2004 Speech

'Energy Challenges Ahead': oil minister at World Affairs Council of Greater Dallas, Texas

Minister of Petroleum and Mineral Resources Ali Al-Naimi addressed the World Affairs Council of Greater Dallas in Texas, USA, on April 22, 2004, in a speech titled: 'The Energy Challenges Ahead'.


Esteemed members of the World Affairs Council of Greater Dallas, ladies and gentlemen… Once again it is a privilege to be in Dallas and to be honored as your speaker today. I would especially like to thank John Bryant, chairman, and Jim Falk, president of the World Affairs Council here in Dallas, as well as recognize Herbert Hunt and Petro-Hunt, and Darab Ganji for their role in today’s program.

As you well know, Texas has long held a dominant position in U.S. and world energy markets. It was the center of world oil for many years. While Texas oil production may have dropped from its peak, the influence of Texas is still felt throughout the world of energy. Texas remains the center of the U.S. oil industry and it is home to many of the world’s best oil companies. Furthermore, your home-grown product -- West Texas Intermediate or WTI -- plays a key role in facilitating oil trading worldwide by providing price transparency for markets.  WTI is one of the three benchmark crudes that are used to price most of the world’s crude oil – including crude oil from Saudi Arabia that is sold to its U.S. customers.

The Texas oil industry has also been at the forefront of developing new technologies to meet the ever increasing demands of finding and producing oil in some of the world’s harshest environments. A prime example is the successful development of deepwater offshore oil and gas resources in the Gulf of Mexico.

Your homegrown oil industry has had a glorious past and I am sure it will continue to play an important role in the future. Recently, we have heard some talk that the “Age of Oil” might be coming to a close. Pessimists are saying that the world is running out of oil and some have even questioned the ability of Saudi Arabia to continue producing at current levels. A few even maintain that we are foolish to think that technology can help increase production in the future. In fact, they say some of the new technologies will make matters worse.

I’m here today to share with you a different view: One that is both realistic and optimistic… one that sees a bright future for the oil industry. And, it is one that believes technology will provide us new tools to meet the growing energy requirements of an expanding world economy.

While I see a bright future, make no mistake, there are many challenges to be met along the way. Whether it is natural gas, oil, coal, nuclear or alternative energies, we in the energy industry are faced with the daunting task of providing the means for fulfilling the world’s rapidly growing aspirations for a better way of life.

A look at history shows us that the economic development and increasing standards of living achieved over the past century were fueled by plentiful supplies of reasonably priced energy. We have achieved this despite wars, depressions, regulation, market restructuring, political instability, extreme price fluctuations, shortages and gluts. It has not been easy, nor has the path always been smooth, but the industry has repeatedly risen to the challenge and met the twin goals of plentiful and reasonably priced energy.

Looking forward to the next twenty to twenty-five years, I can say with confidence that we in the energy business face four major challenges unrivaled in our past experiences:

First, we are expected to face an unprecedented increase in global energy demand during this period.

Second, conventional fossil fuel resources in many major consuming regions have already been extensively exploited.

Third, increasingly stringent regulations will add to the complexity and cost of energy production and consumption.

Fourth, the development of such sizeable new energy resources will require a substantial and steady flow of new capital into energy projects.

I will now discuss each of these challenges in greater detail …

According to the U.S. Energy Information Administration’s recently released International Energy Outlook, annual global demand for energy will grow from about 404 quadrillion Btu’s (67 billion barrels of oil equivalent) in 2001 to 623 quadrillion Btu’s (104 billion barrels of oil equivalent) in 2025, a 219 quadrillion Btu (36.5 billion barrels of oil equivalent) or 54 percent, increase. To put this in perspective, Saudi Arabia produces about 17 quadrillion BTUs (3 billion barrels) of oil annually – or in more familiar terms, about 8 million barrels a day. This forecasted increase in world energy demand is equivalent to adding the annual oil production of 12 (36 billion barrels) new Saudi Arabia’s by 2025. To put it mildly, that is a lot of energy.

