Addressing the OPEC International Seminar in Vienna today, Ali bin Ibrahim Alnaimi, the Saudi Minister of Petroleum and Mineral Resources, said here today that the role of the national oil companies not only affects their business and their economies but also the future role of OPEC and international energy relations in general.
In a keynote speech entitled "the Role of the National Oil Companies in a Changing World: Economic and Energy Relations", the Minister of Petroleum and Mineral Resources of the Kingdom of Saudi Arabia Alnaimi said half of the top 50 oil companies worldwide are fully- or majority-owned government companies. The 2003 ranking of international oil companies using six operational criteria (oil and gas reserves and production as well as refining capacity and product sales) showed that five of the top ten were the national oil companies of Saudi Arabia, Mexico, Venezuela, China and Iran.
To be more specific, the wholly government owned national oil companies hold 72 percent of total world proven oil reserves and 55 percent of gas reserves. In 2003 their daily oil production was around 37 million barrel and that of gas was 55 billion cubic feet contributing 48 and 22 percent to global production of oil and gas respectively. The sheer size of the hydrocarbon resource base and the production profiles of the NOCs underscore their importance to the world energy landscape, he said. The minister sated that today, there are more than 100 national oil companies in the producing and consuming countries, either wholly- or partly-owned by the "state".
One thing that should be emphasized from the outset is that NOCs differ in their historical evolution; some being the outgrowth of the concessionaires in their countries, while others are not. They also differ in their sphere of operations as some are oil and gas integrated companies with presence outside their borders and others are not. Differences also exist in the modes of relations with their own governments and their role in the national economy and society. And finally, at an industry level, NOCs feature markedly different degrees of integration, business environment and corporate culture, he added.
Alnaimi went on to say that it is those and other variations in the historical evolution and mandate which makes it inappropriate to lump all NOCs in one group or to compare them simplistically with the IOCs. The onslaught against NOCs in recent years is largely due to such generalizations and lack of knowledge and appreciation for their role. Therefore, I will focus my remarks on the prerequisites for a strong and successful NOC, the underlying challenges and opportunities facing NOCs in today's world, drawing from my lifelong experience with Saudi Arabia's national oil company Saudi Aramco.
Some of the confusion regarding the role of the NOCs emanate from unmerited benchmarking with IOCs. While the mandate of the latter is to create value to their shareholders, the NOCs mandate is generally wider. Besides managing and developing the hydrocarbon resources of their countries to achieve the development objectives, they are charged with the execution of the government energy policies and the contribution to technology assimilation and development of technical skill in that sector. Independent, efficient, accountable and commercially driven national oil companies are
prerequisites for the achievement of such objectives.
The first challenge is to carryout the objective set to it by the shareholder to keep at all times an excess production capacity of 1.5 - 2 MBD realizing that this is a unique role requiring technical capabilities and continued market monitoring and careful planning. The unique position of Saudi Arabia, and consequently its national oil company in the market as the largest producer and supplier of oil to the world necessitates such a market balancing’ role.
This excess capacity has been rewarding not only to Saudi Arabia but also to the other producers and to consumers, as well as to the industry at large. The increasing production from Saudi Arabia in the past two years and the outlook for further increases in the future could well call for an increase in the production capacity of the company.
There are some who cast doubts on our ability to marshal technical, financial and human resources to maintain and increase capacity when needed beyond its current 10.5 mbd. I refer [such doubters] to Saudi ARAMCO's track record of building the capacity to its current level and maintaining it for the past ten years. We were able through our own technical and financial means to maintain capacity by bringing in new capacity increments from Shayabah, Qatif, Haradh and Abu Saafah fields. All such increments totalling more than 1.2 mbd since 1998 with more than $7 billion dollars of investments were executed by the national oil company utilizing, like our fellow IOCs, national and international service companies. The issue is not our ability to increase capacity since this is within our technical, financial and human capabilities and the service base of the Kingdom, but the timing and magnitude of such capabilities. This depends on the medium to long-term global demand and supply outlook and their underlying uncertainties. In the past few years we have seen continued revisions on such world oil outlook, as well as talk of policy measures in some consuming regions which interfere with the smooth growth in demand. It is those uncertainties which would impact our investment decisions affecting capacity increases and not the ability of our national oil company to deliver.
