Ladies and Gentlemen, good afternoon. It’s always a privilege to join this seminar — my fourth as CEO of Saudi Aramco. Robert Mabro and Nader Sultan: thank you for inviting me back and for making me feel most welcome, as always.
I flew in last night from the west coast of Saudi Arabia where our entire Executive Management team met over two and a half days to discuss our transformation plans for Saudi Aramco — an unprecedented event in our history. I say “entire team”, but that’s not quite true. I value this Seminar most highly so I made a special exemption for three of our team to attend.
I know you’ve had a busy, but I hope educational and enjoyable, two weeks. I’m also conscious that by now you have heard industry assessments and forecasts from a variety of angles, delivered by a range of preeminent industry leaders and analysts.
A common thread in virtually every presentation is that this great industry of ours is in the midst of profound change, and we’re all having to face up to the various challenges this brings. Saudi Aramco is no exception, and I’d like to offer our own unique perspective on the changing landscape as well as talk about some of the profound changes the company is making in order to thrive in this new era.
Paradigm Shift In The Global Energy Landscape
At Saudi Aramco, our view is that a paradigm shift is underway that is significantly changing the global energy picture from what was commonly perceived only a few years ago. I’d like to touch on four strategic areas, or sweeping new realities as I prefer to call them, where this paradigm shift is most clearly in evidence.
First, downward pressure on global energy demand, and oil demand in particular.
Before the world was rocked by the financial crisis of 2008, there had been an expectation of rapid and sustained growth in energy and oil demand. In just four years, that perception has been significantly altered.
We are seeing downward pressure on demand as life-style and demographic changes take hold, while environmental pressures and government policies (including potential carbon taxes) continue to work against oil in particular and fossil fuels in general, impacting their demand growth, particularly in maturing advanced economies. For instance, there has been a welcome emphasis on higher energy efficiency in all sectors, especially in transportation.
In the United States, for example, which is the largest transportation fuels market in the world, aggressive new CAFE standards aim to raise mileage efficiency for light vehicles from around 30 miles per gallon today to around 55 miles per gallon in 2025; an improvement of more than 80 percent. Whether or not these targets are fully achieved, the ongoing trend in vehicle efficiency improvements will clearly exert downward pressure on oil demand.
Then there’s the impact of the global economic turmoil, as a consequence of which global economic growth may not return to pre-crisis levels at least for several years — what some economists are calling the “new normal.” Demand growth figures have varied in recent years.
But demand this year is expected to increase by only a modest 850 thousand barrels per day, or less than 1 percent, whereas growth averaged more than 2.3 percent between 1965 and 2010.
Moreover, 20 percent of this incremental demand is the result of Japan’s nuclear power outages. Furthermore, last year’s global demand forecasts out to 2030 — by both the EIA and IEA — were 8 to 9 percent lower than the same forecasts in 2007. All of this is clear evidence of a slowdown.
Second, long-standing fears about our industry’s ability to keep the world supplied have been well and truly laid to rest.
In just the past five years, despite consuming close to 90 million barrels a day, or a total of 165 billion barrels over just the past five years, global proven oil reserves have increased by more than 200 billion barrels. That’s like discovering another Kuwait and UAE combined! As you know, this is primarily due to the application of improved technologies to unconventional and heavy oils, but new oil provinces are also appearing on the map.
The story of natural gas is even more spectacular. Current proven reserves of gas are more than 7,300 trillion cubic feet, enough for 64 years globally. But total conventional and unconventional resources are believed to be in the range of more than 28,000 trillion cubic feet — split broadly down the middle — which is enough for some 250 years at current consumption rates.
Nowhere has this change in oil and gas supplies been more radical than in the US. The National Petroleum Council indicates that an estimated 180 billion barrels of tight oil could be recovered with existing technologies. That amount would climb to more than one trillion barrels if oil shale acreage reaches its full potential. And of course similar developments are not restricted to the US.
In short, misconceptions about the worldwide scarcity of global oil and liquids supplies have given way to a sense of abundance, and our industry should be proud.
Third, falling investment in renewables.
This has not been an encouraging year for renewable energy. Global investment in green energy projects plunged to $25 billion in the first three months of this year (the lowest level since the global financial crisis), and though they increased by over 50 percent in Q2 that was a still a decline of over 25percent on the same quarter last year.
