2005 Speech
 

02/15/2005
Aramco CEO's speech at CERA conference in Houston
Address by President and Chief Executive Officer of Saudi Aramco Abdullah Jum’ah at the conference in Houston, Texas on ‘Rising to the Challenge: Securing the Energy Future’ organized by the Cambridge Energy Research Association (CERA)

I want to begin with a closer look at the conference theme: ‘Rising to the Challenge: Securing the Energy Future’. I interpret that challenge as providing the adequate, affordable and reliable supply of energy needed to grow the global economy while concurrently protecting the natural environment. As the theme's wording would suggest, achieving this objective will not be easy, and all of us in the energy industry must work hard - and work together - if we are to build an energy future that benefits both our planet and its people.


One of the most important factors in securing that future is the energy mix over the next several decades, and beyond. Some parties advocate a rapid transition from fossil fuels to alternative sources of energy for reasons of both environmental protection and security of supply. While I share their twin objectives and appreciate the depth of their convictions, I strongly believe that rushing from tried and tested energy sources toward still questionable alternatives is imprudent. Such a stance ignores the state of development of alternatives, the seriousness of many unresolved issues associated with them, the demands of global economic development, and the need to eliminate energy poverty in the developing world.

This is a very critical industry that affects the life and well-being of every nation. Therefore, we need to craft an energy vision that is balanced and addresses the concerns of all. Anything short of that will run the risk of taxing economies unnecessarily. It is important that we recognize that we live in an interdependent world, that we promote the development of new technologies based on sound economic merits, and that we avoid creating economic overhangs caused by unfounded overreactions and misguided analyses.

A look at the numbers is instructive. Because of the abundance of fossil fuels, their proven performance, and the size and scope of the global hydrocarbon infrastructure, the Energy Information Administration of the Department of Energy expects fossil fuels to remain the dominant energy sources for the foreseeable future. In fact, the EIA forecasts that the proportion of fossil fuels in the global energy mix will actually rise from 85.5 percent in 2001 to 87 percent by 2025. At the same time, the share of nuclear and other sources, including renewables, is forecast to fall from 14.5 percent to 13 percent.

Now, if we really wish to "secure the energy future" while protecting the environment, should we focus primarily on the narrow niche of alternative energy, or more than 85 percent of supply that will be coming from fossil fuels?

Clearly, the responsible course in the decades to come is to phase in realistic alternatives while developing and deploying cleaner, more efficient uses of hydrocarbons and associated technologies. Given the continued dominance of fossil fuels, even marginally improving their environmental performance will significantly benefit the health of the planet - and I am certain we can go well beyond marginal improvements.

At the same time, we must recognize that economic development also drives social development, spurs technological and scientific progress, and allows people around the world to raise their standards of living.

We cannot risk the future of our societies on energy sources some of which may contribute modestly, while others are prohibitively expensive and lack robust and reliable production and distribution systems. I believe that in the long term we will need to draw upon both fossil fuels and alternative technologies. One day, as the alternatives become both technically and commercially viable, they will be in a position to take on greater responsibility for meeting the world's demand for energy. However, that day is not today, nor will it be tomorrow. In the meantime, we must continue to rely on fossil fuels to meet most of our energy needs, even as we accelerate our efforts to improve their environmental, operational and economic performance.

Let me now turn to today's topic: oil. In particular, I want to look at the prospects for the upstream sector, global refining capacity now and in the future, a set of environmental technologies that will challenge the ingenuity of our scientists and professionals, and the need for increased investment in petroleum-related infrastructure. Recently, there has been a good deal of media speculation about the adequacy of future oil supplies. However, the numbers would suggest that such alarming forecasts are injudicious. The U.S. Geological Survey, for example, places the mean value of ultimate recoverable resources of conventional oil, including natural gas liquids, at more than 3.3 trillion barrels. Of these, less than a third have been consumed to date, with almost 2.4 trillion barrels yet to be produced. In addition, there are also vast resources of "non-conventional" oil - some 7 trillion barrels initially in place, according to various estimates.

Although it is uncertain what proportion of those resources will be ultimately recovered, if advanced technologies could lead to a ten-percent recovery rate on average, another 700 billion barrels of oil could become available. Although 80 percent of these unconventional resources are found in Canada, the United States and Venezuela, at the moment two-thirds of the world's proven reserves are situated in the Middle East. Similarly, a significant share of the yet to be discovered conventional oil is expected to be located in the region. This worries some observers, who fret over import vulnerability and supply insecurity. Certainly we need to acknowledge that a peaceful and stable Middle East will translate into a more secure supply of energy, and that efforts to eliminate tension in the region are more vital than ever.

