Good Afternoon, Ladies and Gentlemen.
I would like to thank Dr. Purnomo Yusgiantoro, the President of the OPEC Conference, for inviting me to participate in the OPEC International Seminar on Petroleum in an Interdependent World. I am especially delighted to be on this panel on the role of the National Oil Companies with such distinguished colleagues and friends. With continued industry restructuring, further globalization and no let-down in the progress of technology, it is essential to reexamine the record and future role of the national oil companies, in their home countries and worldwide. The organizers of this seminar should be commended for the inclusion of this issue in the program, since the role of the NOCs not only impacts their business and their economies but also the future role of OPEC and the international energy relations in general.
The role of the national oil companies in today's energy scene cannot be ignored. Half of the top 50 oil companies worldwide are fully- or majority-owned government companies. The 2003 ranking of international oil companies using six operational criteria -- oil and gas reserves and production as well as refining capacity and product sales -- showed that five of the top ten were the national oil companies of Saudi Arabia, Mexico, Venezuela, China and Iran. In terms of oil and gas reserves, nine and eight out of ten were national oil companies. In terms of both oil and gas production, five national oil companies were in the top ten.
To be more specific, the wholly-government-owned national oil companies hold 72 percent of total world proven oil reserves and 55 of gas reserves. In 2003 their daily oil production was around 37 million barrels and that of gas was 55 billion cubic feet, contributing 48 and 22 percent to the global production of oil and gas respectively. The sheer size of the hydrocarbon resource base and the production profiles of the NOCs underscore their importance to the world energy landscape.
Today there are more than 100 national oil companies in the producing and consuming countries either wholly or partly owned by the "state." One thing that should be emphasized from the outset is that NOCs differ in their historical evolution, some being the outgrowth of the concessionaires in their countries, while others are not. They also differ in their sphere of operations, as some are oil and gas integrated companies with presence outside their borders and others are not. Differences also exist in the modes of relations with their own governments and their role in the national economy and society. And finally, at an industry level, NOCs feature markedly different degrees of integration, business environment and corporate culture.
It is those and other variations in the historical evolution and mandate which makes it inappropriate to lump all NOCs in one group or to compare them simplistically with the IOCs. The onslaught against NOCs in recent years is largely due to such generalizations and lack of knowledge and appreciation for their role. Therefore I will focus my remarks on the prerequisites for a strong and successful NOC, underlying challenges and opportunities facing NOCs in today's world, drawing from my lifelong experience with Saudi Arabia's national oil company, Saudi Aramco.
Some of the confusion regarding the role of the NOCs emanates from unmerited benchmarking with IOCs. While the mandate of the latter is to create value to their shareholders, the NOCs' mandate is generally wider. Besides managing and developing the hydrocarbon resources of their countries to achieve development objectives, they are charged with the execution of government energy policies and contribution to technology assimilation and development of technical skills in that sector. Independent, efficient, accountable and commercially-driven national oil companies are prerequisites to achieve such objectives. Let us consider each of these prerequisites individually.
To start with the first prerequisite, it is important to point out that state control of the NOC per se need not undermine its independence, provided that the mandate given to it is clear and the relation with its shareholder, the government, is well defined. Clear separation between policy-making, regulation and operations is essential.
In Saudi Arabia, policy-making and regulation are the prerogatives of the Ministry of Petroleum and Minerals, while operations are left to Saudi Aramco. The Supreme Council of Petroleum and Mineral Affairs, besides being the effective General Assembly of the national oil company, also sets the strategic objectives of the sector. These roles are well-defined in the royal decrees establishing and setting the objectives and responsibilities of the Council and Saudi Aramco.
With such a well-defined mission, Saudi Aramco has an independent financial structure, paying royalties and taxes to the treasury according to the established tax code and dividends to its shareholder. It has an independent organizational structure, starting with the Board of Directors -- drawn from the company's senior management and other outside Saudi and non-Saudi members selected on the basis of their accumulated knowledge and experience -- which approves and oversees the company's business plan and strategies. The company is then managed along the lines of any other international oil company in which merit and performance are guiding manpower recruitment and placement.