The reasons are all-too familiar. In Europe, many countries are nervous about their debt levels and are implementing austerity measures while cutting back their “feed-in” tariffs. This is hurting the renewables industry as governments there have been subsidizing a rapid growth in solar and wind. Similarly, US renewable developers are struggling to raise funding as government incentives expire and bank lending dries up. Cheaper gas in the US is also providing stiff competition.
I don’t want there to be any misunderstanding; we’re bullish about renewables. Renewables continue to have long-term potential; technological improvements and falling costs are beginning to partially offset the barriers facing them. Prices for solar modules plummeted by nearly half last year alone, and about 75 percent over the past three years.
But there’s been misleading hype about how quickly they could make an impact. As a result there have been a lot of disappointments. And the short-term downward pressure; political, technical and economic hurdles; and the massive global energy infrastructure which must be transformed means that renewables are still only a fraction of the total energy mix and only likely to gain market share in slow increments.
One of the consequences of lower US gas prices and downward pressure on renewables we’re seeing is that when it comes to electricity generation, the economics of relatively clean natural gas are making a stronger case than coal, nuclear, and renewables.
Fourth, the global financial crisis is clearly having an impact on environmental legislation.
Issues such as the affordability of initiatives and investments, job creation, and the reality of renewables are exerting more pressure on the minds of austerity-minded governments. The result is a loss of urgency on global warming legislation which would have required a massive infusion of funds that hard-pressed countries can ill-afford.
For example, we only have to look at the disappointment of Copenhagen; the uncertain future of Kyoto; and the failure to implement the Bali Plan of Action to conclude that targets such as the IEA’s 450 parts per million CO2 scenario which called for the use of fossil fuels to peak before 2020 have become almost impossible to attain.
To sum up, our industry now faces downward pressure on demand; supply abundance; a slow-down in the deployment of renewables; and reduced momentum on climate change legislation.
It doesn’t mean our industry is in bad shape or that prices are going to collapse, but that’s a profoundly altered world energy landscape from the one we faced a decade, or even just a few years, ago.
Profound Change At Saudi Aramco
These sweeping new realities underscore the perennial truth about our industry that it is always in a state of flux; yesterday’s forecasts are rarely tomorrow’s reality; uncertainty is our constant companion. The clear lesson from history is that the companies best placed to weather the short-term storms and thrive are those most able to adapt and plan for the long-term, and never allow complacency to set in.
At Saudi Aramco, we feel good about resources; operational excellence; reliability; safety. But we also know there could be surprises out there: political, economic, technology. And Aramco has never stood still. That’s why we are undergoing a profound, proactive, and strategic transformation.
It’s a transformation which ignored the temptation to take a short-term, less risky approach by continuing to run a best-in-class operation; improve incrementally on the areas where improvements are required; and basically protect the great company we have. Instead, the philosophy underpinning what we call our Accelerated Transformation Program, or ATP, is that we must leverage our strengths and comparative advantages to exploit the full potential of our company against the backdrop of a challenging agenda. That agenda includes four legs:
- Re-shaping our portfolio as we transition from an oil and gas company to a fully integrated and competitive world-leading energy and chemical enterprise;
- being a catalyst for the Kingdom’s economic growth;
- capacity building by step change improvements in our technology and human resource capabilities;
- overhauling our corporate systems and processes to make us more performance-focused and agile in the future.
Transformation Into A World Leading Energy and Chemicals Enterprise
With the planned transition to a world-leading energy and chemicals enterprise, we are strengthening our existing businesses, and adding new ones to broaden and strengthen our portfolio.
Let me begin with our existing businesses. We know that oil and gas will remain central players on the world energy scene for the foreseeable future. At our Board meeting in Tokyo earlier this year, we had a presentation from our upstream engineers and scientists who were presenting our long-term production profile showing where we would be producing, literally in the next century.
We also know that preserving our spare oil production capacity is crucial to maintaining oil market stability because it plays a pivotal role in protecting the world’s economic health. It’s a responsibility we have faithfully and reliably discharged over several decades, despite its high cost to us; and will continue to do so.
So we are continuing to strengthen our oil business to meet the rising call on our oil production; in fact, we plan to invest $35 billion over the next five years in crude oil exploration and development alone to keep our oil production portfolio robust. We are also planning to increase our conventional and unconventional gas supplies by almost 250 percent over the coming couple of decades. And there are vast areas of Saudi Arabia which have still not been adequately assessed, which will be aggressively explored.