However, advocates of supply security ignore the fact that exporting nations need oil revenues every bit as much as consuming countries need oil supplies. Therefore, it is more instructive to talk about mutual dependence, and to recognize that the degree of interdependence, in all areas of trade and for all nations, will only increase in the future.

International oil trade will increase substantially over the coming decades. However, it should be viewed no differently than trade growth in other goods and services, and is simply another aspect of an increasingly interconnected global marketplace.

On a related matter, it is only rational that alongside free trade agreements and tariff rationalization in various areas of international commerce, policies that discriminate against oil should be done away with as well. Exceptionally high taxes on petroleum, along with proposals for additional carbon taxes, unfairly target oil - and even surpass the taxes levied against coal, which has a much higher carbon content.

EIA forecasts that over the next two decades or so, the global demand for oil will grow to over 120 million barrels per day. To reliably meet this growth and achieve a secure energy future, additional capacity must be developed in a timely manner. If that is to happen, discriminatory policies against oil must give way to enhanced producer-consumer dialogue, pragmatic energy policies, rational taxation schemes, and greater cooperation on cleaner and more efficient oil-based technologies.

At Saudi Aramco, we're doing our part to ensure that oil supplies will be available when they're needed. We continue to identify new reserves through additional discoveries, enhanced recovery techniques, more accurate characterization of our reservoirs and a better understanding of their behavior over time. We are confident that we can extend that success well into the future given continued advances in exploration and production technologies and the fact that vast relatively unexplored areas exists in the Kingdom with potential hydrocarbons to be discovered. We are also committed to utilizing long-term reservoir management strategies and developing, procuring and applying state-of-the-art technologies that maximize recovery rates.

We continue to develop production increments that will gradually raise Saudi Aramco's maximum sustained capacity, consistent with demand growth, beyond the current level of 10.5 million barrels per day. In fact, we have ambitious expansion plans to boost our capacity to 12 million barrels per day, and also have a long-term crude development scenario that would raise our production capacity to 15 million barrels a day. We are confident that we can maintain these production rates for about half a century.

Just last year, we brought on-stream the half-a-million barrels per day Qatif field, and work is progressing rapidly on both the Abu Hadriyah-Al Fadhili-Khursaniyah development program and the Haradh increment. Meeting increased demand for oil is a challenge for our industry, but just as it has for nearly seven decades, Saudi Aramco is committed to playing its part in meeting this growing need for energy.

Saudi Arabia's oil strategy calls for maintaining a surplus production capacity of between one-and-a-half to two million barrels per day over its actual production. This surplus capacity, which the Kingdom has maintained at great expense, has played a pivotal role in maintaining market stability. Similar commitment from both producers and consumers will help secure the energy future of our world.

When it comes to oil resources, I believe that there is plenty of new onshore and offshore exploration across the world still to come, especially in an environment of healthy oil prices. We may not find many super giant fields, but many medium and small size fields will continue to be discovered as we explore more, drill more and make use of increasingly better technology.

But here we must turn our attention to the downstream sector, because our challenge doesn't end once the oil is out of the ground. Even as crude oil production must increase by nearly 40 million barrels per day over the next two decades if demand is to be met, there must be a corresponding expansion in the world's refining capacity. Given the nature of much of this additional production, a significant share of new refining capacity will have to accommodate heavy, sour crudes, as the barrel of refined products continues to whiten and product specifications continue to tighten. We've already seen the effects of the mismatch between available refinery hardware and the types of crude increasingly available in the market. Last fall, oil producers - including Saudi Aramco - ramped up production to calm the oil market, but refiners geared toward lighter, sweeter crudes could not process all of these additional heavy, sour barrels. Refiners and marketers, regulatory agencies and producers must cooperate more closely to alleviate the product supply-demand imbalances and ensure that consumer demand is adequately met.

The location of future refineries is just as significant as their configuration, however. Until now, refineries have been built primarily in consuming nations, but I believe we will see a portion of this new refining capacity being located in producing countries. To an extent this is due to the permitting constraints associated with new or expanded refineries in many consuming nations. But the growth of producer-based refineries will be driven primarily by their proximity to oil reserves, the flexibility that comes with supplying products to multiple markets from a central location, and the desire to add value to oil supplies prior to their export.

Such refineries and mega-manufacturing complexes and clusters - which integrate refineries, petrochemical facilities, and downstream conversion and service industries - also serve to strengthen and diversify local economies while stimulating job growth. I think this emerging downstream paradigm also represents a new opportunity for international investors, if they are willing to rethink their investment models and better align them with the needs of host nations. Many producing countries have strong upstream capabilities, but can benefit from partnerships in downstream activities, the engineering and technology sectors, and in selected service areas.

