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Oil Capacity Challenge In The Middle East




By Salim S Al-Aydh

Let me begin my remarks on the challenges associated with boosting production capacity in the Middle East – and in particular, in Saudi Arabia – with a brief look at where energy demand is heading.

Global energy demand is forecast to grow by more than half over the next quarter-century, exceeding 325mn barrels of oil equivalent per day. Oil and gas alone are expected to account for close to 60% of total supply, and over the same period, Dan Yergin’s group is projecting a need for $6 trillion of investment in exploration and producing alone. However, while it is clear that world demand for energy will undergo tremendous growth in the years and decades to come, the details of the picture remain rather uncertain.

The uncertainty begins with future supplies. The amount of oil that will come from non-OPEC suppliers in the years and decades ahead is open to speculation, and within OPEC itself, changes in the production levels of even a single country can have a considerable impact on global supplies. Furthermore, we have to look at the development of non-conventional heavy oil reserves and other non-traditional sources, and their long-term effect on supplies.

The demand side of the equation is equally hazy, however. Over the last several years, expanding Chinese oil consumption has been an important driver of global growth in demand for petroleum, but future trends in that country are uncertain. Demand may also be impacted by new energy policies and tax and tariff regimes in major consuming countries. The long-term price elasticity of oil demand is another point of debate among analysts. So far we see little impact on demand as a result of rising prices, but that dynamic may not continue indefinitely.

The influence of these different factors is reflected in the widely varying demand forecasts in circulation today, and makes planning future investments a real challenge for large producers like Saudi Aramco, who will end up bearing the brunt of such variability. For example, the projected call in 2025 on Saudi Arabian oil is anywhere between 11mn and 20mn barrels per day – a range of 9mn b/d of demand, or nearly equivalent to our current daily production!

Regardless of the projections and the supply-demand scenarios, I do believe that there will be adequate supplies of petroleum available for many decades to come. I think most of us recognize that the real concerns related to future oil supply expansion have little to do with “subsurface” issues like reserves, and instead revolve around “surface” factors such as:

Limits on exploration activities due to environmental concerns;

Constraints in refining and transportation capacity;

Local, regional and global political issues;

The need for substantial infrastructure investments all along the value chain; and

Energy policies, governmental regulations and permitting limitations.

However, the industry has already taken tremendous steps to build for the future. Around the globe, rig counts are up, announced refining capacity expansions in the next five years total some 6mn b/d, and shipbuilders are stretched to their limits because of new construction. That trend is reflected at Saudi Aramco. As an enterprise, we’re committed to playing our part in meeting demand growth and continuing to provide a reliable supply of energy to the world, and we’re backing that commitment with action.

For example, we now have in progress roughly half a dozen major oil production projects, with a combined production capacity of some 3mn b/d. Some of that capacity will help maintain potential, while the remainder will serve to expand our production capability to 12mn b/d by the end of 2009. In addition to the expansion of our worldwide refining capacity through overseas joint ventures, domestically we’re also preparing to build two new export-oriented refineries with a combined capacity of 800mn b/d, and are proceeding with our joint-venture PetroRabigh refining-petrochemical integration project. We’re also constructing a number of new tankers which will join the fleet of our shipping subsidiary.

However, some observers are questioning whether our industry as a whole will be able to meet the logistical challenges associated with these capacity expansions, and in particular, whether our engineering, procurement, construction, and project management capabilities are sufficient. Given Saudi Aramco’s position as the largest producer and exporter of crude oil, my company’s response to these questions is an important piece of the overall picture. Therefore, I’d like to devote the remainder of my remarks to outlining the strategies and tactics we’re employing to make sure we meet all of our project commitments, and with them, our obligations as an energy provider.

Without a doubt, the challenges we face are enormous, and the scope of the projects we have on our plate is unmatched in our company’s seven-decade history and perhaps in the history of the industry.

Therefore, it is imperative that these efforts are matched by the development and deployment of critical support services. At Saudi Aramco, we’re doing just that, with operations which draw on our vast experience of managing megaprojects, integrate our project teams, and encourage innovative, proactive approaches to our initiatives.