Total world energy consumption is projected by the EIA to increase at an average of 1.8 percent between now and 2025. The fastest growth is expected from Asia, driven principally by robust economic growth in China and India. The EIA estimates that energy consumption in the developing countries of Asia will double by 2025 and will account for 40 percent of the projected increase in world energy demand during this period.

By contrast, energy demand among the developed countries is projected to increase only about 1.2 percent per year due to several factors. These include older energy consumers, slower population growth, efficiency gains and the move away from energy-intensive manufacturing to service industries.

Where will all this energy come from? Some people place their hopes on alternative fuels like solar, biomass and wind. Yes, the importance of these fuels will grow over time. But it is not realistic to expect them to make a significant contribution over the next 20-30 years. Today alternative fuels supply only 2.5 percent of world demand.

What about nuclear? Currently, nuclear provides about 7 percent of total global energy supply. But political opposition, safety concerns and unfavorable economics are likely to preclude a dramatic expansion of nuclear power during this period.

Coal will continue to make significant contributions to world electricity generation.  China and India have abundant coal reserves and are projected to account for almost 70 percent of the growth in worldwide demand for this fuel. However, the growth in coal consumption is likely to be constrained by environmental concerns.

Demand for natural gas is likely to rise substantially, particularly in the electricity generation sector. The EIA projects world natural gas demand to increase from 93 quadrillion BTUs (15.5 billion barrels of oil equivalent) in 2001 to 157 quadrillion BTUs (26 billion barrels of oil equivalent) in 2025, an increase of 69 percent.  However, its contribution to meeting transportation demand, while increasing, will remain relatively insignificant.

While the contributions of these fuels to satisfying global energy demand will all increase, none is likely to seriously diminish the role of oil in meeting the need for energy in the transportation sector. Research on hydrogen-powered vehicles may hold the promise of eventually producing an exciting new technology for the future of transportation, but, significant hurdles remain. Perhaps the biggest hurdle is the need to invest trillions of dollars to build the vehicles and facilities necessary for a hydrogen economy.

What does this all mean? It means that oil will remain the dominant energy source worldwide for the foreseeable future. This is evident in the EIA’s latest projections, which indicate that world oil demand will increase 1.9 percent per annum to 2025, raising demand from 77 million b/d in 2001 to 121 million b/d in 2025. Asia will account for about 60 percent of the projected increase.

Can we, the oil industry, meet these expectations? My answer is a resounding “Yes!” Many of the major oilfields outside the Middle East are mature and production is down from peak levels. Nevertheless, I have no doubt that sufficient reserves exist to meet projected future world demands. It is not a question of running out in this time period. There is plenty of oil left to be produced.

The reserves in Saudi Arabia and the Gulf are massive and can be called upon to meet the world’s growing appetite for energy. However, finding and developing new reserves, especially in regions outside the Gulf, will be more difficult and more expensive than in the past. The odds of finding new super giant and giant oil and gas fields are diminishing, with remaining undiscovered reserves likely to be found in smaller fields in isolated locations.

This is not the first time we have heard talk of the world running out of oil. In the 1970s, quite a few experts were saying that world resources were being exhausted and oil production would soon decline abruptly.

What happened? The numbers tell the story. Worldwide reserves of oil grew from an estimated 550 billion barrels in 1970 to more than 1.2 trillion barrels today. This feat becomes all the more remarkable when we consider that this dramatic increase occurred over a period of time when the world consumed more than 800 billion barrels of oil.

In the case of Saudi Arabia, our proved reserves were estimated to be about 88 billion barrels in 1970.

Today, we conservatively estimate them at 261 billion barrels, despite the intervening 35 years of production.

Our careful analysis gives us reason to be optimistic about the future. Current world proven reserves are estimated at 1.2 trillion barrels. The United States Geological Survey estimates that another 1.3 trillion barrels of oil and natural gas liquids will become available in the future. This will come from undiscovered resources and more accurate assessments of reserves located in existing fields. The additional oil raises the conventional liquid reserves and resources to over 2.5 trillion barrels.

