, he noted that it is likely to be more than offset by natural decline among other non-OPEC producers, such as China, the North Sea and Mexico.

These improving market fundamentals, he contends, have been boosted by the recent OPEC agreement, augmented for the first time by a new cooperative framework with major non-OPEC producers.

“Of course, on many occasions in the past, non-OPEC producers have simply reaped the benefits of OPEC supply reductions,” offered Falih.  “But this time around, we made it clear that we will not bear the burden of ‘free rides,’ and both groups are reinforcing one another through voluntary management of their production.  All of us realize that such an expanded network of producers, with a larger share of global production, is the only way to achieve a constructive, stable market for all.”

Having said this, Falih believes that OPEC remains an important catalyst to the stability and sustainability of the market, which remains the organization’s highest priorities and have brought its members into greater alignment than at any time in recent memory.  But history, he said, has also demonstrated that intervention in response to structural shifts is largely ineffective, and he believes the industry has learned that lesson.

“That’s why Saudi Arabia does not support OPEC intervening to alleviate the impacts of long-term structural imbalances,” continued the minister, “as opposed to addressing short-term aberrations, such as financial crises, economic recessions, unforeseen supply disruptions, or the like. As for the current agreement, it is keeping with Saudi Arabia’s policy of seeking a collaborative framework of production management for a restricted period of time, with the aim of accelerating rebalancing, and then allowing the free market to work.  Saudi Arabia has so far led by example, by bringing our production below the psychologically significant 10 MMbopd mark—which is well below our maximum production capacity.”

Falih explained that at the moment, it’s a matter of monitoring the markets and conformance of participants, and, depending upon an assessment of the first half of the year, Saudi will decide with its partners what to do for the second half. “So, in light of improving fundamentals, whose effect has been amplified by the OPEC and non-OPEC cooperation framework, I am optimistic about the global market outlook in the weeks and months ahead—though I caution that my optimism should not tip investors into ‘irrational exuberance’ or wishful thinking that OPEC, or the Kingdom, will underwrite the investments of others at our own expense. In other words, we should not get ahead of the market as informed by our recent experience.”

Turning to the U.S. oil and gas industry, the minister said that it’s just as important to note that collective efforts to reduce global market volatility directly benefit the U.S. industry, which is the bellwether of the global industry.  That’s because, he explained, the U.S. is both the largest market for petroleum and a significant producer, in addition to being the hub for the service industry, supply chain and technology creation.

Saudi-American relations. Turning to relations between his country and the U.S., Falih said that Saudi Arabia has a vested interest in the robust health of the U.S. petroleum sector and the broader American economy.  He noted that Saudi governmental and private sector investments in the U.S. are vast, and the Kingdom will continue to strengthen its presence, including multiple research centers, a number of petrochemical opportunities for SABIC, and Saudi Aramco’s flagship investment in Motiva and America’s largest refinery, just east along Interstate 10 in Port Arthur, Texas.

The division of Motiva’s assets between Saudi Aramco and Shell, he said, will provide a greater degree of autonomy for Aramco to expand the strong platform that it has built over nearly three decades in the American downstream sector. Such an expansion, he believes, is indicative of the alignment between the U.S. under the Trump administration, and the Kingdom’s energy strategies and policies. 

“We welcome the new administration’s attention to strategic energy issues, in particular its pragmatic and inclusive approach to developing all sources to build a diverse energy portfolio, and their pro-business and pro-petroleum sector policies,” commented Falih.  “I personally look forward to working with the new administration—especially my friend and fellow Aggie, Secretary of Energy Rick Perry—for the mutual benefit of our two great nations and, indeed, for the entire world.”

So, just as the American energy sector continues to thrive and diversify, Falih said that exciting commercial and investment opportunities are being created back in Saudi Arabia through Vision 2030, the government’s strategic roadmap to an even more prosperous Kingdom, and a more robust and diversified national economy.

“Saudi Aramco was the original bridge between our two nations, playing a pivotal role in establishing deep energy, business and people-to-people relations,” continued the minister.  “As we continue our national journey of wide-ranging transformation, next year’s initial public offering of a portion of Saudi Aramco is the centerpiece of the broader Vision 2030 framework, and I believe that Aramco going public will create many additional opportunities for engagement and investment across the world—but definitely here in the United States.

Falih concluded by saying that the future for the industry, Saudi companies and the U.S. and Saudi Arabia is both bright and intertwined. He said that he looks forward to working with many of the executives that were in the CERAWeek audience, to realize that potential and take the longstanding U.S.-Saudi partnership to new heights.