The Saudi Minister of Petroleum and Mineral Resources, Ali bin Ibrahim Al-Naimi, stressed that oil-producing countries play a vital role in the global economy, and that relationships between them are on “sound footing”.
“Oil remains an indispensable fuel for today’s industrialized world, which will maintain its primary position over the next three decades,” he said, in an address at the 10th International Caspian Oil and Gas Exhibition and Conference in Baku, Azerbaijan.
“From now until the year 2020, the demand for oil is predicted to increase by an average of one and a half million barrels per day annually. By then, the growth of worldwide demand will require an additional 30 million barrels of oil production per day, which is equal to 40% of today’s production. This additional supply can only be developed in an environment of stable oil prices, and will require significant, continuous investment in all parts of the world, and at all levels of the industry,” he noted. “When Azerbaijan and the other Caspian states obtained their independence over ten years ago, they began opening their doors to international investment. As a result, petroleum production and exports increased. We, in Saudi Arabia, were delighted to see the Caspian countries resume a prominent role among exporting countries.”
The following is the full text of the address of Ali Al-Naimi, the Saudi Minister of Petroleum and Mineral Resources, which he delivered at the 10th International Caspian Oil and Gas Exhibition and Conference in Baku:
“Good morning everybody. I would like, first, to express my appreciation and gratitude to H.E. Dr Medjid Kerimov, Minister For Fuel and Energy of the Azerbaijan Republic, for inviting me to take part in this special 10th anniversary of the International Caspian Oil and Gas Exhibition and Conference. It is a great pleasure to be here with you in Baku city, which we all recognize as one of the world’s notable oil cities. As many of you know, oil has been used in Baku since time immemorial, and oil, as we know it today, was discovered in Azerbaijan over 150 years ago. At one time, Azerbaijan supplied half of the world’s petroleum needs. Everyone in the petroleum business has tremendous respect and appreciation for the achievements of this great city. The world is seeing a rebirth of Azerbaijan’s oil industry, and expects it to resume its former place of prominence.
Before I present my generally upbeat view of the future for oil, let me first mention some thoughts on the recent past. When Azerbaijan and the other Caspian states obtained their independence over ten years ago, they began opening their doors to international investment. As a result, petroleum production and exports began to rise. We, in Saudi Arabia, were delighted to see the Caspian countries resume a prominent role among exporting countries. Some so-called oil-market pundits at the time said that the emergence of the Caspian producers was a threat to Arabian Gulf producers. Others even proclaimed that a radically different structure of the global oil market was in the making, that Caspian production would replace the role of the Middle East region, thus diminishing the importance of OPEC and its market stabilization policies. They claimed that a period of intense conflict among oil producers was on the horizon, and that oil investment would flow into the Caspian and dry up everywhere else. As we know, this did not happen.
I am happy to say that the roles of all producers are on a sound footing, as are the relationships between them. Oil remains the indispensable fuel for today’s ever-industrializing world, and it will certainly not relinquish its primary position over the next three decades at a minimum. From now until the year 2020, oil demand is forecast to grow an average of one and a half million barrels per day annually. By then, the growth of worldwide demand will require an additional 30 million barrels of daily oil production, which is a figure equal to 40% of today’s production. This additional supply will only develop in an environment of stable oil prices, and will require significant, on-going investments in all parts of the world and at all levels of the industry.
Ladies and gentlemen, to anticipate and plan for the world’s energy future, we need to consider the two options that we have. The first option is to face our common future in an un-coordinated way, which some may call the “free market,” environment. The second option is carefully to coordinate policy among major producers to ensure that worldwide oil stocks are maintained at a comfortable level for everyone - producers and consumers alike - so that demand and supply remain in balance. Under the “free market” option, with its tendency for cycles of boom and bust, there is a greater probability of prices falling back to near $10 per barrel, matching the so-called marginal cost. At these low prices, marginal oil fields - fields that are either expensive to operate or are located in remote, difficult environs - disappear from the market. Experts estimate that, in a $10 per barrel scenario, 5 to 10 million barrels of daily production would be lost. The loss of marginal fields would trigger a new round of price hikes, and frantic attempts to cash in on higher prices, which would lead to another period of $10 per barrel oil and restrained growth of supply.
