Saudi Aramco plans to invest $35 billion over the next five years in projects to protect an oil production capacity cushion the world still relies on despite a shale oil boom and weak demand, the head of the world’s biggest oil producer says.

“Preserving our spare oil production capacity is crucial to maintaining oil market stability because it plays a pivotal role in protecting the world’s economic health,” Khalid Al Falih told an Oxford University seminar.

“So we are continuing to strengthen our oil business to meet the rising call on our oil production; in fact, we plan to invest $35 billion over the next five years in crude oil exploration and development alone to keep our oil production portfolio robust.”

Despite weak demand in Europe, Saudi Aramco has been pumping oil at multi-decade highs of around 10 million barrels per day (mbpd) for much of this year, largely to make up for sanctioned Iranian oil, leaving around 2.5 mbpd of capacity.

Saudi Oil Minister Ali Al Naimi had said in June it was unclear whether the kingdom would need to increase its capacity beyond current levels, thanks to uncertain demand and rising supplies of alternative energy sources.

But large investments in new production capacity are still needed to offset declines in older fields if Saudi Arabia is to maintain its key position as the world’s only swing producer over the next decade.

Al Falih ... assuring the world of stable supplies

Until the financial crisis began of 2008, expectations of a sustained and rapid rise in energy demand stoked concern among many consumers that Saudi Arabia’s 12.5 mbpd capacity might not provide a comfortable cushion for long.

But supplies of oil have since ballooned at a time of weak demand, with global economic growth potentially taking years to return to pre-crisis levels while efficiency improvements in the transport sector weigh on oil demand further.

“A paradigm shift is under way that is significantly changing the global energy picture from what was commonly perceived only a few years ago,” Al Falih says.

“We are seeing downward pressure on demand as life-style and demographic changes take hold, while environmental pressures and government policies (including potential carbon taxes) continue to work against oil in particular and fossil fuels in general.”

The chief executive of the world’s largest oil exporter points to increased extraction of unconventional and heavy oils and new conventional oil discoveries around the world as the main drivers of abundant new supplies to the market.

“Over just the past five years, global proven oil reserves have increased by more than 200 billion barrels. That’s like discovering another Kuwait and UAE combined,” he says.

Al Falih says growth in global energy demand – and oil demand in particular – has moderated.

Before the financial crisis of 2008, global energy and oil demand were anticipated to grow rapidly – and, some argued, unsustainably. Now, forecast growth has moderated, not only as a result of economic stagnation but also through welcome and increasing gains in energy efficiency. Changing demographics and lifestyles, environmental pressures, and energy policies have played a role too, he says.

“So, while we believe long-term demand will be robust enough to provide us with the confidence to invest, it will not rise to the point where it creates market imbalances, and stretches the industry beyond its means. Indeed, sustained moderate growth in demand levels is very healthy for our industry,” he says.

However, exaggerated concerns about scarcity and security of oil supplies have been dispelled, Al Falih says.

Not long ago, the global media was replete with doomsday scenarios of ‘Peak Oil’ and the inevitable demise of the petroleum industry. Today, the narrative centres instead on the abundance of oil and natural gas resources, and the industry’s unqualified success in being able to respond to unforeseen supply interruptions over the last couple of years, he says.

Manifa ... adding to overall production capability

“It is a spectacular reversal and you (the US) helped engineer it! That said, although the size of the resource base is growing with the inclusion of unconventionals, these resources will be challenging to extract, requiring ever-advancing technology, enabling policies, a positive regulatory environment and, above all, a stable oil market and a resilient industry,” Al Falih told CeraWeek .

Meanwhile, the global financial crisis has forced policy makers around the world to reexamine priorities.

Because of global economic and fiscal constraints, the world simply cannot afford to squander its limited financial resources. Furthermore, there is a growing realisation that there are tough choices to be made, and that energy regulations and policies can negatively affect national economies and hinder competitiveness. Affordability matters not only to nations but to consumers as well. Although this reality has been accentuated by the sustained economic crisis, it is a reality that is here to stay.

“Largely because of this economic re-balancing, we are seeing a re-evaluation of the role of renewables and of some environmental initiatives,” he says.

The ‘age of austerity’ has seriously affected government support for renewables, while lower natural gas prices have aggravated the competitive position of alternatives in power generation. In the short- to intermediate-terms, renewables face competitive hurdles warranting more realistic targets for their gradual deployment. But, as they become more affordable, I believe renewables will have an important role to play in the long-term, and we are committed to invest in their development, he says.

