E&P 2.0: A New Business Model for a New Era

ep20-a-new-business-model-for-a-new-era

Society of Petroleum Engineers Annual Technical Conference & Exhibition 2016: Opening Ceremony Keynote Speech by Amin H. Nasser, President & CEO, Saudi Aramco

Your Highness Ahmed bin Said Al-Maktoum; Your Excellencies, distinguished guests, ladies and gentlemen – good morning.

For more than 50 years, Saudi Aramco has worked closely with the Society of Petroleum Engineers as our industry’s foremost Upstream organization.

So I’m delighted to join you for the official opening of the Annual Technical Conference & Exhibition.

This year marks the 92nd edition – a testament in itself – and the first time ever in the Middle East.

But most importantly, this event offers a timely challenge – better yet, an opportunity – to take the future into our own hands.

The world’s energy picture is changing. And I believe incremental improvements won’t stand up to this evolving situation.

Instead, we must proactively transform.

Let’s first recap the energy landscape.

World demand is on a steady, if moderate, course.

While its pace has been tempered by energy-efficiency gains, demand will be impacted by global population growth expected to pass 9½ billion by 2050, and rising living standards in developing economies.

Meanwhile, alternative energy sources are gaining ground.

Yet renewables and emerging technologies like electric vehicles and fuel cells have technical, economic and infrastructure hurdles to pass.

And that takes time.

So for years to come, the call on energy will be met by oil and gas – and oil’s central position, especially in heavy transport and petrochemicals feedstock, will remain solid.

But the oil and gas resources we have available, as well as new discoveries, are more challenging and more expensive to develop.

At the same time, the present oil and gas fields are becoming increasingly mature and complex to operate.

Environmental pressures are intensifying, amid misperceptions about our support of a cleaner environment.

While the oil market has recovered from its most severe period, it’s still weak.

With investments into new oil and gas capacity being cancelled and deferred around the world, supply growth has started falling, especially U.S. shale oil.

Despite volatility, the market is heading toward rebalance, and prices are likely to strengthen with time.

However, market volatility could remain with us for the near future.

Meanwhile, the growing share of gas in the global energy mix is good news, especially for electric power generation.

At Saudi Aramco, gas is a strategic resource.

Aside from its clean credentials, gas represents less domestic dependence on oil and thus more to export; it’s also a focus of economic growth and job creation.

In light of this backdrop, I’d say the industry’s present business and operating model is not up to the tasks ahead.

This morning I’d like to discuss an integrated, four-point framework that can stand up to the energy transitions; policy, environmental, and regulatory trends; rising complexity of operations; and other variables at play.

Point 1: Resilience

The first point on our new business model is resilience.

Unprecedented pressures face the industry in this persistent low oil-price, volatile environment – especially in terms of finances, cost and technology.

As we see in the financial arena, companies with weak finances are facing serious difficulties, especially those that are smaller and over-leveraged.

Strong financial capacity to pass through difficult patches is clearly important to future resilience.

This recent market episode has demonstrated again that companies with strong downstream businesses perform better financially, especially during a downturn.

So integration could contribute to resilience, for those whose situations favor downstream – and especially those who are good at it.

As it stands, $1 trillion in costly, challenging and marginal resources may be delayed or canceled by the end of this decade.

Yet long-term investments must be maintained to develop new capacity and keep technology on track.

And that’s where greater efficiency and cost competitiveness come in: spotlighting things we can do better and cheaper, without compromise on safety or the environment.

Continued investments in technology that boost efficiency and reduce costs, while improving reliable access to affordable, sustainable energy, are also critical to future success.

Which leads me to our second framework dimension.

Point 2: Research & High-End Technology

Innovation has always been the Upstream sector’s driving force – an area no one knows better than the Society of Petroleum Engineers.

In recent years, we have seen it take E&P to epic proportions:

Opening new sources of hydrocarbon supply, such as shale oil and gas;

Making exploration more effective, and improving recovery factors;

Lightening our carbon footprint;

Increasing profitability; and

Broadly expanding our knowledge and capabilities.

Clearly innovation can’t stand still – but it can’t plod along, either.

We have to push the envelope.

Saudi Aramco is doing just that as part of our strategic intent to become a global, integrated energy and chemicals company.

We’re using an “open innovation model” to pursue R&D that complements our in-house resources by three other major vehicles.

The first is strategic alliances with academic institutions, service companies and technology developers.

Second, we have a total of 11 satellite research centers and technology offices on three continents giving us access to world-class talent and expertise in all corners of the world.

And the third is the use of venture capital through our subsidiary, Saudi Aramco Energy Ventures, which invests in cutting-edge technology start-ups.