In the “free market” scenario, it is also important to note that investments required to add new capacity, or even to maintain existing capacity, would dry up. Economies racing ahead on cheap oil would be impeded. Two or three years of low oil prices can lead to economic and financial crises in the 30-plus countries that have a population of about one billion and whose economies are highly dependent on the petroleum sector. Such crises have been known to trigger political and social unrest. Low investment and a shortage of supply could trigger significantly higher prices than the current OPEC price of $22-28, which would increase potential for a global economic crisis.
Under the option of cooperation and coordination, producers work jointly to promote the stability of the international oil market. Coordination ensures that worldwide supply and stocks are maintained at comfortable levels for consumers and producers. This approach allows the market to play its customary role, but at the same time ensures that oil prices stay within an acceptable range, such as OPEC’s $22-28. We believe that a target range is preferable, based not on daily or monthly fluctuations, but on an expected and desired annual average. This option leads to a reasonable income for oil producers and keeps supply from marginal fields flowing to the market. “Flowing” is the key word. Investment capital needs to move freely, and smoothly, into petroleum-related infrastructure in order to maintain current capacity, and to add the incremental capacity required to keep up with growth in demand.
Bearing in mind the anticipated 30 million daily barrels of increased global demand by the year 2020, the investment capital needed to achieve and maintain this level of production amounts to approximately $120 billion dollars annually. This money will be hard to find if markets are not sending the right price signals.
Another aim of this cooperation and coordination option is to develop spare production capacity of between 3 to 7 million barrels per day among the most proficient producers, which provides a cushion of 5 to 10% of total worldwide crude oil consumption. In my view, this is the only way to avoid the shocks of restricted supplies and the concomitant price hikes that result from labour unrest, natural disasters, wars, or other unexpected events that inevitably occur from time to time.
My friends, I believe that the choice is clear, and easy to make. It is a folly of the highest order for producers, or consumers, to choose a path that leads to chaotic conditions, where planning is impossible. When cooperation is lacking, it is impossible to plan for a stable oil market. Petroleum producers and consumers both are denied the benefits of balanced supply and demand. Lack of cooperation also makes it very difficult to achieve smooth transition to a future where demand is some 40% higher than it is today.
We in Saudi Arabia have chosen the road of cooperation and coordination in all our dealings with both producers and consumers. Our commitment to this strategy is well known, and our achievements are widely recognized. This emphasis on cooperation does not deny the role of competition in the market place among all producers, whether within or outside OPEC. There is plenty of scope for everyone, and there remains plenty of work to be done.
While OPEC continues to take the leading role and responsibility in balancing the market, as it has often done in the past, it works closely with other producers, especially in times of unusual need or under difficult circumstances. This has been achieved with great success over the last five years. The cooperation of a number of non-OPEC countries, such as Mexico, Norway, Russia, Oman and Angola, has been noteworthy, and has greatly benefited both suppliers and consumers.
My friends, the prospective and future oil production from the Caspian countries is welcome. I anticipate that it will make a considerable contribution towards meeting future global energy needs and will boost the countries’ economic prosperity. Growth in the region can only enhance the prominence of oil as the world’s preferred energy source. The world has already absorbed approximately 18 million barrels per day of non-OPEC production over the past 25 years, and can almost certainly be counted on to accommodate any increment from the region, in addition to that from other regions.
The prospects are especially encouraging because OPEC and non-OPEC producers work together to guarantee market stability.
Let me stress that new reserves and oil production from the Caspian area are not seen as a threat, but as a welcome sign that abundant oil supplies will be available to ensure the future health of the world economy.
I believe that as time goes by, cooperation between and among oil producers will increase, not diminish. There is too much at stake. For our part, we in Saudi Arabia will continue to consult and coordinate our actions, which impact international oil markets, with non-OPEC producers. As far as I am concerned, the future looks bright for enhancing firm relations between Saudi Arabia and the Republic of Azerbaijan. We share common goals and aspirations: an industry that will benefit our people and contribute to world peace, stability and economic growth.
Thank you again for inviting me and offering me this chance to share ideas with such a distinguished audience.”
Source: SPA
