As you all know, Saudi Aramco is celebrating its 75th anniversary throughout this year with the theme “Energy for Generations.” Tonight, I would simply note that since next year marks the SPE-Saudi Arabia Section’s 50th anniversary, this organization and the generations of petroleum engineers who have passed through its ranks have had a tremendous impact on our company and its unmatched record of reliability as an energy provider to the world.
Just as is the case with Saudi Aramco, I am confident that the best and brightest days of this SPE organization still lie ahead, and I believe that together we can look forward to a promising future even as we draw strength from our proud past.
To that end, the Society of Petroleum Engineers’ Saudi Arabia Section continues to do tremendous work in developing, disseminating and exchanging technical information, in keeping earth scientists up to speed with the latest developments in their field, and ensuring that the Kingdom’s upstream professionals remain at the very forefront of their chosen fields of endeavor. Let me therefore take just a moment to thank the Section, its leadership and its members not only for the kind invitation to speak tonight, but for all of your efforts to help Saudi Arabia’s petroleum sector fulfill its commitments and to enable our nation and its people to realize an even more prosperous future.
Tonight, I would like to address an issue which is on the minds and the tongues of many people these days, not only here in the Kingdom but elsewhere around the globe: the impact of the present worldwide economic situation on Saudi Aramco, and in particular on its portfolio of major industrial projects.
If you have picked up a newspaper, read a magazine, watched television, listened to the radio or visited the internet at any time during the last six weeks, you will be well aware that the global economy is in the midst of one of its most serious crises in many decades. In rapid succession, we’ve gone from the collapse of a housing bubble in the United States as a result of defaults in the subprime mortgage sector, to the collapse or buyout of some of the world’s most storied financial institutions and the evaporation of inter-bank and consumer credit markets. Stock markets around the world have plummeted as a result, with hundreds of billions of dollars wiped off the value of equity holdings. Unfortunately we are now familiar with a whole new lingo: “CDOs” or collateralized-debt obligations; so-called “ninja” loans made to people with “no income, no job or assets”; and of course the infamous “toxic debt.”
And yet it appears that even though more than a year has passed since the implosion of the US housing market, no one is quite sure to what extent banks, insurers and re-insurers, and indeed the global financial system as a whole are exposed to such bad debts and junk loans. To date, governments around the world have spent an estimated 3.5 trillion dollars to bail out banks and provide additional liquidity but it’s still not clear that either the banking sector or the stock markets have touched bottom.
Even more worrying, at present we are moving from a crisis in the financial markets to a slowdown in what people call the “real economy”: Main Street and the high street as opposed to Wall Street and the City. A number of major global economies appear to be on the edge of a recession, unless they are already in one. Japan is probably already in recession, figures released on Friday indicate third-quarter declines in gross domestic product in both the United Kingdom and the Euro zone, and one White House advisor says parts of the United States are already experiencing a recession.
Even rapidly developing and expanding economies like China and India are experiencing flatter growth rates: China’s GDP grew roughly 10 percent year-on-year for the first three quarters of 2008—two and half percent less than last year, while India’s central bank recently cut its forecast of 2008-2009 GDP growth from eight to 7.5 percent. While those are still astounding rates of growth, consider that analysts estimate China must maintain annual GDP growth of eight percent simply to absorb new job-seekers. Then consider that as a result of the slowing global economy, the United Nations is now predicting that some 20 million people around the world will lose their jobs by the end of next year, and that the total number of unemployed men and women across the globe will top 200 million for the first time in history.
Of course, all of this doom and gloom has had a negative impact on petroleum demand, which is down roughly eight percent from last year. As a result, crude oil inventories have risen by seven percent over the last month, with crude stocks in the US jumping by more than three million barrels just last week. The markets have taken their cues from both the economic slowdown and this rapid stock-build, with light sweet crude prices touching levels last seen in the spring of 2007. At the moment, this summer’s 147-dollar-per-barrel high seems just a distant memory.
Clearly this is a turbulent time for the petroleum industry as a whole, given the widespread economic uncertainty and destruction of demand that we are currently witnessing. But what do these developments mean for Saudi Aramco, and in particular, for the various megaprojects which we are developing?
When it comes to our new crude oil increments and gas expansion projects, the impact of the present economic turmoil will be minimal. By and large, our upstream projects are self-financing, or “corporate financed,” meaning that we are not reliant on the banks or credit institutions to finance our expansion programs.However the need to bring in additional volumes of oil in a contracting market will be examined carefully.
Of course, we already possess substantial spare crude oil production capabilities, in keeping with the Kingdom’s longstanding commitment to maintain 1.5 to two million barrels per day in spare capacity. Coupled with today’s softening demand picture, this capacity gives us an additional cushion when it comes to project timetables and commissioning activities, and contributes to our operational flexibility in the area of crude oil production.
