May 8 (Reuters) – Below is the full text of Saudi Energy Minister Khalid al-Falih’s keynote remarks at the 19th Asia Oil and Gas Conference in Kuala Lumpur, Malaysia on Monday. Falih is also the chairman of state oil firm Saudi Aramco.
Introduction and Malaysia
Prime Minister Dato’ Sri Najib Razak, Your Excellencies, Distinguished Guests, Ladies and Gentlemen, good morning.
It is my distinct pleasure and privilege to address this gathering of energy industry leaders from across Asia and beyond.
I would like to thank our Malaysian hosts for their hospitality, and for providing us with this opportunity to deliberate on the strategic energy issues impacting the people of Asia-Pacific, the world’s fastest growing region.
As always, it’s fantastic to be back in Kuala Lumpur, which aside from being a shining example of this region’s development and the rise of its people’s standard of living, is also in many ways the crossroads of Asia.
I was honored to be here at the end of February as part of the delegation of the Custodian of the Two Holy Mosques King Salman bin Abdulaziz Al Sa‘ud for what was a historic state visit, during which an agreement was signed between Saudi Aramco and Petronas to partner in the Refinery & Petrochemical Integrated Development project also known as RAPID in the southern state of Johor.
We’re tremendously excited by the prospects for this partnership, which further enhances Saudi Aramco’s position as the leading supplier of energy not only to Malaysia but to Southeast Asia as a whole—which we see as one of the most important growth markets in the world.
Ladies and gentlemen, today I would like to address the increasing importance of Asia not only to our industry but the world at large; the special significance Saudi Arabia attaches to this region; and close with a look at the present and future of oil and energy. Allow me to begin, though, with the ever-growing importance of this region to the global economy and the energy industry.
Asia and Energy
For the last 30 years, Asia has been the fastest growing region for global energy demand—and that is set to continue, underpinned by economics and demographics.
By the middle of this century, Asia’s population will grow by another 870 million people.
In 2050, half of the top 20 economies will be Asian, according to a recent report by PWC. Furthermore, the two countries set to move up the greatest Vietnam and the Philippines are both members of ASEAN, and both will enter the top 20 global economies.
Of course, as economic and population growth sets in, and as living standards rise in the ASEAN region and the rest of Asia, so will energy demand.
Almost all expected oil demand growth over the next quarter century is likely to originate in this part of the world, while almost two-thirds of gas demand will also come from the Asian region.
As such, the importance of ASEAN and the rest of Asia to the global oil and gas industry cannot be overemphasized — lending further weight to the discussions and dialogue taking place here today and tomorrow.
Saudi Arabia’s Growing Relations with Asia
Of course, the Kingdom of Saudi Arabia enjoys deep, historical bonds with Asia and the Pacific that span multiple spheres such as diplomatic, security, economic and energy relations, which are rooted in very longstanding cultural and spiritual ties.
In the years and decades to come, those relationships will continue to grow, diversify and strengthen as a result of our shared values, common interests, and mutually beneficial opportunities. In fact, the recent visits to the region by His Majesty King Salman are a testament to the Kingdom’s desire to take these strategic ties to an even higher plane.
Saudi Arabia has made a long-term commitment to Asia, and we are the number one supplier of energy to all of the region’s major economies — a responsibility we take most seriously. Through our energy products, advanced technology, and continuing investments across the value chain, we are determined to play an even bigger role in satisfying Asia’s expanding energy demands.
As our participation in the RAPID project here in Malaysia demonstrates, we in Saudi Arabia believe the best way to realize that goal is to cultivate close partnerships with key stakeholders and leading institutions across the region that know their markets and whose strengths and capabilities complement our own. And Petronas certainly fits this bill!
In addition to its equity stake in RAPID, Aramco is also a partner with Sinopec and ExxonMobil in the Fujian refinery and petrochemicals manufacturing complex in China, a majority shareholder in S-Oil in Korea, and is collaborating with Idemitsu Kosan and Shell in Japan. Saudi Aramco is also working with Pertamina to upgrade the Cilicap Refinery in Indonesia, with the project set to enter the FEED stage in the second half of the year.
And of course, Saudi Aramco continues to explore a variety of other promising collaboration opportunities across the fast-growing ASEAN region and elsewhere in Asia, with India being a prime target.
That’s in keeping with Saudi Arabia’s own development plans for the future. As you might be aware, last year the Kingdom announced its Vision 2030 to provide a blueprint for the social and economic development of Saudi Arabia.
The Vision calls for diversification of the national economy to be led by the private sector, the privatization of major Government-owned enterprises, building Saudi Arabia into an international investment powerhouse, and turning the country into a hub for logistics, services, and advanced manufacturing, with particular emphasis on the knowledge industries of the future. We will also turn the Kingdom’s young population into a world-class workforce, and promote greater participation of women in the national economy.
