This article is based on an address in October 1999 in Houston by the author to the Houston Forum.
High reserves and low production costs continue to anchor Saudi Arabia's oil policy. But these assets bring with them a strong national dependence on oil income.
Saudi Arabia fully realizes its dependence on oil and is striving to increase its oil income by working in cooperation with other producer nations to maintain what it considers fair oil prices and production levels. The nation is also focusing on full utilization of all its hydrocarbon resources. This is why Saudi Arabia has introduced the possibility of foreign investment in its energy sector.
Rather than seeking investment aimed at increasing oil production, the kingdom is setting its sights on integrated projects that add value at each link in the chain. These projects could involve petrochemicals, electricity, and water desalination.
Saudi Arabia's resources
Saudi Arabia is blessed with spare production capacity, a national economy closely linked to the oil industry, and a stable political and economic system driven by moderate and dynamic policies.
These factors work together to form a stable and consistent oil policy.
Saudi Arabia's recoverable oil reserves currently stand at 261 billion bbl, or one fourth of the world's total.
Significantly, during the last 20 years global oil reserves have increased by a net of 400 billion bbl, with Saudi Arabia's contribution alone accounting for one quarter of that total. During the same period, Saudi Arabia has been able to find 3 bbl of oil for each barrel produced in the kingdom. And, in the years to come, more oil will likely be found in Saudi Arabia than anywhere else in the world.
In addition to the enormous oil reserve base, Saudi Arabia's cost of production is one of the lowest in the world. Today, our all-inclusive cost of production is less than $1.50/bbl, while the global average cost is about $5/bbl. In some areas, that cost is more than $10/bbl.
We also have a great advantage when it comes to adding new reserves or increasing production capacity. It costs Saudi Arabia less than 10¢/bbl to discover new reserves, while the cost in some other areas of the world can be as high as $4/bbl.
Our recent development of Shaybah oil field, located in one of the most remote, barren deserts in the world, is a good example of Saudi Arabia's ability to develop new production at low cost. Despite the field being so far from anything that we had to build a 240-mile road and a 400-mile pipeline to connect it to our networks, the cost of bringing this 500,000 b/d field on production was only $2.5 billion.
This shows that the cost of adding the capability-all the necessary infrastructure, production, and transportation facilities-to produce 1 bo/d more in Saudi Arabia is, at most, $5,000, compared with $10,000-20,000 in most other areas of the world. So our current production costs and the costs for developing more production capacity for the future are probably the world's lowest.
These two factors-high reserves and low costs-are tremendous benefits. We believe that these benefits must be managed prudently for the advancement and prosperity of our nation and for the peace and well-being of people worldwide. The Saudi government, under the leadership of King Fahd and Crown Prince Abdullah, is managing its oil resources with these goals in mind.
Further, our understanding of this resource is that we must do our best in its administration or we will not deserve to have it.
We have installed the infrastructure required to meet not only our current and projected production demands but also to meet global emergency needs.
Currently, we are producing at only about 70% of our daily production capacity, with about 3 million b/d of available production capacity on standby.
Additionally, we have surplus oil export and pipeline capacity. For example, our cross-country, east-west oil pipeline system can carry and deliver 5 million b/d through our terminal on the Red Sea, yet we are running it at only half capacity. Similarly, our oil export terminals on the Arabian Gulf can load 14 million b/d but are currently handling much less than half of that.
Maintaining this spare capacity has a cost. Saudi Arabia's willingness to bear these costs illustrates its strong commitment to the stability of the world's oil market.
Saudi economy
Oil's share of the Saudi gross domestic product is about 35%, and oil's share of government revenues is about 75%. Oil's contribution to the value of our exports is almost 80%.
We have succeeded to some degree in reducing this dependency on oil, especially with regard to GDP, where oil's contribution has gone down from 70% during the last 25 years. Yet the road is still long. The major challenge is to use our comparative advantage as a springboard for the creation of wealth by different sectors and sources.
We are concerned about our high dependence on a single natural resource. Yet having oil as the foundation for our economic strength is not unlike other countries that have also relied at times on a dominant commodity or industry.
Cotton, gold, wheat, coffee, tea, and textiles, for example, all helped build other nations and made possible new opportunities. By using the comparative advantage of their resources-natural or otherwise-these countries have enjoyed economic expansion. Our comparative advantage is a strong base of hydrocarbon reserves favored by low production costs.
In the long run, Saudi Arabia must not remain dependent solely on crude oil exports. Instead, we will use our comparative advantage to tap the potential of oil and gas in related ways.
This abundant energy resource can be made available to develop domestic enterprise, attract international investors, and diversify our economic base.
The strength of Saudi Arabia's oil industry and our national march forward are the results of a stable, well-established political system with a clear economic policy. Saudi goals aim for social, economic, and political stability at all levels-regionally and internationally.
Economically speaking, we have adopted a middle-course policy. Saudis have a free economy in terms of investment, private enterprise, and transfer of funds. Yet the government gives special attention and care to the social needs of its citizens.
Free schooling and free medical services are provided by the state. The government also builds and maintains an infrastructure that includes airports, railways, and a national road system. It takes special care to ensure that water, electricity, fuels, and communications are extended to all areas, for private and commercial use.
The government constantly reviews the structure and processes of our economic policies and organizations. We do our utmost to keep our systems and institutions competitively up to date. By doing so, our policies and goals reflect the changing needs of Saudi Arabia, as well as related global economic developments.
