1999 Speech
 

10/20/1999
Saudi oil policy: stability with strength
Speech by Minister of Petroleum and Mineral Resources Ali Al-Naimi in Houston, Texas

I would like to thank Mr. G. Edward Powell, chairman of the Houston Forum, for inviting me to take part in this highly respected economic gathering, and to address this distinguished group. It is a pleasure to be with you here in Houston, the center of great oil industry activity.
Ladies and Gentlemen, from time to time, we read and hear comments about Saudi Arabia’s oil policy that do not always reflect the facts. So today I would like to clarify few things and to talk about the foundation and goals of our oil policy. Within this context, I’ll also address the Kingdom’s oil industry expansion plans, as well as our relations with consumers, other oil producers and related industries.
Saudi Arabia’s oil policy is founded on four simple facts: high oil reserves and an ability to produce at low costs; spare production capacity; a national economy closely linked to the oil industry; and a stable political and economic system driven by moderate and dynamic policies. These four cornerstones work together to form a stable and consistent oil policy.


Let’s look at each factor in closer detail. Saudi Arabia’s recoverable oil reserves currently stand at 261 billion barrels - one-quarter of the world’s total. Significantly, during the last 20 years global oil reserves have increased by a net of 400 billion barrels, with Saudi Arabia’s contribution alone fully one-quarter of that total. During the same period, Saudi Arabia has been able to find 3 barrels of oil for each barrel produced. And in the years to come more oil will likely be found in Saudi Arabia than anywhere else in the world.
Along with the advantages of this enormous oil reserve base, Saudi Arabia’s cost of production is one of the lowest in the world. Today, our all - inclusive cost of production is less than $1.50 per barrel, while the global average cost is about $5 per barrel - and in some areas more than $10 per barrel.
We also have a great advantage when it comes to adding new reserves, or increasing production capacity. It costs Saudi Arabia less than ten cents per barrel to discover new reserves, while the costing some other areas of the world can be as high as four dollars.
Our recent development of the Shaybah oil filed, located in one of the most remote, barren deserts in the world, is a good example of Saudi Arabia’s ability to develop new production at low cost. Despite being so far from anything that we had to build a 240-mile road and a 400-mile pipeline to connect the field to our networks, the cost of bringing this 500,000 barrel a day field onstream was only $2.5 billion. This shows that the cost of adding the capacity - that is, all the infrastructure, producing and transportation facilities - necessary to produce one additional barrel of oil per day in Saudi Arabia is, at most, $5,000 compared to between $10,000 and $20,000 in most areas of the world. So both our current production costs, and the costs for developing more production capacity for the future, are probably the world’s lowest.
These two factors - high reserves and low costs - are tremendous benefits, an immense gift from God. We believe that God’s gift must be managed prudently for the advancement and prosperity of our nation, and for the peace and well-being of people worldwide.
The Saudi Government under the leadership of the custodian of the Two Holy Mosques King Fahd and His Royal Highness Crown prince Abdullah, is managing our great oil bounty with these goals in mind. Further, our understanding of this God-given grant is that we must do our best in its administration or we will not deserve to have it. This leads me to another cornerstone of Saudi oil policy.
We have installed the infrastructure required to meet not only our current and projected production demands, but also to meet global emergency needs. Today, we are producing at only about 70 percent of our daily production capacity, with about 3 million barrels of available oil production capacity on standby.
Additionally, we have surplus oil export and pipeline capacity. For example, our cross-country, East-West oil pipeline system can carry and deliver 5 million barrels per day through our terminal on the Red Sea, yet we are running it at only half capacity. Similarly, our oil export terminals on the Arabian Gulf can load 14 million barrels per day but are currently handling much less than half of that.
Maintaining this spare capacity has a cost. Saudi Arabia’s willingness to bear these costs illustrates its strong commitment to the stability of the world’s oil market.
Ladies and gentlemen, having discussed two elements of Saudi Arabia’s oil policy, I would like now to talk about the two other factors: The role of oil and the oil Industry in the Saudi economy, and the political system and economic policy of our country.
Today, oil’s share of our Gross Domestic Product is about 35 percent, and its share of the Government’s revenues is about 75 percent. Oil’s contribution to the value of our export is almost 80 percent.