But that’s not all. There are vast amounts of unconventional heavy oil and bitumen. The in-place volume of these two resources is estimated at about 3.7 trillion barrels; 570 billion barrels of these resources are expected to be recoverable. Based on the current global oil consumption rate, these conventional and unconventional oil resources would last for more than 100 years.

As I mentioned earlier, some pessimists are even suggesting that output from Saudi Arabia’s own fields is set to decline sharply in the next few years. Let me reassure you; this is not the case. The reserves we report are in the ground. In fact, the estimates we use are quite conservative and there is considerable upside potential to book additional reserves in the near future.

We are very confident there is a lot more oil to be found in Saudi Arabia. There are vast areas of Saudi Arabia yet to be explored. They present great opportunities for new discoveries. We expect the cumulative impact of these new finds to be quite significant.

On this point I want to be clear, ladies and gentlemen. We have more than sufficient reserves to increase production capacity and are committed to do so in line with growing demand. We also possess the human, financial and technical resources to do the job.

Saudi Arabia could without much difficulty raise output from 10.5 million b/d to 12-15 million b/d and maintain that level of output for 50 years or more. We produce our fields very carefully, with the aim of maximizing overall recovery.

Where other companies may look at a 20 year production profile, we are looking to produce our fields for 70-100 years. This is our guiding principle, a principle we will not compromise for short-term expediencies.

I would just add that the EIA shares our optimism. In the International Energy Outlook which I mentioned earlier, EIA forecasts that Saudi oil production capacity could rise to 22 million b/d by 2025. Clearly, and contrary to some people’s concerns about Saudi oil reserves, no such concern is obvious to the experts at the U.S. Department of Energy.

The third major challenge I would like to address today is the proliferation of increasingly stringent governmental regulations. In certain countries like the U.S., refiners are straining to meet growing consumer demand for petroleum products.

Their task is made more difficult and expensive by the need to adhere to multiple product standards and specifications. For example, we see nearly fifty different grades of gasoline sold in the U.S. gasoline market, each with its own unique formulation. The lack of uniformity in regulations and standards from region to region increases complexity and costs, and it reduces the flexibility of the system to respond to disruptions in supply in any one region, because gasoline from other regions may not conform to local mandates. Such a regulatory environment also limits the ability of imports to fill any gap that may arise between demand and supply.

The final challenge I mentioned, is to ensure that sufficient capital will be available to finance future projects.

The International Energy Agency’s World Energy Investment Outlook, published in late 2003, estimates that the industry will need to invest at least $16 trillion over the period from 2001 to 2030 in order to expand the energy supply infrastructure necessary to meet projected global energy demand. It is my belief that financial markets will respond to these needs and that sufficient capital will be available to develop the required energy resources.

However, there are no guarantees this will happen. Investors crave stability and predictability – particularly when it comes to financing multi-million and billion dollar projects. A steady flow of investment capital to the energy industry depends in large part on the degree to which these conditions prevail. If prices do not offer a sufficient return to producers, then investments will not be made and the potential for shortages and price spikes will increase. With a steady stream of investment, the road to the future can be a smooth one. Without the proper incentives, the road ahead is likely to be rough, with energy markets lurching forward in boom and bust cycles. I am sure many of you here in Texas are all too familiar with such cycles.

In the U.S., we see what can happen when the industry must operate in a climate of uncertainty. Companies are reluctant to invest capital in projects that do not offer reasonable assurances of an adequate return.

Regulatory and legal uncertainty have been major factors in limiting investment in new facilities, as has the growing trend of NIMBY (not in my back yard) sentiment.

We do not have to look far to see the impact that the uncertainty has had on the energy infrastructure of the U.S. and its ability to meet rising energy demands. In 2000, California experienced an electricity crisis. In August of last year, the Northeast experienced the worst blackout in U.S. history. During the last three winters there have been shortages of natural gas which have led to record price spikes.