The recent creation of a Supreme Economic Council, as well as continuing revisions to our foreign investment laws and the privatization of some domestic activities, reflects these needs. Our discussions with international oil companies about energy and hydrocarbon investments in Saudi Arabia show the dynamic nature of the kingdom's economic direction.
Investment climate
One of our primary policy goals is to achieve a stable international oil market.
Here's what that means to us: Wide and rapid swings in prices are undesirable.
We are quite aware that, since the opening of the oil-futures market in the early 1980s and the end of fixed oil prices in the mid-1980s, prices have bounced up and down-not only daily and weekly but also hourly. In this completely free market, with financial tools like futures and options, volatility is the norm. Yet these trends in what are known as paper markets reflect only one of the factors affecting oil prices.
Wide fluctuation is not good for producers, consumers, or investors; after all, they're the core of the market, not the traders and speculators. We believe that oil-price fluctuations of more than 10% are not a healthy sign. A stable oil market means a reasonable income for public, private, and state-owned oil producers, yet not so high as to restrain global economic growth or the needs of developing or advanced countries.
What is the right price for oil? I doubt that any two people in the oil industry would give the same answer. Yet we all know the wrong price.
When the price of oil dropped to about $10/bbl in 1998, all of us in the oil industry, and outside as well, knew it was the wrong price. Oil-producing and exporting countries faced hard times, while oil company stock shares and profits declined sharply. Oil production in some areas was shut in or otherwise declined.
Equally important, or perhaps more alarming, is the change in the flow of investment, which affects the future of the petroleum industry. It has been reported that oil investment during 1999 decreased by more than 20% worldwide. This decline will not reverse itself immediately, even though the price of oil has recovered in recent months.
Nobody expects a shortage of oil supply in the near future. However, the drop in investment will disrupt the development of new oil fields and the search for new deposits as well as retard the steady growth of production and production capacity. Undoubtedly, the investment crisis would have been harsher had low oil prices continued for another year.
We know that a continuation of 1998's low prices would have had a severe and adverse impact on oil producers, oil companies, and the industry as a whole. In turn, this would have had a negative impact on the world's economy.
One thing is for sure: Saudi Arabia cannot accept a low oil price. Yet it cannot defend the world oil price all by itself; it can do so only in cooperation with other producers. We have tried doing it alone in the past, and it did not work.
Along with some of the other producers, we have successfully avoided a major catastrophe in the oil industry. I am sure that cooperation among oil producers, both Organization of Petroleum Exporting Countries and non-OPEC producers, will continue in pursuit of this goal of a lasting, stable market.
What's needed
Saudi Arabia is an open country for foreign investment, open to new ideas and opportunities.
Regarding energy and hydrocarbon industries, we are looking for investors who meet our needs and can get a good return.
Downstream, we are fully open to investors. Currently, we have two joint-venture refineries in Saudi Arabia, one with Mobil Corp. and the other with Shell Oil Co.
In the industry's oil-services sector and lube oil manufacturing and distribution, Saudi Arabia has a large number of projects with foreign companies and Saudi private and nonprivate investors. Internationally, we are big investors in the refining and marketing business and continue to seek strategic alliances with major refining and marketing enterprises worldwide.
But what about upstream investments? In philosophy and principle, Saudi Arabia is not against foreign investment in crude oil production and exploration. Thus, it is not an issue of principle, but an issue of whether foreign-company participation can be mutually beneficial at this time.
Opportunities for investors in the energy sector of Saudi Arabia clearly exist. Crown Prince Abdullah identified these kinds of investments very clearly as "something good for Saudi Arabia and good for the oil companies-a mutual benefit for both."
The benefit of such investments in Saudi Arabia would not be found in finding new oil or increasing our production and capacity. We already have plenty of reserves and idle capacity. Any production increase is subject to our commitments with other producers, especially within OPEC.
What we need, then, is not somebody to come and produce oil or gas and sell it to others. We need integrated projects where each link of the chain adds value. These projects could involve petrochemicals, electricity, and water desalination. The needed investments are those that complement our industries and national companies, not replace them.
Many of the proposals that we have received do fit within our needs and within our criteria. We are looking into these proposals carefully, with each receiving close consideration. Equally important, we are considering other new ideas and possible projects. We expect soon, therefore, to see the commencement of negotiations with companies to formalize the needed projects.
The outlook
Saudi Arabia promotes sustainable growth in oil use, which can be created by balancing supply and demand in both the short and long terms.
We strive to achieve a reasonable and stable oil price, which makes for a healthy and growing oil industry, providing oil producers with a reasonable income while contributing to global economic growth.
On the average, the governments of oil-producing countries receive about 20% of the total proceeds from the economic value represented by a barrel of oil, while the governments of consuming countries in Europe, for example, receive about 75% through taxes on gasoline and other petroleum products.
Saudi Arabia fully realizes that it is highly dependent on oil income. While we are working to increase this income, we are also working hard to find income from sources other than oil. We intend to realize oil income increases through a combination of fair prices and production levels and through the full utilization of all our hydrocarbon resources.
And that's where possible foreign investments in Saudi Arabia come into the picture. A number of these are currently being assessed for joint projects at home and abroad.
I am optimistic about the future of the oil market and its stability. I also see a great advancement and development for our industry and for Saudi Arabia.
The Author
Ali I. al-Naimi was appointed Saudi Arabia's Minister of Petroleum and Mineral Resources in 1995. Before that, he was president and chief executive officer of Saudi Arabian Oil Co. He has held executive posts with Aramco since 1975, when he was named a vice-president. He became a senior vice-president in 1978, was elected an Aramco director in 1980, and in 1982 became executive vice-president of operations.
