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The oil industry's time-intensive nature demands planning horizons stretching across multiple decades. Furthermore, these time windows must be supported by massive amounts of capital to finance operations, manpower, infrastructure, and research and development and to address environmental concerns.

Experts predict that by 2030 the global population will rise from the current 6.7bn to 8bn people, raising energy consumption by half to meet economic development needs, even after accounting for continued progress in energy efficiency. These projections further expect that of all energy supplies, fossil fuels will continue to meet 80% of world demand through the next few decades and that oil is expected to retain its leading position as the world's largest single source of energy. This is not surprising given petroleum's proven nature in terms of reliability, security, acceptability, cost-effectiveness and safety, as well as its massive infrastructure, all of which place the future energy burden squarely on oil.

However, our ability to respond to this anticipated mushrooming of global energy demand is facing strong headwinds. Extraordinary economic and financial events and conditions have created the global crisis that has dominated headlines for the past several months. Virtually no sector is untouched by this deep recession. The downturn has caused a dramatic price slide for oil and gas, after the longest bull run in the entire history of oil markets, which lifted oil prices to historical highs in July 2008.

During this bull run, some argued that high prices were indicative of dwindling supply, and that the world should turn to alternatives to oil. Merely months later, after oil prices dropped more than $100/B, and despite a global recession the likes of which have not been seen since the great depression, the momentum behind alternatives to oil continues unabated, which clouds the future prospects of oil demand.

Adding to this is a trend of lower energy demand from sectors such as industry, manufacturing and construction, which has followed the deep unexpected economic downturn. Demand is now expected to drop by more than 1mn b/d from last year's average. Not only is this the largest decline in demand since 1982, it also marks a second successive year of decline. Compounding this clouded outlook are calls to lessen or end dependence on oil, particularly from certain regions.

In such an uncertain demand environment, long-range petroleum industry initiatives suffer. Inconsistencies and unknowns are not conducive to future investments, when long-term, capital-intensive industries require a good financial return and stable prices, as well as clarity of future demand.

Saudi Arabia's leadership is reflected in production of 8mn b/d, plus a continued commitment to maintain a spare capacity cushion of 1.5-2mn b/d to help stabilize the international oil market in the event of sudden supply shortages or demand spikes. Our daily production capacity is set to rise to 12.5mn b/d by the middle of this year, through the most ambitious upstream project slate in our history, valued at around $70bn. Furthermore, one of our notable achievements over the last few years was the expansion of non-associated gas reserve and production, which today accounts for over half of the Kingdom's gas supply.

Another milestone is the Kingdom's expanded emphasis on research and development. This innovation thrust is especially focused on technologies to enhance petroleum recovery and to formulate the environmentally friendly ‘fuels of the future,' on which advanced internal combustion engines will run. Note that both these strategic paths are geared to future demand, particularly in the energy-dominant transportation sector, and toward greater environmental sustainability.

This transformative path will continue into the future, with an ongoing emphasis on: helping ensure reliable energy supplies; adding value to our hydrocarbon resources through downstream and associated industries; continuing to expand refining capacity at home and in key world markets; and further diversifying our national economy. These steps are part of a broader ambition to evolve the Kingdom's economy towards a knowledge-based industrial society by investing not only in energy infrastructure but also in human resource development and education.

If fulfilling such a commitment is contingent on deep and wide obligations of time and money, that dual investment is in turn reliant on energy prices that make such long-term commitments both practical and supportable.

Long-range projects have often given rise to the discovery of additional resources with the potential to contribute significantly to the world's energy mix. In addition, programs to develop difficult and marginal areas such as non-conventional resources are themselves capital-intensive, and in the present price environment, they may no longer make good business sense.

I have often described unsustainably low oil prices as carrying the seeds of future spikes and volatility. This danger is inherently linked to the ability to strategically plan oil capacity expansions to meet future demand. In a low-price environment, the trend is often to focus on survival instead of expansion. If we place a low priority on preparing for the future, that lack of action can come back to haunt us through supply shortages and another round of high prices.

Today's deep economic crisis has on many levels challenged conventional wisdom. It has become difficult to see when things will begin to turn around, or what long-term economic aftershocks we might encounter. In this uncertain environment, energy demand has pulled back, negatively impacting oil prices and impinging on the industry's long-term planning capability. This is also complicated by other factors, such as political rhetoric calling for reduced dependence on oil for perceived reasons of environmental sustainability, or seeking independence from a particular region.

Time and capital intensive commitments rely on oil prices that are low enough to enable economic growth, especially for developing nations. However, prices should be high enough to provide sufficient return to producers, and allow for timely planning and acceptable risk. They should be at a level to incentivize energy efficiency among consumers; they should also be sufficient to encourage production from other sources, such as marginal fields, non-conventional sources and renewables.

Volatile energy prices have heightened interest in the development of other sources of energy, called by some “alternatives”, but in my opinion they should be called “supplemental”. These sources cannot contribute meaningfully to the world's energy mix until they have attained levels of affordability, accessibility, acceptance and sustainability that can come only with the investments that will enable their research, and later building and maintaining their infrastructure.

We frankly court disaster if these supplemental resources on which such high hopes for energy security and sustainability are pinned do not fulfill their high expectations. While all viable energies will ultimately have a role in meeting world demand, many of these sources are either in their infancy, or face too many unresolved sustainability issues, to serve as more than supplemental resources for some time. Just as the oil industry needs a long-term horizon, so do many alternatives.

In years to come, if traditional energy supplies should prove inadequate because capital expenditure was curtailed due to unsustainable prices, unreliable indication of future demand, or hopes for a substitute for oil that cannot deliver, such a supply crunch would be catastrophic. The painful result would also be felt sooner rather than later: it would effectively take the wheels off an already derailed world economy.

Ali Naimi is Saudi Arabian Minister of Petroleum and Mineral Resources. Petroleumworld not necessarily share these views.

Editor's note: This article is an edited version of a keynote address made by Minister Naimi to the 4th OPEC International Seminar in Vienna on 18 March and originally published by Middle East Economic Survey (MEES) on 30/04/2009, VOL. LII, No 13. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld News 04/19/ 08

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