The second challenge relates to the company's future role in the Saudi economy. Saudi Aramco has been mandated by its shareholder to develop the hydrocarbon resources of the Kingdom to contribute to the development objectives of diversifying the economy and developing human resources. The efficient extraction, production and marketing of oil provide the necessary revenues and foreign exchange for the non-oil sector to grow and for the economy to be more diversified.
Another sources of contribution to the diversification of the economy is through the provision of energy and feedstock to the industry (especially Petrochemicals). This was possible by utilizing the Kingdom's hydrocarbon comparative advantage and increasing the contribution of the manufacturing sector in GDP. Saudi Aramco has been in the forefront of this effort through the construction of the Master Gas System and its ability to increase gas reserves, production and processing capacity. Through intensive gas exploration and development programs Saudi Aramco has been able to add 54 trillion cubic feet to its non-associated gas reserves in the past decade, bringing total proven gas reserves to 235 trillion cubic feet, 40 percent of which is non-associated. It was able to more than double its marketed gas capacity from 3.5 to 7.3 billion cubic feet per day.
The growth in gas consumption for utilities and industry which has registered 7.5. percent annual grown in the past two decades is projected to grow at around 4 percent annually through 2025. The past growth in gas demand has been adequately met by Saudi Aramco contributing to the robust growth of annual petrochemical investments from $500 million in the seventies to more than $20 billion today. This enhanced the role of the private sector and the flow of foreign direct investment to the Kingdom.
The challenge will be to meet future growth in domestic gas demand through Saudi Aramco's own gas development program combined with the programs of the four gas E and P foreign consortiums of which the company is a partner. Having worked with partners from the international oil industry for years, Saudi Aramco is confident that its partnership in the gas business will be rewarding to the national oil industry and the Kingdom as well as the international oil companies who won the gas offering.
Since the government takeover of Aramco and the formation of the national oil company, the Saudi economy expanded markedly. The share of oil in GDP declined from 60 percent to 35 percent and in the process the private sector gained strength and resilience. Saudi Aramco realized the growing role of the private sector and moved early on to outsource many of the services and materials locally, thus contributing to the growth and competitiveness of the private sector and at the same time to the efficient utilization of the company's resources.
The third challenge is related to the future of the core business of the company. Being the custodian of the world's largest proven oil reserves with long lifetime for the reserves, the objectives would be to enhance the role of oil in global energy mix. However, environmental and energy security concerns have been channeling technologies and research towards alternative fields especially fuel cells. Although technologies to develop hydrogen for fuel cells have been under development for years and still face many technological, infrastructure and cost barriers, the research and investment in those technologies pose long-term challenges to the oil industry in general and to the NOCs including our own.
The challenge for Saudi Aramco here is how to mobilize its own and cross-industry resources to promote the use of oil and gas. Carbon sequestration and capture technologies as well as technologies that ensure a role of these fields in the hydrogen generation are emphasized in the R and D programs of the company and in collaborative research with the industry, universities and research institutions.
Besides the challenges posed by the globalization process, there are opportunities as well for the NOCs. Industry restructuring offers possibilities for alliances with IOCs in different regions and business lines. The 2003 ranking of the top 50 oil companies worldwide shows IOCs own reign capacities of around 32 million barrels per day compared to a crude production of 22 million barrels per day. On the other hand, the NOCs refine capacities of 20 million barrels per day and crude production of 37 million barrels per day. This mismatch between crude production and fringing capacities could be bridged through business alliances between the two groups taking different forms and modalities. Liberalization of energy markets could also offer downstream investment opportunities to NOCs especially in the growing markets of Asia. Saudi Aramco for its part has been exploring such alliances and investment opportunities in line with its mandate and mission. The challenges could be met and opportunities taken depending on the degrees of success and NOC achievements in meeting the prerequisites I outlined earlier. We are confident in the ability of Saudi Aramco to face the challenges ahead, because we have been able over the years to build an
independent, efficient, accountable and commercially driven national oil company. We in Saudi Arabia are proud of its role and record.