Meanwhile, we will aggressively expand our business portfolio by pursuing related integration across conventional and unconventional areas, and diversify and grow earnings along the way while adding greater value to our streams. So we are leveraging our strengths and comparative advantages across our business in several important ways.
To begin with, and in contrast with the prevailing global sentiment, we believe that large, integrated companies can build and sustain a turbocharged and profitable downstream business, yielding returns across the value chain. That’s why we are moving ahead with a massive expansion of our global refining capacity, pushing the total worldwide capacity of refineries we own fully or through joint ventures up to some eight million barrels per day over the coming decade, the largest of any company in the world.
On the back of that expansion, we also believe there is huge potential for building a world-class petrochemicals business by integrating it with those world-scale refineries, as well as gas plants; NGL fractionation facilities; pipeline networks; hydrogen systems; storage and terminals. In doing so, between upstream, downstream, and chemicals, we will also reap other benefits from integration across the value chain, thereby maximizing profits from our oil; gas; NGL; and refined products, especially distressed hydrocarbon streams as inexpensive petrochemical feedstocks.
Then there’s unconventional gas. Indications suggest that Saudi Arabia’s unconventional gas potential could be as large as our conventional gas, with some estimates suggesting that the Kingdom could hold the world’s fifth largest unconventional gas reserves. We are currently evaluating this potential.
Another distinct comparative advantage is solar energy. The Kingdom experiences roughly 3,000 hours of sunshine each year, emitting about 7,000 watts of energy per square meter, among the highest in the world. We have vast open spaces of desert, where large solar farms can be established on relatively cheap real estate. And we are blessed with deposits of quartz which can be used in the manufacture of polysilicon and photovoltaic cells.
Kingdom Economic Growth
The second part of our agenda, which is intrinsically linked with our ability to thrive, is being a catalyst for economic growth in Saudi Arabia as well as enabling a globally competitive and vibrant Saudi energy sector. We also need to create value addition and jobs for our young population which is a demographic challenge facing the Kingdom and many countries in the Middle East.
So we must help to develop the local energy support sector so that domestic suppliers have the opportunity to supply an increasing volume of our goods and services, including more high-value products. We must help to raise educational standards and develop a knowledge base for the Kingdom’s future. And we must help to reduce the Kingdom’s level of energy intensity and create a more energy efficient nation, while playing our part in diversifying the Saudi economy.
Good examples of this are the ones I just mentioned: chemicals, solar, and unconventional gas that are both good for our business and help expand and diversify the Kingdom’s economy.
For instance, by growing and integrating chemicals with our world-scale refining operations, we plan to build a world-leading chemicals business. The materials produced by our chemical plants will help spawn new industries in Saudi Arabia. Many of these will be conversion industries located in industrial parks adjacent to our refining-petrochemicals manufacturing complexes, producing semi-finished and finished value added products. These downstream industries are likely to be much richer in value addition and jobs, while providing a platform for an emerging knowledge economy.
If we succeed with our strategy we will be spending at least $500 million each year on chemicals-related technology, and creating a very large company of around 20-30,000 employees with well-paid jobs. It also offers other Saudi companies a chance to be a part of a one trillion dollar global petrochemical industry by increasing Saudi industry’s involvement to a level commensurate with our crude oil reserves.
Similarly, with solar, our vision is to help the Kingdom become the world’s leading R&D hub and eventually a powerhouse across the full value chain of this energy sector. For starters, we’ve installed a 500-kilowatt solar farm on Farasan Island in the Red Sea, as part of our efforts to compare solar PV technologies and gain operating experience.
And when it comes to unconventional gas, if our quest is successful, there will be some major benefits for the Kingdom. We could replace liquid fuels with cleaner, more efficient natural gas for the Kingdom’s electric power generation, providing more liquid hydrocarbons for export. Depending on the gas composition, it could provide additional feedstock for petrochemicals. Other economic benefits include localization, employment, and skill creation.
Capacity Building: Technology & Human Resources
But we are not only leveraging our sizeable capital and energy resources. The ATP is also designed to leverage the power of technology and the people in our company in support of our broadened portfolio and to succeed in an increasingly uncertain and challenging environment.