As a result of our previous world-scale projects such as Shaybah, the Haradh and Hawiyah Gas Plant Projects, Qatif, and most recently our Haradh III crude oil increment, management of megaprojects is now a recognized core competency within Saudi Aramco, and we actively work to apply lessons learned in previous projects and to share information and expertise across organizational lines.

This strategy also helps us harness the power of integration. Our project teams incorporate representatives from Saudi Aramco and our contractors, vendors and service providers from around the world. We have worked with a number of these firms for many years on many projects, and they consistently bring a positive attitude and considerable commitment to our shared activities. Such integration enables us to make the best use of specialized expertise and perspectives, and provides cost and time savings not only in the project phases, but also over the lifetime of the new facilities. I think of this as an inclusive approach to project management and EPC work, and its validity and effectiveness have been proven in every one of our recent megaprojects.

At the same time, we’re leveraging new technologies and seeking innovative solutions to operational challenges. IT advances, for example, have revolutionized the way we communicate and coordinate our activities, allowing us to bounce massive volumes of information halfway around the world in the blink of an eye. We’re using a combination of computerized geographic information systems and GPS equipment to facilitate field operations, while elsewhere we are working with industry leaders to reduce the complexity of project-related software, using laser scanning to provide as-built drawings, and considering use of tools like Radio Frequency Identification to facilitate the tracking of vast amounts of tools and materials.

Other solutions rely on new thinking about existing processes. For instance, we are enhancing various project management processes, such as standardizing procurement processes and equipment designs, increasing the productivity of local design and construction contractors, and leveraging Capital Program data for improved planning. We’re also making greater use of longer-term agreements to minimize contractor risk, and fast-tracking our contracting, design and purchasing activities. This allows us to greatly streamline our processes, secure vital resources quickly and efficiently, and deliver more oil and gas to the market earlier.

Even at a time of increasing global commodity prices and material supply delays, our Haradh III project was successfully completed earlier this year in 21 months, and was brought on-stream five months before its original target date. Our Hawiyah NGL project is also progressing quickly, and we anticipate bringing it on stream two months ahead of schedule in 2008.

Furthermore, we saw the current wave of price increases coming, and addressed it in our planning process. As a result, none of our projects has come in substantially over its original budget, and we have not had to scramble for additional funding for our oil and gas initiatives. Similarly, our use of innovative contract strategies allowed us to beat the industry out of the blocks, and lets us focus on schedules rather than just costs. We already have the necessary equipment in place, materials have been sourced and fabrication assets are prepared, and we anticipate bringing these crude oil increments on or ahead of schedule.

As I said, the scale and complexity of these current and future projects are considerable, and the challenges we face are enormous. However, given our combination of vast experience and know-how, qualified people and integrated project teams, and material resources and innovative processes, Saudi Aramco will meet those challenges, and reap the considerable opportunities that they represent.

Ladies and gentlemen, we are prepared to go to these lengths because we understand just how much depends on our activities and operations: not abstract supply and demand figures, but rather the livelihoods and living standards of billions of people on the planet. Oil and its derivative products provide us with mobility, allow us to produce all manner of goods and products, help us grow our food, keep us comfortable in the heat of summer and the dead of winter, and make our lives safer, healthier and more enjoyable. Those of us in the petroleum industry have both the responsibility and the privilege of enabling countless men and women around the globe to live fuller, more meaningful and more productive lives, while building a still more prosperous future for their children. That’s an obligation we at Saudi Aramco take very seriously, and why we will continue to do what it takes to ensure a steady, stable supply of energy to the world.

Salim S al-Aydh is Saudi Aramco’s President, Engineering & Operations Services. Petroleumworld not necessarily share these views.

Editor's Note: The preceding speech was delivered to the CERA “East Meets West” Conference in Istanbul on 21 June 2006, and first publish by Middle East Economic Survey - MEES, VOL. XLIX, No 32, 7-Aug-2006, Issue. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld 09/10/06

Copyright ©2006 Salim S al-Aydh. All Rights Reserved.

 

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