Vision 2030 also recognizes the role that international cooperation and cross-border investments must play to realize those aspirations. As a result, there is a wide range of attractive business opportunities on offer in the Kingdom for strategic investors around the world.
I am confident that many of these opportunities will be of interest to companies and organizations throughout the ASEAN region and right across Asia and the Pacific, just like Khazanah, the sovereign wealth fund of Malaysia, which I am proud to note is actively investing in the Kingdom.
Ladies and gentlemen, allow me now to build on what I said about Asia in a more global perspective on the oil and energy markets, beginning with a look at longer term trends.
The world’s economy is likely to more than double in size by 2050, with economic power as I mentioned continually shifting to developing nations. By then, in fact, six of the seven largest economies in the world in PPP terms will be emerging markets. Likewise, the world’s population will continue to grow, requiring ever more energy.
As we all know, the global energy environment is in the early stages of a major transformation, with renewables and electric vehicles starting to make progress.
But alternatives are starting from a small base, and their future growth is also likely to be slower than many casual observers imagine.
Besides the technical and economic hurdles faced by alternatives, affordability is likely to be an issue in many developing economies, considering that alternatives still require subsidies due to their high cost compared to conventional energy sources that are proven, reliable, and supported by a massive system of existing infrastructure.
So, in my view, the global energy transition, while certain, will be long and complex. In fact, I’m concerned that the slowdown of oil and gas investments, driven in part by short-term oversupply and by the unrealistic expectation of alternatives’ rapid deployment, could lead to energy shortages and supply security concerns.
I therefore do not anticipate that oil demand will peak anytime soon.
I believe we should continue to work to develop a diversified energy portfolio which encompasses both conventional and new energy sources, giving alternatives the time and space they need in order to effectively, efficiently and economically shoulder a larger burden of world energy demand over time.
Present Oil Market and Future Direction
Let me now turn to the short term status of the global oil market.
Despite lingering headwinds, the oil market continues to improve from the conditions we saw early last year, when crude oil inventories were at an all-time high and set to continue rising.
The markets, however, have recently been impacted by a combination of low seasonal demand and refinery maintenance in the US, some growth in non-OPEC supply, and the actions of financial players in the market. All of this has slowed the impact of recent production cuts.
I believe the worst is now behind us with multiple leading indicators showing that supply-demand balances are in deficit and the market is moving towards rebalancing. We should expect healthier markets going forward.
For us in the Kingdom, there is primarily one metric that we focus on and target as we move forward, and that is global inventories. We are pleased that OECD inventories for which reliable and timely data are available—have been gradually declining since the middle of last year, with an estimated oil stock draw of 60 million barrels since they peaked last July. Floating storage, for which less data are published, has also declined significantly.
Unfortunately, however, the US market—where analysts are most focused upon—is where inventories have been fluctuating! But we expect US inventories to resume a downward trend driven by increasing refinery inputs, which are underpinned by seasonality and a healthy US products demand that shows signs of continuing to grow in 2017.
Turning to oil demand in other major markets, we look for China’s oil demand growth to match last year’s, on the back of a robust transport sector, while India’s anticipated annual economic growth of more than seven percent will continue to drive healthy growth. In sum, we expect global oil demand to grow at a rate close to that of last year.
On the supply side, short cycle and smaller projects—such as shale oil developments—and incremental investments are picking up as a result of the price recovery, which is good! However, longer-cycle, more complex and higher cost upstream projects, especially mega investments involving expensive marginal barrels, remain on hold. In fact, global E&P investments worth about one trillion dollars have been deferred or cancelled since the downturn.
It is also worth noting that some of the supplies currently coming on-stream and contributing to inventories stem from investments made roughly a decade ago, but this backlog of production projects will soon be depleted.
And then we have to deal with the natural decline of the large base of legacy production, which we see clearly in the North Sea, Mexico, China, and other major producing basins. In fact, conservative estimates predict that we will need to offset 20 million barrels per day in combined demand growth and natural decline over the next five years. That is why I fear, as earlier mentioned, that we are heading into a future of supply-demand imbalances.
Finally, turning to our posture with other producing countries, I am pleased that our OPEC and non-OPEC partners who agreed on supply cuts are so far exhibiting high levels of adherence to the commitments that were made last December.
I would also like to emphasize what I have said in the past, that the producer coalition is determined to do whatever it takes to achieve our target of bringing stock levels back to the five-year average.
Based on the consultations I have had with participating members, I am rather confident the agreement will be extended into the second half of the year and possibly beyond.
So, ladies and gentlemen, let me close by emphasizing my optimism, first on the future of Malaysia and by extension the region, which is indeed bright. I am equally optimistic about long-term global energy trends, so long as wise and timely investment decisions are made to ensure petroleum supplies will meet growing demand. And I am also very confident that global oil markets will soon rebalance and return to a healthy state.
Thank you for your attention this morning, and once again thanks to our hosts for their gracious hospitality. (Editing by Reem Shamseddine)
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