Facing up to reality

The financial crisis created a new world order in which oil and gas, like every industry, faces a whole new set of challenges. Aramco President and CEO Khalid Al-Falih reflects on these changes.

“Our Manifa project, at 900,000 barrels a day capacity, is one of the largest heavy crude oil increments ever commissioned by the industry, but distinctive aspects of the field made for costs not typically associated with development”
-Khalid Al-Falih

The recent World Oil and Gas Assembly theme, "New Realities and New Challenges," assumes special significance in the midst of the financial and economic turmoil that the world is going through. In fact, this backdrop is recasting the ups and downs that have always characterised the oil and gas sector.  I would like to offer my perspective on how the financial upheaval and other dynamics we will be exploring are changing the way our sector does business, and how their implications must factor into our forging a brighter, more secure energy future.  It is difficult to approach any business discussion today without first talking about the financial and economic crisis. Like an earthquake, the crisis rocked much of the financial world, and its far-reaching waves shook economies and markets around the world.  It is germane to my remarks today to point out that while oil and gas were impacted by the crisis, our industry fared better than many other economic sectors. While not immune, the performance of oil and gas speaks to petroleum's fundamental nature, and its importance as an essential commodity to virtually every aspect of modern life. Likewise, no geographic region or country has been unscathed by the deep recession, but fortunately, some emerging economies, such as India's, were positioned to fare better. I believe India's ability to weather a storm of such enormous proportions is a testament to the strength and breadth of its economy, the talent of its people, and the wisdom of its business and national leadership.

The road to recovery

Some say that the economic recovery has begun; others say we have a way to go yet.  This latter viewpoint would certainly apply to harder-hit industries and countries.  However, this much is certain: the world will emerge.  After the downturn, and as economic expansion resumes, so will the need for energy - especially petroleum - to fuel economic activity.  Two primary reasons for this demand are global population growth and rising living standards, closing the gap between the industrialised and developing worlds. My earlier remark about India's favourable positioning during this financial crisis leads me to the first of four reality checks that I would like to highlight in seeking greater clarity on the role of oil and gas in the world energy future.

Our first reality check is the growing shift of the economic centre of gravity towards the East - a phenomenon given even greater momentum by Asia's dramatic population growth.  Together, these economic and demographic trends are resulting in the emerging East accounting for a steadily-rising share of global energy and petroleum demand. The developing economies of the world, including India's dramatic human and economic growth, are at the heart of the International Energy Agency's forecast that world primary energy demand will increase by close to 40 percent by the year 2030, growing on average at 1½ percent per year, with oil remaining the single-largest fuel in the energy mix. To put things in perspective, consider that in 1949, world population stood at about 2.5 billion.  By 2050, global population is expected to exceed nine billion, with most growth occurring in developing nations.  The challenge will not be the number so much as the drastically escalating need for energy to help people realise their economic aspirations and lifestyle goals. Considering the vast future energy demand, the world will clearly need the contributions of all viable energy sources, including renewables, but the industry must help bring greater clarity to public perceptions about the factual future roles of various sources in the energy mix.

This brings us to our second reality check: for a long time to come, the world won't be able to survive without fossil fuels.  For the next few decades at the least, as the contribution of renewables increases from a small established base, fossil fuels will continue to dominate the world's energy picture, accounting for a more than a three-quarters share among oil, gas and coal.  As a proven and reliable resource whose accessibility and sustainability continually increase thanks to research, development and innovation, petroleum will remain indispensable to the world economy, and vital to nations reaching for a better way of life.

Meeting global demand

In response to this long-term call for petroleum, Saudi Aramco is aggressively ramping up exploration, improving recovery and building our reserves year after year - indeed, increasing our capacity all along the value chain. While oil fields in many basins throughout the world are becoming increasingly mature, the share of the Middle East in global oil supplies will steadily rise.  I am proud to say that Saudi Aramco has played, and will continue to play, an even bigger role as one of the key suppliers of oil to India, Asia and the whole world. At Saudi Aramco, our message of reliable and abundant petroleum supplies is substantiated in the expansion of our crude oil production capacity to 12 million barrels per day; the increase in our production of natural gas and gas products; our increasing refining capacity; and our expansion into the petrochemicals sector.  In addition, our company's spare production capacity plays a vital role in promoting oil market stability, as it has done in times of market turmoil or disruptions elsewhere to global supply.  Maintaining this spare capacity is a huge commitment for Saudi Aramco, costing us tens of billions of dollars to build, and billions more to maintain - but this is an obligation we undertake responsibly, in the interest of global market stability.