This state of affairs is largely due to the oversight of Saudi Aramco's shareholder, the government. It acknowledged after acquiring the concessionaire's ownership interest some 25 years ago that maintaining the corporate culture established over the years by the Aramco Four is essential in building an efficient national oil industry. The successes of the company in carrying out its mandate led the government to assign it the task of developing the natural gas resources of the kingdom. The company undertook this task in the late seventies and constructed and operated the Master Gas System, and expanded it subsequently.
In the process of building an integrated, streamlined national oil company, the government also restructured the industry by transferring the refining and distribution assets of the government agency Petromin, in the early nineties, to Saudi Aramco. It also expanded the scope of operations of the company outside the Kingdom through different refining and marketing joint ventures in the U.S, Europe and the Far East. This gradualism in building the industry has been a source of strength to Saudi Aramco, enabling it to carry out the mission assigned to it at different phases.
Throughout the process of building the Saudi national oil industry, business relations with the international oil companies continued to expand. Rather than viewing the acquisition of the concessionaire company as an end of an era and relationship, it dealt with it as an opportunity to enter into new types of partnerships. The joint ventures with those companies in refineries in Saudi Arabia and elsewhere and the new partnerships in the gas business in the Kingdom are examples of this trend. Today Saudi Aramco has joint ventures with ten IOCs in downstream and gas operations.
The second prerequisite to a successful NOC is efficiency. It is argued oftentimes that government ownership does not in itself foster efficiency and could derail the NOC from performing its core activity. This need not be the case if independence is well-established and political interference is checked. If the national oil company is commercially run and its performance monitored through the appropriate company bodies, it can be as efficient as any other in the industry group.
Saudi Aramco, building on the inherited efficient business structure of the former Aramco, directed its efforts -- whether in training and employment, procurement, field and plant operations -- towards enhancing efficiency. This efficient utilization of resources was manifested in the execution of large-scale capital projects in recent years. These include the development of the 500,000 barrels per day (bpd) capacity of the Shaybah field in the Empty Quarter in 1998, the construction of combined 3.2 billion cubic feet per day gas processing facilities at Hawiyah and Haradh in 2001 and 2003, and most recently the capacity expansion of 800,000 bpd of Qatif and Abu Sa'fah fields. All these projects were executed months ahead of schedule and at lower costs than budgeted.
Efficiency also requires the introduction and assimilation of new technologies. National oil companies are often faulted for not being able to develop new technologies compared to the international oil companies. This is generally true, due to the established position of the IOCs and their home countries in research and development, but need not impact the efficiency drive of the NOCs.
The NOCs can employ off-the-shelf technologies, or partner with vendors, service companies, research consortia and universities, or employ outsourcing, since there is essentially no technical knowledge that cannot be procured competitively from the market by all players. Realizing the importance of this aspect, Saudi Aramco has been directing human and financial resources to bridge the technology gap by utilizing leading-edge technologies aiming at cost containment and productivity enhancement.
The particular characteristics of Saudi Arabia's oil and gas fields, the large size of the reservoirs and the high productivity of the wells pose many specific challenges in the upstream. Saudi Aramco's R&D efforts have been directed towards developing and patenting specific technologies and systems for its unique upstream. These include large scale parallel reservoir simulators, multi-lateral well completion systems and proprietary systems to monitor and control crude flows from wells to tankers.
The third and fourth interrelated prerequisites for the success of an NOC are accountability and commercialism. These are of particular importance given the fact that the strongest criticism against NOCs is that oftentimes they are called upon to perform social, economic and political functions that are outside their core competence. A commercially driven NOC with a clearly defined mandate to develop the hydrocarbon resources of the country is an essential ingredient for accountability.