“In terms of the environment, austerity has reduced the appetite of governments to make massive investments, while the need to stay competitive argues against further constraining consumers and the private sector through environmental regulation and taxation. It is not that policy makers are dismissing environmental priorities – and neither are we. But a better balance between environmental and economic objectives is not only rational but also necessary if we are to provide the world with the essential and affordable energy it needs.”

In just a few years, these four realities have profoundly altered the world energy landscape, which is inducing a more pragmatic debate about global energy policies and regulations. “For us, it is now more certain that our industry will continue to play the major role in fuelling the transport, power, and chemicals sectors for many decades to come, and importantly providing a sustained environment of growth and investment for our individual companies.”

“So I believe that if we are to position our industry for the future we surely need to build greater resilience. I’ll talk briefly about five features which I believe are central to achieving this objective.”

“Perhaps the first thing to recognise is that market stability will make us more resilient,” he says.

“Market stability is not only essential for economic recovery today but is also necessary for sustaining long-term global growth and prosperity and for the global economy – as well as the good of our own industry. Last year, Saudi Aramco responded at great expense to natural disasters, geopolitical shocks, and fluctuations in our customer demand. In fact, we saw fluctuations of demand of over 1 million barrels in the last year.

“Once again, we helped maintain oil market stability and played a pivotal role in protecting the world’s economic health. Of course, no single player can shoulder the burden, as ensuring stability is a collective responsibility.

“Second, we need to heed the lessons of the past and better manage our risks.

“Indeed, despite our efforts to bring stability, we should all anticipate volatility and build prudent conservatism into our financial strategies. In very recent memory, we saw prices swing between $35 and $150 a barrel within a period of a few months. And on the other hand, as we know from painful experience, what happens to one company affects us all. It could be an industrial accident, a crisis of trust in corporations, or a security breach. As I know from last year’s malicious cyber-attack on Saudi Aramco, there are a lot of bad guys lurking out there!

“We therefore must fortify our defences – both physical and virtual – to protect ourselves and the stakeholders who are so dependent on us. At a more fundamental level, if our commitment to managing risk is unwavering and we weave strong values into our corporate cultures, then our long-term chances of success are exponentially greater.

“Furthermore, prudent diversification of our business portfolios makes our companies more robust and resilient over the long-term, no matter how attractive one business sector may appear in the short- to intermediate-term. Although it goes against the prevailing currents today, Saudi Aramco is doing just that; investing massively in expanding our downstream portfolio, growing petrochemicals, pursuing unconventional gas, and assessing solar.

“Third, we need to take a broader view of the industry we work in and be more closely connected to societal expectations.

“In particular, safety and protecting the environment have never been more important to society, and hence to us. Yet there are safety and environmental issues – real and imagined – which could derail our entire industry. Ladies and gentlemen, let us take ownership of the environment and accept that it is our responsibility by embracing absolute excellence in our operations, jointly undertaking R&D efforts, and sharing our safety- and environmental-related technologies and best practices. This will better position us to serve the collective good while also safeguarding our people, our communities, and the natural world.

“Fourth, we will significantly bolster our resilience if we continue to create truly transformative, game-changing technologies.

“Our business is already technology intensive, but we must aim even higher. In other words, we have to devote even more resources to R&D and technology creation directly within our companies. For example, could our investments in R&D at least be doubled? Could we aim for 70 per cent recovery of conventional resources? And could we look to double or even triple recovery from unconventional resources? As a result, we would almost quadruple the reserves of global liquids from our combined conventional and unconventional resources.

“On the consumption side, should we aim to convert crude oil directly into chemicals bypassing the refining process? Why not team-up with the auto industry to quadruple fuel efficiency and capture the carbon along the way? Should we then convert that carbon into valuable products rather than venting it into the atmosphere? These are certainly bold targets, but I know we can meet them if we widen the circle and bring our collective strength to bear.

“Finally, we need to attract and harness the right talent. All too often our industry is portrayed as low-tech, out of date, and part of the problem rather than being part of the solution; indeed many young people see us as a ‘sunset industry’. This is deeply concerning, as well as highly misleading. We need to spark the imagination of young people, and show them the abundant high-tech, complex, and exciting opportunities our industry has to offer,” he adds.