We have succeeded to some degree in reducing this dependency, especially with regard to GDP, where oil’s contribution has gone down from 70 percent to 35 percent during the last twenty five years. Yet the road is still long. The major challenge is to use our comparative advantage as a springboard for the creation of wealth by different sectors and sources.
We are concerned about our high dependence on a single natural resource. Yet having oil as the foundation for our economic strength is not unlike other countries who have also relied at one point of time on a dominant commodity or industry. Cotton, gold, wheat, coffee, tea and textiles, for example, all helped build nations and made possible new opportunities. By using the comparative advantage of their resources - natural or otherwise - these countries have enjoyed economic expansion. Our comparative advantage is a strong base of hydrocarbon reserves favored by low production cost.
In the long run, Saudi Arabia must not remain solely dependent on crude oil exports. Instead, we will use our comparative advantage to tap the potential of oil and gas in related ways. This abundant energy resource can be made available to develop domestic enterprise, to attract international investors and to diversify our economic base.
Ladies and gentlemen, the strength of Saudi Arabia’s oil industry and our national march forward are the result of a stable well-established political system with a clear economic policy. Since its founding almost 70 years ago, Saudi Arabia has been one of the world’s most consistently dependable countries - especially so in the Middle East where we stand second to none. Saudi Arabia also works for social, economic and political stability at al levels, regionally and internationally.
Economically speaking, we have adopted a middle-course policy. Saudis have a free economy in terms of investment, private enterprise, transfer of funds and so on. Yet, the Government gives special attention and care to the social needs of its citizens.
Free schooling and free medical services are all provided by the State. The Government also builds and maintains a first-rate infrastructure, including airports, railways and a national road system. It takes special care to ensure that water, electricity, fuels and communications are extended to all areas, for both private and commercial use.
We should all take note of the fact that the Saudi Government constantly reviews the structure and processes of our economic policies and organizations. We do our utmost to keep our systems and institutions competitively up-to-date. By doing so, our policies and goals reflect the changing needs of Saudi Arabia as well as related global economic developments.
The recent creation of a Supreme Economic Council, as well as on-going revisions to our foreign investment laws and the privatization of some domestic activities, reflect these needs. Our discussions with international oil companies about energy and hydrocarbons investments in Saudi Arabia show the dynamic nature of the Kingdom’s economic direction.
Ladies and gentlemen, I’ve spoken of the four foundations which underlie Saudi Arabia’s oil policy. Now I would like to address some of the questions which are often asked. Namely, the status of the international oil market and the recent opportunities for energy related investments in Saudi Arabia.
As I said before, one of our primary policy goals is to achieve a stable international oil market. Let me explain what that means to us. Wide and rapid swings in prices are undesirable. We are quite aware that since the opening of the oil futures market in the early 1980s, and the end of fixed oil prices in the mid-‘80s, prices have bounced up and down - not only daily and weekly, but hourly. In this completely free market, with financial tools like futures and options, volatility is the norm. Yet these trends in what are known as paper markets reflect only one of the factors affecting oil prices.
Wide fluctuation is not good for producers, consumers or investors. After all, they’re the core of the market - not the traders and speculators. We believe that oil price fluctuations of more than 10 percent are not a healthy sign. A stable oil market means a reasonable income for public, private and state-owned oil producers, yet not so high as to restrain global economic growth or the needs of developing or advanced countries.
Ladies and gentlemen, I am sure that many of you would like to know: what is the right price for oil? I doubt that any two people within the oil industry would give the exact same answer. Yet, we all know the wrong price. When the price of oil dropped to around $10 a barrel last year, all of us in the oil industry, and outside as well, knew it was the wrong price. Oil-producing and exporting countries faced hard times, while oil company stock shares and profits declined sharply. Oil production in some areas was shut in or otherwise declined.
Equally important, or perhaps more alarming, is the change in the flow of investment, which impacts the future of the petroleum industry. It has been reported that oil investment this year has fallen by more than 20 percent worldwide. This decline will not reverse itself immediately, even though the price of oil has recovered in recent months.
Nobody expects a shortage of oil supply in the near future. However, the drop in investment will disrupt the development of new oil fields and the search for new deposits, as well as retard the steady growth of production and production capacity. Undoubtedly, the investment crisis would have been harsher had low oil prices continued for another year.
