Editor’s Note:
The Assistant Petroleum Minister, Prince Abdulaziz bin Salman, spoke today at ‘The Conference of the Arabian Gulf and Regional Challenges’ in Riyadh about the “future role of the GCC and its position in the international political, economic and energy order.” His remarks provided an insightful analysis of Saudi Arabia’s energy outlook and perspectives on the changing landscape in the global energy market. We are pleased to provide Prince Abdulaziz’ remarks for your consideration.
Assistant Minister of Petroleum and Mineral Resources for Petroleum Affairs: The World We Live in Is Changing Faster than Ever Leading to the Emergence of New Patterns of Economic Relations
Riyadh, Dhu-AlQa’dah 22, 1435, Sep 17, 2014, SPA — Prince Abdulaziz bin Salman bin Abdulaziz, Assistant Minister of Petroleum and Mineral Resources for Petroleum Affairs, stressed that the world we live in is changing faster than ever, with powerful forces continuing to shape the geopolitical, economic and energy landscape around us. The global economic recovery remains fragile with new sources of geopolitical and economic risk developing in many parts of the world. The geopolitical scene and international and regional relations remain in flux; new patterns of economic relations are emerging as wealth creation shifts towards emerging economies; and energy trade flows continue to adjust, as new patterns of energy demand and supply continue to evolve.
Conference of the Arabian Gulf and Regional Challenges, Riyadh
This came in a speech delivered today by Prince Abdulaziz bin Salman at ‘The Conference of the Arabian Gulf and Regional Challenges’ which is organized by the Institute of Diplomatic Studies in cooperation with the Gulf Research Centre. Prince Abdulaziz bin Salman also said ‘Amidst these transformations on the global scene, many questions are being raised about the future role of the GCC and its position in the international political, economic and energy order. Some observers predict a very uncertain future for this region. They argue the impact from the recent development on the US energy scene will be transformational, not only for the US but for the rest of the world, eroding the dominant role Saudi Arabia and other Gulf producers have played in global energy markets. These same observers warn that the political, economic, social, and security implications of this trend could be enormous. These predictions come as no surprise to us; in uncertain and rapidly changing times, the emergence of such gloomy predictions is expected. However, as in the past, the future will defy such predictions.’
He explained that globalization, industrialization, urbanization, and rapid development – all fuelled by energy – have lifted hundreds of millions of people out of poverty and created a substantial middle class in emerging markets. In Asia alone, 525 million people can be considered as middle class – this is more than the total population of the EU. Indeed, one of the key dynamics shaping energy markets over the last three decades has been growing energy demand in non-OECD. Between 1990 and 2013, non-OECD increased its oil consumption from around 25 million b/d to almost 45.7 million b/d, i.e. an increase of more than 20 million b/d. During the same period, OECD demand increased only by 3.8 million b/d.
He also said that over the next two decades, the size of the global middle class is expected to grow from the current level of 1.8 billion to 3.2 billion in 2020, and to 4.9 billion in 2030, with the bulk of this expansion occurring in Asia. Unlike their Western counterparts, the new emerging middle class will be made up of younger people eager to increase their consumption. The young demographics amidst rising income levels will generate strong oil demand growth, even after factoring in efficiency gains and alternative fossil fuels used for transportation. In terms of oil and liquid fuel consumption, even some of the pessimistic scenarios project an increase of close to 20 million b/d by 2035.
While oil demand is expected to continue on its upward trend, increasing supply is proving more challenging and more costly. A few years ago, peak oil enthusiasts dominated the energy scene, insisting that global oil production was beyond its peak. Now the pendulum seems to have moved in the opposite direction and expectations of scarcity have been replaced with expectations of abundance. Some are predicting the oil market might be drifting into an oil price shock, describing the current situation as very reminiscent of the period 1981-86, which culminated in the dramatic 1986 oil price collapse. The development of shale resources in the US contributed in large part to this shift in perceptions, the Assistant Minister of Petroleum and Mineral Resources for Petroleum Affairs said.
But this view of oil abundance does not conform well to data. Few numbers are in order. In 2002, non-OPEC production outside the Former Soviet Union reached 36 million b/d. In 2013, it was still at 36 million b/d. In other words, over the last decade, non-OPEC production outside the Former Soviet Union did not increase, reflecting the new oil discoveries and development of new resources, which have just been enough to replace the decline rates in existing fields. In some countries, these decline rates have been very steep. For instance, back in 2004, Mexico used to produce 3.8 million b/d compared to 2.8 million b/d today. The United Kingdom used to produce close to 2.9 million b/d at its peak in 1999 compared to 866 thousand b/d today. With global decline rates estimated at 5-6%, the global oil industry would need to bring on 4.5-5.5 million b/d of new production every year to offset the losses from decline rates, the Assistant Minister of Petroleum and Mineral Resources for Petroleum Affairs said.