And now we are seeing the effect of the lack of investment in refinery capacity that has plagued the U.S. industry for more than a decade. Refiners are straining to produce sufficient quantities of gasoline to meet both demand and currently mandated formulations. The result is record high gasoline prices.

I would like to say one more thing about gasoline prices. Some may try to convince you that high gasoline prices are the result of OPEC production decisions. This is not the case. Even if OPEC were to raise output it would not necessarily translate into more gasoline for U.S. consumers. This is because the supply “bottleneck” is created by the lack of U.S. refining capacity, not by the amount of available crude oil in world markets. Saudi Arabia is willing and ready to invest in two new refineries and their associated marketing facilities in the U.S. to alleviate bottlenecks in product availability.

Price volatility also creates uncertainty and can hold back investment. Demand surges and supply disruptions are a fact of life in commodity markets and oil is unfortunately no exception. Left unchecked, these events can lead to price swings and supply shortfalls that destabilize markets. We in Saudi Arabia firmly believe that consumers, producers, and the world economy all benefit from stable and predictable oil markets. That is why we are committed to maintaining spare production capacity – at significant cost to ourselves – that can be quickly tapped when the market needs additional supplies. Our spare capacity has proven to be instrumental over the years in helping to ensure stability in times of turmoil. In practice, this spare capacity allows us to help smooth out the inevitable “bumps” in the road.

Yet Saudi Arabia’s spare capacity is not the only tool required to keep markets stable. In order to achieve long-term stability, it is essential that we cooperate closely with other OPEC and non-OPEC producers, not only to ensure that we do not over- or under-supply markets, but to also make additional supplies available in times of shortage.

This combination of spare capacity and cooperation among producers has worked well over the years. There is no better example of this, than what transpired in early 2003… a period when we faced six different overlapping crises.  The first was when political problems in Venezuela caused oil production to drop from about 3 million b/d to about 1 million. The second was an unexpected spike in oil demand caused by a colder-than-normal winter in the northern hemisphere. The third was a natural gas crisis in the U.S. which created shortages, a large spike in prices and increased demand for oil due to fuel switching. Fourth, problems in Japan’s nuclear power industry caused a significant rise in oil imports. Fifth, Nigerian oil output dropped 40% due to political unrest. And finally, the cutoff of 2.5 million b/d of Iraqi production due to the war. As a result of OPEC’s rapid supply response -- with a major contribution from Saudi Arabia – the oil market remained stable in 2003 despite this multitude of problems.

Saudi Arabia prefers to play a quietly constructive role in maintaining stable oil markets, one which is often overlooked by the media and some opinion leaders. It is not our custom to boast when things go right. However, I believe that when you ask our customers, they will attest to the fact that Saudi Arabia, in conjunction with other major oil exporters, played a crucial role in preventing a major supply crisis.  Not just in the last year, but over the past 30 years.

We in Saudi Arabia also believe stability in oil markets is greatly enhanced by close cooperation between both producing and consuming nations. That is why we have an active policy of maintaining a close dialogue with major consuming countries through bilateral and multilateral arrangements and with relevant international organizations.

I would add that a strong dialogue between producers and consumers should not be limited to times of crisis. That is why we are strong supporters of the International Energy Forum and its efforts to promote dialogue; and, as a result of His Royal Highness Crown Prince Abdullah’s initiative, Saudi Arabia now hosts the new Secretariat for the Forum in Riyadh.

In closing, I would like to reiterate that we face enormous energy challenges in the future. The degree to which we are successful in providing the world’s needs for vast new quantities of reasonably priced energy will have a major impact on the ability of the world’s people to fulfill their aspirations for a better life. I am confident that working together, producers, consumers and industry can meet these challenges that lie ahead. I am sure that the oil industries in both Saudi Arabia and the great state of Texas will be leaders in the effort to ensure that the world has abundant and affordable energy supplies. Working together we can accomplish great things.

Thank you again, ladies and gentlemen, for the opportunity to share some of my observations about the energy scene and the challenges ahead. It has been my privilege to speak before the World Affairs Council of Dallas.