We know that a continuation of last year’s low prices would have had a severe and adverse impact on oil producers, oil companies and the industry as a whole. In turn, this would have had a negative impact on the world’s economy. One thing is for sure; Saudi Arabia, for reasons stated earlier, cannot accept a low oil price. Yet it cannot defend the world oil price all by itself, but only in cooperation with other producers. We have tried doing it alone in the past and it did not work.
Along with some of the other producers, we have successfully avoided a major catastrophe in the oil industry. I am sure that cooperation among oil produces, both OPEC and non-OPEC producers, will continue in pursuit of this goal of a lasting, stable market.
Ladies and gentlemen, I would like to turn now to the future of Saudi Arabia’s oil industry, especially in light of our recent discussions with international oil companies about possible investments in the energy, hydrocarbon and petrochemical sectors in Saudi Arabia.
As you all know, Saudi Arabia is an open country for foreign investment, open to new ideas and opportunities. Concerning energy and hydrocarbon industries, we are looking for investors who meet our needs and can get a good return. As for downstream, we are fully open to investors. Already we have two joint-venture refineries in Saudi Arabia, one with Mobil and the other with Shell. In oil services and lube oil, Saudi Arabia has a great number of projects between foreign companies and Saudi private an non-private investors. Internationally we are big investors in the refining and marketing business and continue to seek strategic alliances with major refining and marketing enterprises worldwide.
But what about upstream investments? In philosophy and principle, Saudi Arabia is not against foreign investment in crude oil production and exploration. Thus, it is not an issue of principle, but an issue of whether foreign company participation can be mutually beneficial at the present time.
Opportunities for investors in the energy sector of Saudi Arabia clearly exist. His Royal Highness Crown Prince Abdullah identified these kinds of investments very clearly as “something good for Saudi Arabia and good for the oil companies - a mutual benefit for both.”
The benefit of such investments in Saudi Arabia would not be in the finding of new oil or increasing our production and capacity. We already have plenty of reserves and idle capacity. Any production increase is subject to our commitments with other producers, especially within OPEC.
What we need, then, is not somebody to come and produce oil or gas and sell it to others. We need integrated projects, where each link of the chain adds value. These projects could involve petrochemicals, electricity, water desalination and so on. In other words, the needed investments are those which complement our industries, our national companies, not replace them.
Ladies and gentlemen, I am happy to tell you today that many of the proposals which we have received do fit within our needs and within the criteria I just mentioned. We are looking into these proposals carefully, with each receiving close consideration. Equally important, we are considering other new ideas and possible projects. We expect soon, therefore, to see the commencement of negotiations with companies to formalize the needed projects.
In this regard, I would take this opportunity to make it clear that the concerned companies will have an equal and fair chance. Moreover, the proposals and information supplied by each will be kept completely confidential.
Ladies and gentlemen, let me summarize by re-emphasizing the four cornerstones of Saudi oil policy: high reserves, low cost of production and development, coupled with unused production capacity: an economy closely linked to oil production and price, and finally, a stable political system with a dynamic and moderate economic policy.
These four factors are closely interrelated and drive our oil activities, both nationally and internationally. We promote sustainable growth in oil use, which can be created by balancing supply and demand in both the short and long terms. We strive to achieve a reasonable and stable oil price, which makes for a healthy and growing oil industry, providing oil producers with a reasonable income while contributing to global economic growth.
On this subject of oil-derived income, I would like to mention two final points. First, on average, the governments of oil producing countries receive about 20 percent of the total proceeds from the economic value represented by a barrel of oil, while the governments of consuming countries in Europe for example receive about 75 percent through taxes on gasoline and other petroleum products.
The second point is that Saudi Arabia fully realizes that it is highly dependent on oil income. While we are working to increase this income, we are also working hard to find income sources other than oil. We intend to realize oil income increases through a combination of fair prices and production levels, and through the full utilization of all our hydrocarbon resources.
And that’s where the possible investments in Saudi Arabia come into the picture. A number of these, as I noted, are currently being assessed for joint projects at home and abroad.
To conclude, I am optimistic about the future of the oil market and its stability. I also see a great advancement and development for our industry and for Saudi Arabia.
Thank you.

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