‘Despite a very poor decade of exploration drilling and a disappointing rate of oil discoveries in non-OPEC countries, some continue to talk about abundant oil supplies and weak long-term oil prices, not realizing that even at these record oil prices, which averaged over 100 dollars per barrel for the last three years, firms are cutting their exploration budgets to save on costs. To makes things worse, capital expenditure for exploration and production has exploded over the last 10 years. Newer finds are smaller, decline rates have stepped-up as the asset base has matured, and companies have increased their expenditure on field maintenance. This has led to the search for newer higher cost basins to replenish the losses elsewhere, resulting in sharply higher breakeven prices for international oil companies, with their free cash flow halving since 2005. It is no surprise that as oil prices weakened in recent weeks, some of the CEOs of the big oil companies warned that billions in oil investments are at risk from low crude prices. CEOs of international oil companies have openly talked about using $100 as their break-even price, demonstrating how prices approaching $100 a barrel have become a concern-compared to a few years ago when it used to be a sign of comfort,’ the Assistant Minister of Petroleum and Mineral Resources for Petroleum Affairs added.
The oil market needs a high oil price to balance, especially as new and more difficult sources such as oil sands, tight oil, deepwater, ultra-deepwater and pre-salt ultra-deepwater start contributing at the margin. Such trends help put a floor on the long-term oil price. As the CEO of Saudi Aramco Mr. Khalid Al-Falih has recently noted ‘to tap these increasingly expensive oil resources, oil prices will need to be healthy enough to attract needed investments. The other side of the same coin is that long-term prices will be underpinned by more expensive marginal barrels.’ The market is already signaling the challenges ahead in the shape of spiraling costs, a manpower shortage and a shrinking pool of cheap and easy oil. While spot prices in recent weeks have fallen, the long-term Brent price is currently trading higher compared to last year, Prince Abdulaziz bin Salman bin Abdulaziz said.
‘In addition to these more costly and difficult sources of supply, most international organizations anticipate greater reliance on the Middle East, mainly from the GCC and Iraq. In its latest World Energy Investment Outlook (http://www.iea.org/publications/freepublications/publication/WEIO2014.pdf), the IEA points out that investment in the Middle East oil sector has to increase to offset declines elsewhere. Should investment in the Middle East fail to pick up, the IEA predicts oil prices will be around $15 higher than current prices by 2025, in real terms’, the Assistant Minister of Petroleum and Mineral Resources for Petroleum Affairs said.
These supply and demand patterns indicate that the long-term fundamentals of the energy complex remain robust. In the oil market, like any in other market, temporary factors such as concerns about global economic recovery, geopolitical events, and positioning in paper markets, can affect short-term price movement. But for a major oil producer and exporter such as Saudi Arabia with long-term interest in the stability of the market, such daily, weekly or even monthly gyrations have little meaning, and constitute a source of noise around a solid trend. Instead, the main focus of the Kingdom has always been on the medium and long-term fundamentals, especially as Saudi Arabia has been successful in the last few years at increasing its economic resilience against temporary weaknesses in oil markets, as a result of its prudent fiscal and monetary policies.
The GCC will continue to play a central role within this complex energy system. Views that the US shale will erode the important role that Saudi Arabia and other Gulf producers have played in global energy markets are misguided. In addition to the size of its reserves and its production, a key factor that makes Saudi Arabia stand out is that it is the only country with usable spare oil production capacity. In case of supply disruptions due to geopolitical or technical factors, and there have been many such disruptions in recent years, Saudi Arabia has used its spare capacity to fill the supply gap and stabilize oil prices. Between 2011 and 2013, it is estimated that more than 1.6 billion barrels of oil production were lost due to outages. GCC producers have proactively used their spare capacity to fill the gap and prevent oil prices from spiraling. The combined output of Saudi Arabia, Kuwait, Qatar, and the UAE has risen from around 14 million b/d prior to the start of the Arab Spring, to above 16 million b/d for much of the last three years, the Assistant Minister of Petroleum and Mineral Resources for Petroleum Affairs said.
