On Friday, April 14, 2017, Saudi Aramco's President and CEO, Amin Nasser, delivered keynote remarks at the Center on Global Energy Policy's Global Energy Summit. Following his remarks, Mr. Nasser sat down with Dr. Daniel Yergin, Vice Chairman of IHS Markit and a member of CGEP's Advisory Board, for a fireside chat to discuss some of the most pressing issues in the oil market. Mr. Nasser's full remarks can be found below:
Saudi Aramco President & CEO Amin Nasser Keynote Remarks Columbia University SIPA Energy Summit
New York Friday, April 14, 2017
Thank you, Jason for that kind introduction. Let me begin by complimenting Columbia’s School of International and Public Affairs for hosting this energy summit, which is encouraging constructive debate about energy markets, policies, economics, and the environment.
I’m delighted to share my views in this public session and I will keep my remarks brief, so that we have ample time for the Q&A.
Ladies and gentlemen, given the history of the oil market, it is no surprise that we have seen continuing volatility since the current downturn began in 2014. A lot has been written about the present market and its future direction. But I would like to caution against drawing too many conclusions about the long-term based on the short-term conditions we are seeing... let me elaborate.
Prices continue to respond to the weekly changes in drilling rig and production levels in the US; sporadic bumps in inventories; interest rate changes by the Fed; movements in the dollar exchange rate; financial activity in the futures market; the shapes of forward curves; and a range of analyses reported by various entities. And yes, I deliberately left fundamentals out of that list!
These factors have legitimate influence, especially on the short-term market, and contribute significant information to price formation.
But they also complicate the picture by obscuring or drowning out the all-important longer-term phenomena driven by fundamentals.
That matters, because the oil business is long-term in nature. Some projects—such as shale oil—can be developed relatively quickly. But
many more projects require up to a decade to complete, especially if you start by leasing land, securing government clearances, and undertaking exploration.
So many things may have changed between the initial investment decision and when a major project is done. That is why we are continuing to see projects still coming on stream that were funded some time ago, when oil prices were much stronger.
Looking at another critical angle, if we examine the supplies needed in the coming years, we must meet not only demand growth, but also make up the natural decline of legacy fields. That means infill drilling, bringing undeveloped fields into production, and new discoveries over the longer term.
To underscore the magnitude of future capacity required, a conservative figure for demand growth and natural decline to be offset over the next five years stands at some 20 million barrels per day. That is a lot of production capacity, and the investments we now see coming back—which are mostly smaller and shorter term—are not going to be enough to get us there.
But that’s not where things end.
Between 2014 and this year, about a trillion dollars in oil and gas investments were deferred or cancelled: 800 billion in development and 200 billion in exploration. That equates to between 5 and 10 million barrels per day of oil supply which otherwise would have materialized. [Ad Lib: Let’s remember that these 20 and 5-10 MMBD figures are additive.
Yet another troubling factor in the equation involves exploration. The volume of conventional oil discovered around the world over the past four years has more than halved compared with the previous four- year period.
The point I want to make is that while the short-term market points to a surplus of oil, the supplies required in coming years are falling behind substantially.
Also, I think it would be imprudent to assume that major oil producers will simply make the massive investments needed to bridge all these gaps—particularly since most long-term projects continue to be on hold, even after the recent price recovery.
That impending shortfall has a time lag, though, and its effect will be felt over a period of time whose duration is difficult to estimate.
So in my view, the future market situation will be increasingly on firmer grounds, though volatility could continue until the rebalancing takes firmer hold and inventory withdrawals assume a more consistent trend.
It is this confidence in the future that drives Saudi Aramco’s adherence to our long-term strategy, which I’ll briefly outline next.
Saudi Aramco Strategy
As many of you know, the Kingdom’s Vision 2030 calls for diversifying the national economy. But it also emphasizes the further development of Saudi Arabia’s three existing pillar industries: oil and gas, chemicals, and minerals, in which vast potential remains unexplored and untouched.
So we are continuing to invest and strengthen our core oil and gas business across the value chain.
Of course, a robust crude oil program remains at the heart of the existing pillar industries. At the same time, gas production will be doubled to about 23 billion standard cubic feet daily over the coming decade, raising the share of clean gas in our utilities to about 70 percent—that will be the highest in the G-20.
Downstream, we are continuing to build a world-class business portfolio to better balance our upstream oil business. Accordingly, Saudi Aramco’s global refining and marketing capacity will be increased to between 8 and 10 million barrels per day.
As part of this effort, we will build on our Motiva business here in the U.S., once the transaction is completed between Shell and Aramco. We will provide Motiva with the support it needs to capitalize on growth and expansion opportunities to help it become a highly competitive major downstream player in the world’s biggest oil market.
In the fast-growing Asian market, we recently reached an agreement with Petronas of Malaysia to participate in a large refining and petrochemicals complex being built with a capacity of 300,000 barrels per day and 7.7 million tonnes per year of differentiated and specialty chemicals. We are also discussing several other refining and marketing joint ventures with high growth countries in Southeast Asia.
Similarly, we are creating a world-class chemicals business that will also enhance the profitability of our refining assets through integration of petrochemicals.
As part of this strategy, we have established a joint venture with the German specialty chemicals company LANXESS, a world leader in synthetic rubber and its applications. And we have made a substantial investment in green chemistry by acquiring Converge, a CO2-based polyols technology, enhancing our downstream expansion strategy.
Another of our important chemicals strategies is to develop groundbreaking technologies to directly convert crude into chemicals. This will considerably improve the comparative economics of oil feedstocks and substantially expand oil’s share in the petrochemical feedstock mix.
And we are also working to grow the role of various petrochemical materials across a wide range of applications.
In summary, the increase in US drilling rig levels and relatively small growth in shale production, combined with the occasional bounce in inventories, continue to put downward pressure on oil markets.
But these are not a good indication of where the market is likely to be
headed going forward, as the large new production capacity and investments we will need in the future are lagging, and in fact missing in many cases.
In light of this, Saudi Aramco continues to invest confidently in its oil and oil-based businesses across the value chain. And while there may be legitimate differences of opinion over the timing of broader market improvements, there can be little or no doubt that the future direction is upward.
Thank you, and I look forward to our discussion here.