While there is a good deal of euphoria around alternatives in many camps, over- promotion is a concern, given the likelihood that they may not be ready to shoulder a sufficiently large burden of world energy demand, because of inherent technical, commercial and economic viability challenges.  It would be imprudent to assume that subsidies could be the acceptable basis for the long-term and large-scale application of alternatives.  Of particular concern to our industry is the risk that over-confidence in alternatives could also distract from much-needed investment in oil and gas - and thus be severely counter-productive to energy security.

While alternative energy sources are being brought along, we must continue our efforts in making the production and uses of hydrocarbons cleaner and more efficient.  Another new reality is evident in the growth in oil supplies - and this constitutes our third reality check.  With supplies of conventional oil maturing in many basins, the contributions of niche non-conventional oil sources are expected to continue rising, complementing the growing supplies of conventional oil from mostly major producers in developing nations.  By unconventional oil resources, I mean natural gas liquids, condensates, heavy oils, and oil from extreme locations, like deep sea and the Arctic region, that carry very high development and operating costs due to their difficult environments.

New discoveries

Technology has played a central role in making economically viable many of the non-conventional areas of oil and gas and has added enormous reserves to the industry's portfolio. Some relatively recent examples of massive but expensive new discoveries include the Carioca and Tupi fields offshore Brazil, which alone reportedly hold close to 20 billion barrels in reserves.  Likewise Saudi Aramco will also be venturing into the deep waters off the Red Sea coast over the next few years, including sub-salt plays.  Similarly, our Indian colleagues are looking at new opportunities both onshore and offshore, including deep-sea, following Reliance's major gas discovery in the Krishna Godavari basin.

These examples demonstrate that there is no shortage of oil potential - as we know, the world's oil reserves are abundant - but the complexity of bringing oil online increases significantly as we tap into more difficult conventional and non-conventional oil resources. 

The unique circumstances and challenges that can be associated with more complex conventional and non-conventional oil set the stage for our fourth and final reality check, which highlights the rising costs, wild swings in oil prices and lengthy lead times involved in developing energy projects in general. For illustration, I would like to share with you some compelling examples of this phenomenon from our own Khurais and Manifa mega-projects. At 1.2 million barrels per day capacity, the recently completed Khurais programme is the single-largest crude increment ever commissioned by the industry. When we made this investment decision, oil prices were in the range of $55 per barrel with expectations of stronger prices; oil demand projections were healthy; and costs were in the usual range.  Mid-program prices peaked at around $140 per barrel.  And yet toward the end of the program, prices had fallen to below $35 and demand had tumbled due to the financial crisis, while costs spiraled, doubling our investment.  Our Manifa project, at 900,000 barrels per day capacity, is one of the largest heavy crude oil increments ever commissioned by the industry, but distinctive aspects of the field made for costs not typically associated with development. Manifa lies in shallow waters in the fragile ecology of the Arabian Gulf, requiring unique access solutions involving drilling islands. When we made this investment decision, oil prices were above $70 per barrel, and as in the Khurais example, demand prospects were strong.  After contracts were awarded, however - again as with Khurais - prices declined to below $35, demand projections fell, but costs did not proportionally decrease, clouding the robustness of the investment. We reviewed the program, and with some execution plan modifications, including deferring completion by two years, decided to continue.

We pride ourselves in our ability to complete major projects such as these in record times.  From conception to completion Khurais took six years while Manifa will take nine years, partly due to its complexity. Our own experience with costs is consistent with the industry's rapidly rising cost trajectory. For example, our brownfield Haradh III crude oil increment that came on stream in 2006 cost us about $2,500 per daily barrel. The cost of the grass-roots Khurais increment that has been recently completed was almost 4 times higher, while the cost of the more complex Manifa field, which will begin production in 2013 and be completed two years later, is expected to be more than 7 times higher than the Haradh cost. Besides greater complexity, the rising capital cost trend has played a distinctive role in these higher costs. Of course, non-conventional oil costs substantially more to develop.