When it comes to our downstream joint ventures, including our export-oriented refineries and our integrated refining and petrochemical projects, I can tell you that our partners are still highly committed and anxious to see these projects move forward. I think it is realistic to say that financing these megaprojects through borrowing in a tight credit market will be a challenge. However, because of the uncertain nature of the global financial crisis, it is really too early to tell what sort of fallout there will be for the funding of these projects. In addition, any such impact will be a function of the generally tight global credit market and the internal lending considerations of banks and financial institutions themselves, rather than a reflection of the long-term economic viability of these projects, which remains positive.
On the bright side, the declining commodity prices that are a byproduct of the global economic slowdown will help to reduce the estimated price tags of these projects, as the cost of materials like steel and copper falls sharply. In addition, equipment like drilling rigs and building cranes as well as the qualified professionals needed to operate them will likely be in greater supply as a result of cancelled or delayed projects elsewhere in the industry, and in other parts of the global economy such as the construction and basic infrastructure sectors. As a result, short-term project economics may actually benefit from the current financial turmoil, and companies with a lot of cash will come ahead.
But I would argue that the whole question of the impact these short-term market gyrations will have on Saudi Aramco and its projects is somewhat misguided because of the very nature of our business and in particular, because of the nature of our business model. Ladies and gentlemen, just as we have for many, many decades, we look to the long-term, so the day-to-day noise generated by the markets doesn’t matter very much when it comes to Saudi Aramco’s project portfolio.
Let’s face it: our facilities are designed and built with 40- or 50-year time horizons in mind. We know without a doubt that the massive hydrocarbon resource base is there thanks to men and women like you and therefore we know for certain that these facilities will still be in our operational portfolio when our sons, our daughters and even our grandchildren are the ones producing and processing our oil and gas. No one today could tell you what the Dow was doing when we began to produce Ghawar or where the FTSE index was when Safaniya was developed, and in the future the world will only remember that Saudi Aramco brought sufficient crude oil, refining and petrochemical capacity on-stream when it was needed, where it was needed just as we have done for 75 years.
Furthermore, short-term market volatility is nothing new to our industry; as the well-known energy analyst and historian Dan Yergin has said, “Cycles of shortage and surplus characterize the entire history of oil.” Over the last decade, for example, we’ve seen WTI prices as low as twelve and as high as 147 dollars. It’s a similar picture in refining, where refiners made a killing between 2004 and 2006 after having hemorrhaged money for years. These chronic boom-and-bust cycles are why successful petroleum enterprises view their activities as a marathon rather than a sprint, and why the oil business is not for the faint of heart or the short of breath. In fact, given the long lead-times involved in petroleum industry projects, we may actually be poised to catch the bounce as the global economy recovers, energy demand picks up, and our new facilities come on-stream.
But even if the global economic recovery proves to be some way off, the only way these investments don’t make good business and economic sense over their useful life spans is if you believe that rising economies like China and India will cease to grow; that the billions of people living in those markets will no longer want to enjoy a more prosperous and affluent lifestyle; that they are not interested in providing greater economic and social opportunities for their children; and that overall energy demand will somehow decrease even as the total population of the planet increases.
I for one don’t see any of those scenarios coming to pass, and therefore I remain bullish on Saudi Aramco’s plans for the future and our business portfolio of tomorrow. Our ship may have encountered choppy seas as a result of the current economic crisis, and we may be in for a bumpy few months. But at Saudi Aramco, we set our course as the world’s foremost supplier of energy a long time ago, and are both committed to and capable of reaching our chosen destination, no matter how hard the storm around us may blow or how dark and gloomy the skies above us may seem.
Ladies and gentlemen, let me close tonight by sharing a recent experience I had, which brought home to me the measures to which people will go in order to produce even a few barrels of oil. As they say, seeing is believing.
A few weeks ago I was in Canada, visiting one of the oil sands production facilities there in Alberta. It was a vast open-pit mining operation incorporating powerful earth moving equipment, huge dump trucks, vast amounts of heated water used to create slurry, and massive bitumen extraction and upgrading units to process it. It was truly an incredible operation from both a logistical and a technological perspective. But while petroleum production from Canada’s oil sands has doubled over the last ten years, it still totals only about 1.2 million barrels per day roughly equivalent to the production of our upcoming Khurais increment alone, and just one-tenth of what Saudi Aramco’s total crude oil production capacity will be at the end of next year. If the folks I met at that facility are willing to go to such extremes to tap even a small fraction of the crude oil we produce, think about the significance of what the Kingdom and its petroleum sector contribute to global energy markets.
My friends, at Saudi Aramco we have been entrusted with the world’s largest reserves of crude oil and its fourth-largest natural gas reserves. We are charged with operating, maintaining and further developing the planet’s largest petroleum production network; processing that hydrocarbon energy; and supplying oil, refined products and natural gas to domestic and international markets in a timely and reliable fashion. And that is why as the world’s economy continues to grow—as it will billions of our fellow men and women will increasingly look to us to meet their energy needs, so that they might realize the promise of prosperity for themselves and for generations to come.
Ladies and gentlemen, let me express my appreciation for your attention this evening, and thank you again for your continued efforts and considerable contributions to the vital work that we perform as energy providers to the world.