Commercialization implies an adequately constituted Board of Directors capable of providing objective oversight and direction to the company as well as an efficient organizational structure. Strong internal financial oversight and corporate planning functions are also important. Furthermore, an NOC cannot behave commercially unless it is allowed to retain net cash flow adequate to meet current and near-term obligations and plan over a reasonable time horizon.
I realized the importance of commercial functioning of the company during my 48-year career in its ranks before and after the government takeover. For the company to carry out its mandate of exploiting the hydrocarbon resources of the country, its commercial functioning was as essential after the government takeover as it was before. This conviction was reinforced after I assumed the role of Minister of Petroleum, realizing that the objectives of the state are better served if the national oil company continues its commercial structure and operation.
Looking forward, what are the prospects and challenges facing NOCs in the changing corporate environment on the one hand, and the changing world economic and energy relations on the other? The past five years have been extraordinary for the oil industry and the market by all accounts. Waves of mergers and acquisitions swept the oil industry and changed its overall structures. The top twenty international oil companies in 1997 have been consolidated to seven in 2003, leaving some IOCs larger in size than some NOCs. Liberalization of the energy markets in both consuming and producing countries accelerated. All this happened against a background of overwhelming technological progress that is affecting all regions and industries.
The national oil companies work today in a different world and industrial setting than the time they took control of the oil industries in their countries more than three decades ago. They also work in different political and economic relations in their home countries, whereby their economies are larger, more diversified and liberalized than the time they took control. The globalization process has intensified competition whether for markets, capital or technology. The restructuring process of the different world industries, including oil, has changed the roles of the different players and the energy market playing field.
All such changes have put national oil companies in the spotlight nationally and internationally, questioning their role and performance. Each NOC and its shareholder should take note of the industry, country and global changes. They should learn the lessons from the accumulated experiences of other companies and adjust the strategies and relations accordingly. Each NOC will face different challenges depending on the political setting and the development of the oil industry of the country. On my part, I can only touch here upon the challenges and opportunities of the national oil company of Saudi Arabia.
The first challenge is to carry out the objective set for it by the shareholder to maintain at all times an excess production capacity of 1.5 - 2 million bpd, realizing that this is a unique role requiring technical capabilities, continuous market monitoring and careful planning. The unique position of Saudi Arabia, and consequently its national oil company in the market as the largest producer and supplier of oil to the world, necessitates a such market-balancing role.
This excess capacity has been rewarding not only to Saudi Arabia but also to the other producers and the consumers, as well as the industry at large. The increasing production from Saudi Arabia in the past two years and the outlook for further increases in the future could well require an increase in the production capacity of the company.
There are some who cast doubt on our ability to marshal technical, financial and human resources to maintain and increase capacity beyond its current 10.5 million bpd level when needed. To those, I would cite Saudi Aramco's track record of building capacity to its current level and maintaining it for the past ten years. We were able through our own technical and financial means to maintain capacity by bringing in new capacity increments from Shaybah, Qatif, Haradh and Abu Sa'fah fields. All such increments, totaling more than 1.5 million bpd since 1998 with more than $7 billion dollars of investments, were executed by the national oil company utilizing, like our fellow IOCs, national and international service companies.
The issue is not one of our ability to increase capacity, since this is within our technical, financial and human capabilities and the reserve base of the Kingdom, but of the timing and magnitude of such capacities. This depends on the medium- to long-term global demand and supply outlook and their underlying uncertainties. In the past few years we have seen continued revisions of the world oil outlook as well as talk of policy measures in some consuming regions which interfere with the smooth growth in demand. It is those uncertainties which would impact our investment decisions on capacity increases and not the ability of our national oil company to deliver.
The second challenge relates to the company's future role in the Saudi economy. Saudi Aramco has been mandated by its shareholder to develop the hydrocarbon resources of the Kingdom to contribute to the development objectives of diversifying the economy and developing human resources. The efficient extraction, production and marketing of oil provide the needed revenues and foreign exchange for the non-oil sector to grow and for the economy to be more diversified.