Now considering the typical project cycle in our industry, there is an orderly progression of events from leasing of acreage to exploration to development, and that takes a long time.  With environmentally-sensitive, harsh locations and conditions, such progression can take up to 15 years or more. These long lead times can result from geographic and geologic challenges, concerns for protection of the environment, as well as regulatory requirements.  And as the Khurais and Manifa examples I cited show, a host of key economic factors can change, impacting a project's profitability or even its viability.

In the wake of the four transformative realities that I have discussed to this point, let's turn our attention to how they relate to challenges facing us; and explore how we can effectively respond; or better yet, proactively work with various stakeholders to achieve optimum results for both consumers and producers.

Challenges ahead

I would like to highlight two broad challenges: first, the highly uncertain future energy environment and its implications for petroleum investments in particular; and second, ecological issues, including global warming. The uncertain and unattractive environment that is discouraging timely petroleum investments poses a critical challenge which the various concerned stakeholders, including the industry and governments, must jointly address. Because capital prefers certainty, a vague global energy future would discourage essential investments across the energy value chain. This scenario applies especially to fossil fuels in general, and to petroleum in particular, which is being singled out for harsher treatment in the global energy policy agenda. Unless addressed expeditiously, this environment will cause investment to fall behind demand growth, with negative implications for global energy stability. The confluence of three prominent factors is influencing the uncertain environment in which petroleum investment decisions must be made. These factors are: the absolute level of oil prices and their volatility; an uneven regulatory playing field for competing energy sources, including carbon taxation plans; and political agendas and rhetoric impacting national and international energy policies, such as talk in some quarters of energy independence.

When it comes to price, excessive levels on either side are damaging. Prices on the low side discourage investments, especially in light of rising costs. On the other hand, excessively high prices impact economic growth, limiting the aspirations of people seeking better lives for themselves and their children. Financial speculation has played a detrimental role in amplifying price volatility, which is problematic to both producers and consumers. Efforts to minimise excessive speculation are a step in the right direction. The long-term nature of our industry and investments; the increasing complexity of our operations; and the various geopolitical, environmental, regulatory, cost and other concerns that factor into shaping the industry landscape, underscore the need for jointly creating a climate that makes worthwhile significant commitments of capital and time that span decades.

Thus I would urge decision makers across the globe to help create such a favourable investment climate to grow petroleum supplies in a timely fashion, which I consider to be a critical factor in enhancing energy security in general, and the security of petroleum supplies in particular.

Another of the industry's biggest challenges is also one of humanity's most pressing concerns, as environmental pressures, especially those related to greenhouse gas emissions and global warming, continue rising. Societal expectations on climate change are real, and the industry is expected to take a leadership role. At Saudi Aramco, one of our key corporate strategies is the pursuit of innovative research and technologies to minimise the environmental impact of our petroleum operations, with areas of focus including the desulfurisation of whole crude oils, cleaner-burning fuels, smokeless flares, and lower carbon release. Through the establishment of our master-gas grid, we were able to eliminate gas flaring from most of our facilities.  We also recognise the need to help develop cutting-edge carbon capture and sequestration technologies, and are actively involved in promoting technical solutions that reduce CO2 emissions from petroleum use. To help shoulder pragmatic climate-change research efforts, we are carrying out research and development in enhanced oil recovery using carbon dioxide flooding and long-term carbon dioxide storage as part of our own carbon management research program.

Saudi Aramco's environmental focus is not only reflected in our development and management of God-given hydrocarbon resources for economic and social benefit at home and abroad - we are also leveraging our natural environment in other ways to develop future energy sources, as I will explain. Saudi Arabia is richly endowed with oil and a highly favourable geology. But the Kingdom is also beginning to leverage another of our prime competitive advantages: plenty of bright sunshine; vast, open spaces of desert; and miles upon miles of clear sand. I invite you to re-imagine this desert environment's roughly 3,000 annual sunshine hours, in contrast to geographic areas with cloud cover during long periods of the year, which gives us solar potential among the highest in the world; stretches of desert, where vast arrays of mirrors can concentrate solar energy; and deposits of clear sand, which can be used in the manufacture of silicon photovoltaic cells.

