HOUSTON, Feb. 8 -- The oil industry's lack of knowledge about current world demand for crude and its subsequent growth "is probably the weakest link in our efforts to understand the future," said Ali I. al-Naimi, Saudi Arabia's oil minister, in his opening address to the Cambridge Energy Research Associates annual energy conference Feb. 7 in Houston.
"The root of the problem is the inadequacy of existing data collection and analysis in much of the world," he said. "Good data is crucial for developing a baseline for projecting the future. In addition, our ability to know and predict the drivers of oil demand growth in many countries is weak at best."
Oil is set to "capture its fair share of any increase in world energy demand," Al-Naimi said. "Given current and anticipated technologies, it appears highly likely that oil will remain the fuel of choice in the transportation sector for many decades to come."
However, that is not enough for an industry with massive capital requirements. "We in the oil industry face the prospect of undertaking long-lead-time megaprojects requiring massive commitments of capital with long payback periods," said Al-Naimi. "There is little room for error when one is dealing with projects on such a scale."
Current conditions are positive for the oil industry, "if one's perspective is merely short-term," said Al-Naimi. Prices are high, demand is growing, supplies are tight, and there appears to be no serious challenge to oil as the dominant transportation fuel. However, he said, "A healthy long-term market is one where demand and supply are in balance, and there is sufficient spare capacity to ensure the system can handle unexpected surges in demand or disruptions to supply smoothly and without sharp price hikes."
He told industry representatives at the CERA meeting, "Current tight capacity conditions are not conducive to this outcome. In the current environment, market volatility is exacerbated. The lack of global spare capacity magnifies the price impact of relatively minor supply disruptions or demand surges."
Al-Naimi refused to make forecasts about oil prices, which he dismissed as "merely speculation." He said, "The task is made all the more difficult by our inability to predict the unpredictable: those seemingly random political, economic, and natural events that can turn the status quo on its head."
In a healthy oil market, prices should benefit both consumers and producers, he said. "It is imperative that prices be high enough to provide sufficient return to producers, but not so high that they harm economic growth. When oil prices are too high or too low, they become unsustainable. Oil prices should always provide an incentive to conserve and to use this valuable resource efficiently."
Al-Naimi noted that the oil industry embraces the necessity of a clean environment and invests large sums in environmental safety. "However, we need to provide these products to consumers at reasonable costs so that they are both economically and environmentally friendly," he said. "To do this, the industry requires certainty and rationality with regard to environmental mandates and product specifications."
In the past, the oil industry has faced the challenge of managing excess capacity in its supply system. "Today, we face a different environment, one where there are a myriad of constraints on supply," Al-Naimi said. Those constraints, he said, "are the product of the cyclical nature of investment patterns in the oil industry and the changing cost structure of oil supplies."
Saudi Arabia plans to increase its production capacity to 12.5 million b/d over the next 4 years from 11 million b/d at present. It also plans to build two grassroots joint-venture export refineries, each with a capacity of 400,000 b/d. One will be in Jubail on the kingdom's east coast and the other in Yanbu on the west coast. Saudi Arabia also plans to expand its Ras Tanura refinery, possibly transforming it into an integrated refining and petrochemical complex.
It already is expanding its Rabigh refinery into one of the world's largest refining and petrochemical complexes through a $9 billion program in partnership with Sumitomo Chemical. When completed in 2008, the refinery will produce fuels to European and US market specifications. Other plans include:
-- Upgrading the Yanbu refinery to increase its complexity and boost capacity by 100,000 b/d.
-- Expanding by as much as 300,000 b/d one of the US Gulf Coast refineries under the Motiva Enterprises LLC joint venture between Shell Oil Co. and Saudi Refining Inc.
-- Working in partnership with ExxonMobil Corp. and Sinopec to expand a refinery in China's Fujian Province.
-- Possibly building a grassroots refinery in South Korea.
"Taken together, these projects mean that over the next 5 years, we will be boosting our total refining capacity by almost 50% to some 6 million b/d," Al-Naimi said.
Contact Sam Fletcher at [email protected].