Another source of contribution to the diversification of the economy is the provision of energy and feedstock to industry (especially petrochemicals). This has been made possible by utilizing the Kingdom's hydrocarbon comparative advantage and increasing the contribution of the manufacturing sector in GDP. Saudi Aramco has been in the forefront of this effort through the construction of the Master Gas System and its ability to increase gas reserves, production and processing capacity.
Through intensive gas exploration and development programs, Saudi Aramco has been able to add 54 trillion cubic feet to its non-associated gas reserves in the past decade, bringing total proven gas reserves to 235 trillion cubic feet, 40 percent of which is non-associated. It was able to more than double its marketed gas capacity from 3.5 to 7.5 billion cubic feet per day.
The growth in gas consumption for utilities and industry, which has registered 7.2 percent annual growth in the past two decades, is projected to grow at around 4 percent annually through 2025. The past growth in gas demand has been adequately met by Saudi Aramco contributing to the robust growth of annual petrochemical investments from $500 million in the seventies to more than $20 billion today. This has enhanced the role of the private sector and the flow of foreign direct investment to the Kingdom.
The challenge will be to meet future growth in domestic gas demand through Saudi Aramco's own gas development program, combined with the programs of the four gas E&P foreign consortiums, of which the company is a partner. Having worked with partners from the international oil industry for years, Saudi Aramco is confident that its partnership in the gas business will be rewarding to the national oil industry and the Kingdom as well as the international oil companies who won the gas offering.
Since the government takeover of Aramco and the formation of the national oil company, the Saudi economy has expanded markedly. The share of oil in GDP has declined from 60 percent to 35 percent and in the process the private sector has gained strength and resilience.
Saudi Aramco realized the growing role of the private sector and moved early on to outsource many services and materials locally, thus contributing to the growth and competitiveness of the private sector and at the same time to the efficient utilization of the company's resources.
The third challenge is related to the future of the core business of the company. Being the custodian of the world's largest proven oil reserves, with a long lifetime for those reserves, the objective would be to enhance the role of oil in the global energy mix.
However, environmental and energy security concerns have been channeling technologies and research towards alternate fuels, especially fuel cells. Although technologies to develop hydrogen for fuel cells have been under development for years and still face many technological, infrastructure and cost barriers, the research and investment in those technologies pose long-term challenges to the oil industry in general and to the NOCs, including our own.
The challenge for Saudi Aramco here is how to mobilize its own and cross-industry resources to promote the use of oil and gas. Carbon sequestration and capture technologies as well as technologies that ensure a role of these fuels in hydrogen generation are emphasized in the R&D programs of the company and in its collaborative research with industry, universities and research institutions.
Besides the challenges posed by the globalization process, there are opportunities as well for the NOCs. Industry restructuring offers possibilities for alliances with IOCs in different regions and business lines. The 2003 ranking of the top 50 oil companies worldwide shows IOCs' own refining capacities of around 32 million barrels per day, compared to a crude production of 22 million barrels per day. On the other hand, the NOCs' refining capacities are 20 million barrels per day and crude production is 37 million barrels per day. This mismatch between crude production and refining capacities could be bridged through business alliances between the two groups, taking different forms and modalities.
Liberalization of energy markets could also offer downstream investment opportunities to NOCs, especially in the growing markets of Asia. Saudi Aramco for its part has been exploring such alliances and investment opportunities in line with its mandate and mission.
The challenges could be met and opportunities taken depending on the degrees of success an NOC achieves in meeting the prerequisites I outlined earlier. We are confident in the ability of Saudi Aramco to face the challenges ahead, because we have been able over the years to build an independent, efficient, accountable and commercially driven national oil company, and we in Saudi Arabia are proud of its role and record.
Thank you for listening.