Saudi Aramco is partnering with one of our affiliates-Showa Shell, a leading advanced photovoltaic cell manufacturer-to build two pilot solar plants. Concentrating Solar Power, commonly referred to as CSP, or the thermal approach, is another solar technology area that Saudi Aramco is helping promote. The King Abdullah University of Science and Technology, or KAUST, the new international research university on Saudi Arabia's Red Sea coast that our company was privileged to help build, was established for the very purpose to explore solutions to global challenges. KAUST has created the Solar and Alternative Energy Science and Engineering Research Centre to support solar as one of its core research areas. These activities demonstrate a commitment to ameliorate the environmental footprint of our operations and products through both conventional and unconventional routes. What is more, they underscore a long-term strategy to offer a wider energy portfolio to serve burgeoning global demand. It is my earnest hope that such considerable investments of capital and human ingenuity in both the petroleum and solar arenas will help recast some public misperception regarding our industry's approach to energy and the environment.

The three Ts

Our resilient and enduring industry boasts an admirable track record of overcoming challenges via innovation and technology, so that they are not so much obstacles as windows to improvement and growth. I would like to conclude by sharing with you what I consider to be a core strategy for rising to challenges and opportunities across the value chain - a tripod model I call The Three T's-for Technology, Talent and Teaming. Technology, the first "T," is a great enabler both for our unique challenges at Saudi Aramco, and for the benefit of the broader industry. Our emphasis on this key enabler has taken our company from a user of commercial technology to leading industry innovator. We have developed a reservoir simulator, for example, that can model the giant Ghawar field, by far the largest oilfield in the world, in a single run using a billion cells and describing the reservoir in great detail.  Another technology that we have deployed as one of the largest users in the industry is the Intelligent Field concept, which affords us better control and versatility in producing and managing our hydrocarbon reservoirs.

Technology is vital for maximizing exploration successes, enabling increased ultimate recovery, and ensuring more efficient, profitable and safe operations. However, even the most exciting, most advanced technology hinges on the second "T" of our tripod: Talent, one of our most important and differentiating competitive advantages. Thankfully, one of the biggest industry human-resource issues, the Great Crew Change, as mature engineers, geologists, senior scientists and other highly specialized workers retire en masse, is not so much a concern here in India, or in Saudi Arabia, as it is in the West. In fact, Saudi Aramco is fortunate in having a pool of talent developed through a range of long-term corporate educational and training programs that are part of our legacy. Saudi Aramco invests heavily in professional development at all levels, and cultivates a corporate environment that stimulates and rewards excellence and innovation, leading to effective solutions for the range of challenges we have discussed today.

The third "T" in the tripod, Teaming, is closely tied to the value placed on talent as well as to the purpose of this gathering. Our increasingly interdependent and interconnected world underscores the value of joining forces for shared goals and mutual benefit. At Saudi Aramco team work is both a corporate culture and a partnership strategy, reflected in joint ventures with leading global petroleum and chemical companies, and in carefully nurtured relationships with customers at home and around the world. From joint industry projects to collaborations with producers, refiners, service providers, research institutions, academia, financial institutions, and many other partners, Saudi Aramco works hard to identify and develop strong alliances that multiply the strengths of all parties far beyond what any one of us could achieve alone.  In fact, we see our relationships in India as just such an alliance. Beyond our role as an economic partner helping to meet India's energy needs, our friendship extends to a mutually beneficial exchange of views through meetings such as WOGA; in contributions of talented Indian nationals, who are an important part of not only Saudi Aramco's workforce but indeed the Kingdom's as a whole; and in the goods and services provided by Indian companies.

I believe that looking at this brave new world through the prism of new realities will give us a fresh perspective on how the oil and gas industry can transform challenges into opportunities as we have done in the past again and again. Such a viewpoint will help us bring greater clarity and rationality to the future of global energy, and promote an environment that enables timely investments across the oil and gas value chains. I hope that my perspective will give us all a fresh incentive in our commitment to deliver - reliably, economically and with due concern for the environment - the energy that enables growth, prosperity and hope here in India, in the emerging East, and all around the world.