We’re also leveraging technology to increase recovery in our oil reservoirs from the current average of 50 percent to 70 percent, and improve exploration to take our resource base to 900 billion barrels.

Point 3: Top-Notch Talent

But investing in technology and research to solve E&P’s big challenges also calls for investing in the people who will develop and use these tools.

The alternative – putting the recruitment, development and retention of top talent on the back burner during a down cycle – will only come back to haunt us.

Now is the time to re-boot our approach to human resources.

Thanks to technology, the deep functional expertise of the past has given way to multi-disciplinary skills for cross-functional challenges.

And the learning curve for staying on top of new technologies, methods and standards is getting shorter.

To complicate things further, the drastic job-cuts during this downturn are making our industry unattractive to students and young workers – a situation whose impact could be felt far into the future.

In fact, we’re already seeing enrollment in some petroleum engineering programs drop, and undergraduates changing majors.

Unless all companies commit to dealing with cycles with an eye toward the long-term, we’re at risk of repeating the 1980s talent gap.

Here I’d like to highlight some talent solutions we’re implementing at Saudi Aramco.

To switch gears from traditional training to a more immersive, hands-on approach, we developed our Upstream Professional Development Center.

The Center helps to compress the time for newer engineers and geoscientists to hit the ground running, while capturing the knowledge and experience of more senior professionals.

In another paradigm shift, King Fahd University of Petroleum and Minerals collaborated with us to establish their new College of Petroleum Engineering & Geosciences.

This pioneering college seeks the best undergraduate and graduate students to pursue state-of-the-art studies and research in a creative, multi-disciplinary environment that integrates classroom, lab and field. Students are challenged to achieve stretch targets with the overall objective of maximizing discovery and recovery of hydrocarbon resources.

Its first cohort of students graduated last spring, and we expect research-oriented Ph.D. enrollment to grow 10-fold.

Another urgent HR challenge facing the industry is bringing more women into the Upstream.

Increasing women’s representation is a big focus for Saudi Aramco, both in our company, but also through programs that develop their business potential in general.

This diversity objective especially resonates in the Kingdom, where women are highly educated but under-represented in the workforce.

Point 4: Collaboration

The first three aspects of industry transformation through a new model converge in point No. 4:

And that’s collaboration.

As oil companies, service providers, technology developers, higher education and others come together in strategic cooperation, it’s clear: resilience, technology and talent integrate and overlap.

There are many areas in which the industry’s interests are aligned, and collaboration can pool resources, spread costs, and enhance the chances of success.

Enhancing our industry’s reputation is one such area, where we have been historically lacking.

Partners can help tell our story, and shed new light on our strides in sustainability.

A recent example is the industry’s joint efforts to highlight its role in reducing carbon emissions and conventional pollutants, notably the Oil and Gas Climate Initiative declaration.

Another area where collaboration can make a big difference is for oil companies, EPC contractors and service companies to radically improve project designs and cut costs.

Evolving energy and environmental policies, and creating a level playing field among various energy sources, are also potential topics for strategic cooperation.

Expanding SPE’s Mandate

Now, what about SPE’s role in this transformed business model?

SPE has done an outstanding job aiding the creation and sharing of technical information, and developing technical talent.

I believe serious consideration should be given to expanding SPE’s mandate to include the study and creation of E&P 2.0 – especially where the industry has common goals, some of which I’ve highlighted today.

Before concluding, let me briefly touch on Saudi Arabia’s Vision 2030, as it pertains to a transformative new business and operating model.

The Vision calls for the private sector to take the lead in developing and diversifying the national economy.

Steps include:

Reforms across a range of government policies and structures;

Economic diversification, with the private sector taking the lead;

Privatizing major national enterprises;

Positioning Saudi Arabia as an international investment powerhouse; and

Making the Kingdom a logistical hub linking Asia, Europe and Africa.

As part of this program, Saudi Aramco will be listed on the Saudi Stock Exchange, Tadawal, and potentially outside, depending on studies currently underway.

The current listing target is 2018.

Ladies and gentlemen:

Our sector is undergoing dramatic, complex shifts like never before.

Merely adapting or reacting to change is only a stop-gap.

These dynamics call for us to transform through a holistic process that spans every dimension, from technology and operations to human resources and organization.

In my view, the new business model I’ve sketched out in part today can help us meet the challenges ahead, with:

Greater resilience through better financial management, improved project designs, major cost reductions and other efficiencies;

Research, technology and talent as our long-term success drivers; and

Cooperation that multiplies strengths and resources toward mutual goals.

And to strengthen the new model, we as an industry can work more closely with SPE both as a platform for discussion, and a catalyst for action.

Innovating our business model in this way can deliver the reinvention needed in disruptive times – and position us even better for the recovery.

Thank you.