‘But it is not only in times of disruption that this spare capacity is useful for the world economy. In the period between 2002 and 2007, global oil demand increased at a very rapid pace, buoyed by strong economic growth in Asia. During this period, global oil demand increased by a massive 8 million b/d. Saudi Arabia and other GCC producers managed to increase output to meet the growing global oil demand. Without this ability to ramp up production in a relatively short period of time, prices would have had to increase to balance the market, fuelling global inflation and putting a break on global economic growth. Therefore, spare capacity is an insurance policy against unexpected changes in oil market conditions and key to maintaining oil markets and global economic stability. Another widely circulated view is that lower US dependency on oil imports from the region will erode the United States interest in the Middle East, and its special relations with the GCC. Historically, the US reliance on imports from Saudi Arabia has been modest. In 1977, US crude imports from Saudi Arabia stood at 1.3 million b/d, increasing to 1.7 million b/d in 1991 during the first Gulf war, and in 2013 stood at 1.3 million b/d. In 2013, US imports from Kuwait were just above 300 thousand b/d more than any other year in the last two decades. For Gulf producers such as UAE, Oman and Qatar, crude oil exports to the US were close to nil over the last three decades. These trends show that shifts in GCC exports to the US are dictated by market conditions and commercial considerations. Whether the US imports crude from the GCC or not is of little importance for the dynamics of the global oil markets, as oil is a highly fungible commodity. Oil that cannot be sold in the US will find its way to other markets where it is mostly needed,’ the Assistant Minister of Petroleum and Mineral Resources for Petroleum Affairs added.
Furthermore, the oil market is highly interconnected and supply shocks in any part of the world will affect oil prices all over the globe. Given that the US is still far from achieving the goal of oil independence, the US cannot isolate itself from such supply shocks. But for a minute, let’s assume the US becomes self sufficient. Supply disruptions could still prove costly not only in terms of their direct impact on the US economy, but also indirectly through their impact on its trading partners. Supply shortages will lead to a scramble for oil, which will translate into higher prices impacting the global economy and feeding eventually into the US economy. For supply shocks to have no impact, the US would have to cut off its economy and its domestic oil markets from the rest of the world through isolationist policies, which is highly unrealistic and economically counterproductive, the Assistant Minister of Petroleum and Mineral Resources for Petroleum Affairs said.
Prince Abdulaziz bin Salman bin Abdulaziz also said that given our strong belief in the health of the long-term energy market fundamentals, and our strong conviction the region will play a key role in meeting the expected increase in energy demand, every effort is being taken by GCC governments to maintain and improve their standing in the global political, economic and energy system. In order maintain its export capability, the GCC has been working hard on new programmes to increase the efficiency in its energy use. As I argued recently in an article ‘although the growth in energy demand is partially attributed to the industrial growth and growing economic prosperity in the Kingdom, a rather significant portion of it results from the inefficient use of energy; deeming this accelerated growth unsustainable.’
‘In the Kingdom, efforts are already under way to reduce the energy intensity of economic activity through implementing energy efficiency schemes. In addition to improving efficiency, the region has been diversifying its use of energy resources. The bulk of GCC primary energy demand up to now has been met by the region’s two chief energy resources, crude oil and petroleum products and natural gas. Many efforts throughout the GCC states have been taken to increase the role of renewable and nuclear energy in the energy mix. Efforts to improve efficiency and diversify the energy base should be seen as a validation of our belief in the strength of the long-term fundamentals of energy markets, and would enable the region maintain its export capability,’ the Assistant Minister of Petroleum and Mineral Resources for Petroleum Affairs said.
While GCC’s links to the global economy have been shaped by crude oil trade flows, the nature of these links continue to evolve as countries in the region turn more of their crude oil into refined products and petrochemical products in an attempt to diversify their economic and revenue base, capture more value added for local economies, and expand the knowledge base of the GCC economies by developing their capacity to make a large variety of complex products. As the Saudi Minister of Petroleum and Mineral Resources Mr. Ali Al Naimi noted few years ago, ‘Saudi Arabia today is highly dependent on one source of revenue from hydrocarbons production … we cannot continue forever on this source of income: let us do our best to diversify the economy, industrialize and eventually move to a knowledge society’. An integral part of this strategy has been the development of industrial parks and clusters around the petrochemical industry. Initiatives like Saudi Arabia’s Industrial Clusters – where the development of sectors such as automotive ventures, solar energy, plastics and packaging, and home appliances is encouraged – clearly indicate regional governments’ willingness to invest in establishing the appropriate framework to enhance downstream integration and to develop a manufacturing base with all of its supporting activities, including training and research centers and R&D laboratories. Another important component has been the integration of refineries and petrochemical operations; a trend that has gathered momentum in recent years, evident from the start of new megaprojects such as Sadara, Petro Rabigh, Yasref, Satorp and Jazan.
Saudi Arabia also possesses valuable resources other than oil and gas. The Ministry of Petroleum and Mineral Resources has identified 1,270 sources of precious stones and 1,170 sources of other minerals, and has issued a large number of mining and exploration concessions. Concrete steps have also been taken in recent years to encourage greater private sector involvement in the development of the mining sector. These include incentives for investment by both domestic and foreign companies, and support services intended to facilitate development of minerals. Substantial investment has been made in industrial infrastructure such as power plants, water production, treatment and distribution facilities, and roads and telecommunications, to support the mining operations. Energy consumption in mineral extraction and processing is substantial and therefore by developing the mining industry, the Kingdom would be capturing more domestic value added from its resource wealth. Saudi Arabia’s strategy of dual horizontal and vertical integration across the refining, petrochemical and mining sectors would help diversify the economic base and efficiently localize the sources of energy demand, reducing the vulnerability of the economy to the cyclical nature of international energy markets.