The experience of Saudi Arabia and Saudi Aramco certainly demonstrates that promising, mutually beneficial opportunities are available. From our existing in-Kingdom refining and gas partnerships, to the joint-venture expansion of the Rabigh Refinery into an integrated refining and petrochemical complex and our plans for the development of an export refinery, Saudi Aramco is partnering with world-class companies that recognize the immense potential on offer.

We view cooperation as a two-way street, though, and value just as highly our refining and marketing partnerships located outside Saudi Arabia in the United States, Europe, Asia and the Pacific. We also look forward to strengthening our relationships with the Chinese and Indian petroleum sectors, and to helping them meet the rapidly expanding energy needs of their home markets.

Whether it's our present partnerships or prospective deals, these are long-term, strategic investments based on the principle of mutual benefit for our companies, as well as the benefit of the consumers we serve.

Partnership and cooperation will be critical in another important area: improving the environmental performance of oil. As I noted earlier, the development of cleaner burning fuels, new generations of higher efficiency, lower-emission engines, and even more environmentally responsible oil production and transportation activities are all vital in securing our energy future. The petroleum industry can take the lead in these research and development initiatives, though we should not try and go it alone. Rather, we should work cooperatively, enlisting the aid, support and expertise of technology developers, national laboratories, academic institutions and related industrial sectors, such as automobile and electric power equipment manufacturers.

At Saudi Aramco, we continue to work on incremental efforts to steadily improve petroleum's environmental performance. At the same time we have identified three strategic technology areas, which I would like to highlight for the industry's attention. We believe that one day these technologies may revolutionize the way we view oil as an energy source.

First of these technology areas entails de-sulfurization of both whole crudes and oil products. This could help refiners meet the challenge of producing ultra clean fuels from sour crudes, using groundbreaking but cost-effective technologies. The second area involves economically managing the issue of greenhouse gas emissions, going beyond carbon sequestration. Potential technologies could include the use of hydrogen enrichment, nanotechnology and other ground breaking techniques. Finally, the industry needs to devise technically and economically viable ways of reforming oil to produce hydrogen, focusing on both fuel formulations and hardware.

Together, these technologies - and others like them - will help meet growing demand for energy and lighten the footprint of our activities on the environment. As business leaders, we have an obligation to utilize resources wisely and to exercise our stewardship of nature responsibly. That obligation is every bit as important as our role as producers and suppliers of energy and enablers of economic development. We as an industry are committed to maintaining the balance between promoting prosperity and protecting the environment.

I would be remiss if I did not address the important issue of investments in crude oil and product infrastructure. The existing infrastructure, including pipelines, terminals, tanker fleets, and road and rail systems, is coming under increasing strain with the growth in oil demand. This is a worldwide issue that can be seen in several geographic regions including the areas of the former Soviet Union and Russia. As we all know, significant new infrastructure will be required if growing amounts of oil are to be transported from these areas to world markets, including the fast-growing Asian region.

Furthermore, the growth in oil trade means increased traffic through the world's strategic shipping channels, including the Straits of Hormuz, the Bosphorus Straits and the Straits of Malacca. Managing the safe movement of oil through these key channels and ensuring the security and stability of sea lanes will be critical in ensuring security of supply. For all these reasons, cooperation between the concerned nations, and investment in and attention to infrastructure will be vital in meeting future demand for oil in a reliable and responsible manner.

Lastly, I am convinced that global capital formation, including the financial resources of producing nations, is sufficient to fund the wide range of investments required to expand oil supplies. This is true so long as oil prices are sufficiently healthy to attract capital and there is no legislation restricting cross-border investments in producing nations.

At the same time, government bodies and regulatory agencies bear a heavy responsibility in ensuring that permission for petroleum projects and programs is forthcoming in a timely fashion, so that these investments are both logistically and commercially viable.

In conclusion, I firmly believe that petroleum will remain the bedrock of the world's energy supplies for the foreseeable future, just as it has for the past century. However, if we are to "secure the energy future," there are issues that must be addressed cooperatively by a range of concerned parties. These include pragmatic energy policies and a level playing field for the competing sources of energy; increased investment and capacity expansion all along the petroleum value chain; and the understanding that cleaner and more efficient uses of petroleum are vital to protecting the natural environment.

When all is said and done, rising to the challenge is more than just a matter of getting oil out of the ground, maintaining market stability, or even meeting growing demand for energy. It goes beyond these factors, because energy is so fundamental to our societies, and so essential to the well-being of the people who live in them. For me, securing the energy future reliably and responsibly means not only delivering on our commitments as an industry, but also meeting our obligations as individuals to the generations that will follow us, and to the Earth that they will inherit.

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