In technology, that means positioning Saudi Aramco as a leading force in creating energy technologies with the aim of meeting our unique requirements, consistent with our long-term business strategies. Our key challenges are to improve oil discovery and recovery; develop advanced fuel formulations, matched with future generations of engines; investigate cutting-edge chemical technologies; master carbon capture, focusing on mobile sources; maximizing the potential of nanotechnology and advanced materials and, as I just mentioned, advanced solar technologies.
Of course, we can’t rely solely on developing technology solutions in-house, and are leveraging collaborations in many parts of the world. One of the most exciting developments is our recently-formed subsidiary, Saudi Aramco Energy Ventures, designed to invest in start-up technology companies which can generate greater value through innovative technologies in a wide range of areas from upstream and downstream oil and gas to energy efficiency and water.
But, for all that technology can offer, long-term human capital investment is just as critical. At Saudi Aramco, we saw that for ourselves just last month when we were the target of a malicious computer virus attack which tested our resilience. The reputation of Saudi Aramco as a reliable supplier of energy was maintained thanks to the resourcefulness, dedication, and ingenuity of our people. Customers were called; contracts were faxed; work-arounds were found.
In the final analysis, the petroleum business still comes down to people. That’s why we are giving special attention to building our talent pipeline and unleashing the power of our increasingly youthful company, which by 2016 will see roughly forty percent of our employees under the age of thirty. Our experience tells us that this generation is tech savvy, learns fast, and can deliver great performance if properly motivated. For that reason, we are training and developing them for the Company and, just as importantly, preparing the Company for them.
Corporate Systems & Processes
Part of that is fixing the plumbing and wiring — in other words, our own corporate systems and processes. As an industry, we’re quite conservative in some ways, but this has to change. Among other things, this means changing our planning processes; learning new behaviors and skills; and busting bureaucracy — all of which we’ve been discussing at our Executive Management workshop this week.
Delivering the ATP goals, some of which I have briefly outlined, will sustain Saudi Aramco as a pre-eminent oil and gas exploration and production company. But it will also make us the world’s largest refiner; one of the largest chemical companies; a leader in technology development; and we’ll have a major position in power generation, including renewables. It’s this potent combination, together with the talent of our people and the power of our cutting-edge technologies, which will help a great company to thrive even more in the new energy landscape.
Societal Expectations: Saudi Aramco’s Role As A Global Corporation
There is one more reality we could add that affects IOCs and NOCs alike, which is rising societal expectations of global corporations.
When it comes to extractive industries in general and the petroleum industry in particular, many attractive resource-rich provinces around the world are located in developing nations. The people in these regions increasingly believe that while both NOCs and IOCs are benefiting from the exploitation of their natural endowments they are getting a raw deal while their natural resources are being depleted.
In addition, people’s trust in business more generally has eroded around the world. This is clearly something we need to address collectively if we are to convince people that our priority is to provide reliable, affordable energy in a safe, secure, and environmentally responsible way, while investing in the well-being of the communities and countries in which we operate. In my view, simple compliance or box ticking is no longer adequate; our standards should be best-in-class. Let me elaborate.
We must link our long-term fortunes more deeply to the countries and regions where we do business. That could include onshore value addition; localization of goods and services; encouraging entrepreneurship; transferring technology and conducting real research in host nations; developing people; and supporting high quality education — much as we are doing in Saudi Arabia. Because a prosperous country from which we extract our resources or where our markets lie is clearly good for everyone’s business.
None of this means that we will lose our commercial focus; on the contrary, we must be profitable enough to be able to meet societal expectations. But if we can work more closely together on these issues, our license to operate will be strengthened immeasurably and society will see our industry as a key enabler of prosperity, well-being, and aspiration.
Ladies and Gentlemen, we know our industry is changing profoundly, and we know we must respond proactively. We also know we must meet the challenge of rising societal expectations, wherever we operate. Change always creates anxiety and challenges, but also opportunities. Those of us who deal best with change will be ahead of the game. That’s why I believe we should view the changing landscape as an opportunity to re-define ourselves, as we’ve done so many times before.
We should perhaps take our inspiration from the motto of this great college of St. Catherine’s: Nova et Vetera – the new and the old. By leveraging our strength to tackle the new opportunities and fresh challenges of the changing world of energy, while drawing on timeless values and decades of hard-won experience, we can all be a thriving part of the energy world of tomorrow and meet our responsibilities. Thank you for your attention; I look forward to your questions.