These efforts are not only concentrated on mining, energy and energy intensive sectors. Saudi Arabia has improved its investment regime to attract foreign investment and capital inflows to diversify away from energy. The Global Competitiveness Report 2014-2015 has ranked Saudi Arabia as the second highest in terms of competitiveness, among the 20 largest emerging market economies. The report emphasizes Saudi Arabia’s key strengths: the country’s strong fundamentals, supported by macroeconomic stability, low debt, and a strong budget surplus. Saudi Arabia has also begun investing in the development of large-scale infrastructure projects to realize its potential as a leading global transport and logistics hub. A US$100 billion investment is planned over the next ten years to upgrade the Kingdom’s transportation infrastructure, including multi-modal facilities in the Economic Cities that will be the largest and most advanced in the region. The recent performance of the Saudi stock market is quite telling. Saudi Arabia’s stock market, the Tadawul, surpassed the 11,000-point mark to reach its highest levels since the collapse of Lehman Brothers in September 2008, despite a string of bad news from the surrounding region. This reflects the strong confidence in our economy, not only by local investors, but also by foreign investors who are benefiting from the greater openness of the Saudi economy and its liberal investment regime.
The strength on the domestic front has also been reflected in greater prominence in the international scene. With over 10 sovereign wealth funds (SWFs) and 1.7 trillion US dollars worth of assets under management, the GCC has fast emerged as the world’s largest net supplier of financial resources, at a time when many countries in the world are registering deficits and accumulating debt. These large foreign currency reserves and assets provide an important fiscal buffer against temporary weaknesses in oil markets. Arguments that lower oil prices will cause the collapse of GCC economies are misguided to say the least, and ignore the increased resilience of GCC economies. GCC is also an important consumer market. In 2013, GCC imports of goods and services amounted to 711 billion US dollars, almost triple from the 2000-2008 average of 240.8 billion US dollars. In terms of food alone, aggregate spending on food imports is to double from its current level, reaching 53.1 billion US dollars by 2020. GCC’s greater integration into the global economic system through trade, investment, and financial links, has allowed the region to play a key role in the rebalancing of the global economy. Higher export earnings mean more spending on foreign goods and services, more investment in foreign assets, and more investment in our domestic economies, which will provide massive opportunities for foreign investors and international partners.
GCC is also politically and economically essential for the rest of the Middle East. Over the last few years, the GCC has played a major role in preserving the security and stability of the region. At times when Western governments are imposing austerity measures and reconfiguring their foreign policies, leaving a huge vacuum in the region in the process, the GCC has intensified its political initiatives and increased its economic assistance and financial support for their ailing strategic partners in the region. Such economic and political support has helped these countries relieve some of their immediate financial pressures and preserve their political and social security. GCC governments are conscious of the limitations and the challenges ahead and recognize that any successful effort to stabilize the region should be part of a wider international cooperation. But without the GCC support, the political situation could have been much worse.
The GCC will not lose its international and regional prominence and will continue to play a key role in the global political, economic and energy scenes. The fundamentals of the energy complex are robust and as global economic activity and energy flows continue to be redirected away from traditional centers of consumption in the OECD towards emerging economies, GCC countries are in a very strong position to benefit from these shifts in economic growth and wealth. Many efforts and initiatives – be it in the shape of diversifying the economy through horizontal and vertical integration, improving energy efficiency, diversifying the use of energy, improving the business and investment environment – open the economy for foreign investment, and are being implemented to consolidate GCC’s position in the global economy and make the region more prosperous.
A more prosperous GCC contributes positively to the world economy and provides many economic opportunities for our partners. A stable and secure GCC is a prerequisite for the stability of energy markets, the global economy, and for the security of our international and regional allies, the Assistant Minister of Petroleum and Mineral Resources for Petroleum Affairs concluded.
Source: SPA
Read more about this topic:
GCC economies remain resilient despite low oil prices: Prince Abdulaziz Bin Salman – Saudi Gazette – Sep 17, 2014
Analysis | The Other “Pivot to Asia” – The Shifting Strategic Importance of Gulf Petroleum – Cordesman – SUSRIS – Nov 18, 2013
AUSPC2013 | US-Arab Energy Cooperation – SUSRIS – Nov 8, 2014
International Energy Outlook 2013 – SUSRIS – Jul 25, 2013
The Enduring Legacy of Oil – Ali I. Al-Naimi – SUSRIS – Apr 30, 2013