The Future of Global Energy: Uncertainty Surrounding Global Energy Issues and Policies, And Its Impact on Future Supply Expansion

By ΄Abd Allah al-Jum΄ah

The following is the keynote speech given by Saudi Aramco President and CEO ΄Abd Allah al-Jum΄ah at CERAWeek in Houston on 12 February.

Energy is an essential driver of the world’s economic health and social well-being, and in some shape or form, energy touches the daily life of each and every individual on the planet. Today, though, we are meeting amid considerable uncertainty in the energy and petroleum markets, as well as the global economy.

Over the past year, oil prices have been buffeted by the combination of relatively healthy demand, concerns for supply interruptions, stretched refining capacity, world and regional events, and a continued debate about the role of financial speculation in oil price volatility. More recently, the effects of the sub-prime debt problem have rippled through global markets, risking global economic growth and creating uncertainty for the oil market in general, and oil demand in particular. If these uncertainties were not enough, volatility among key world currencies has confused the situation further.

It is against this backdrop that we take a look at the issue of energy security that is on so many minds—and legitimately so, in my view, given the criticality of energy to our modern way of life, and to our hopes and aspirations for the future.

To achieve the goal of energy security, the world currently employs a variety of what I’ll call conventional strategies, such as beefing up the security of the world’s energy infrastructure; stockpiling oil; pursuing source diversification; and boosting the degree to which alternatives contribute to energy supplies, etc. Let me first say that these strategies make positive contributions to enhancing supply security and should be continued. However, in my view, they offer only part of the answer. The remainder of the solution requires us to look at these concerns from a different perspective, and also consider the underlying causes that give rise to these supply security issues in the first place. As any Texas cowpuncher will tell you, the best way to clear brush is to remove it root and branch, not just trim the leaves!

Geology Rather Than Geopolitics

That is to say, if we could proactively address the fundamental causes of our energy security challenges, many of the most pressing concerns would diminish in intensity and relevance, and in some cases would dissipate altogether. If we are indeed serious about developing more effective and more enduring energy security solutions for the long term, then surely we should be targeting the root causes of our supply concerns rather than simply battling with their various manifestations like the many heads of the Hydra.

Imagine, for a moment, that the primary causes of conflict and tension in the key production areas of Latin America, the Middle East, Central Asia and Africa were effectively addressed, and that stability and tranquility were to prevail in those regions. Clearly, many of our present supply concerns would be alleviated to a great extent, and those of us in the oil business could focus on geology rather than geopolitics, and get back to analyzing seismic data rather than worrying about security arrangements.

Now I’ll be the first to admit that it would be naïve to assume that the many complex issues afflicting energy-rich nations of the world will disappear overnight, or that lambs and lions are going to lie down together anytime soon. Successfully resolving these problems will not be easy, but precisely because any progress on such issues would be so significant to achieving meaningful energy security, I believe these efforts deserve the world’s sustained attention, even as we continue our work along more traditional avenues of energy security.

Of course, such a position assumes that there are plentiful energy resources available to the world, and in particular that there are abundant reserves of oil that remain to be produced. Not everyone would agree with that assumption, and in recent years the so-called peak oil theory has been the subject of a good deal of popular attention and speculation. Back in November, I addressed the issue of oil resources at the World Energy Forum in Rome, and argued that, for the purposes of the peak oil discussion, it is essential to consider the planet’s total endowment of liquid fuels. In other words, we have to look at both conventional oil and such non-conventional resources as condensate, natural gas liquids, extra heavy oil, bitumen and tar sands, oil shales – and even coal-to-liquids, gas-to-liquids, and bio-fuels. That’s because the fuels and feedstocks produced from each of these sources serve the same end-use segments, ranging from transportation, industrial and power generation, to domestic and commercial needs, and the manufacture of petrochemicals.

Even if we leave aside the potential of coal-to-liquids, gas-to-liquids and bio-fuels, the world’s total in-place endowment of conventional oil and non-conventional fuels ranges between 13 and 16 trillion barrels. To put that number in perspective, to date the world has consumed roughly 1.1 trillion barrels, or 7-9% of the in-place endowment. Of course, we also need to consider the even more critical question of how much of this endowment can actually be recovered and converted into supplies, and at what pace and at what cost.

Recoverable Resources

According to analysts, the range of recoverable resources from both conventional and unconventional liquids lies between 3 and 6 trillion barrels, depending on the economics of development, improvements in technology, recovery factors to be achieved, environmental considerations, government policies, and of course regional and global political trends. At Saudi Aramco, we believe the low figure of 3 trillion barrels represents an ultraconservative set of assumptions, and will be substantially exceeded in most scenarios. Here, the contribution of non-conventional resources and their development pace will ultimately depend on how badly the world needs this energy, and how much effort is expended to create a structural environment which enables greater development and higher recoveries. Frankly, though, I see no reason why we cannot improve the recovery rates of both conventional and unconventional liquid resources, tapping that precious energy at an appropriate pace of development and supply.

Without a doubt, though, we will need to work together if we are to move our recovery figure to the higher end of the scale, and in my view, such an effort should be based on four key elements. To begin with, there is the potential for substantially improving oil field recovery rates through new tools and techniques, and second we can grow reserves in known fields by delineating additional oil and gas pockets, building on our existing and evolving knowledge of these reservoirs, and concentrating on new concepts such as resources in oil field transition zones and residual oil zones.

To give you an example of increased recoveries through the use of cutting edge technologies – such as extended reach wells, intelligent completions and geo-steering – combined with better reservoir description, improved monitoring and reservoir management strategies emphasizing longer-term field performance, at Saudi Aramco we are starting to raise recoveries in some fields to the level of 70% of original oil-in-place. In fact, I have challenged our professionals to set that recovery level as the target for as many of our oil fields as possible.

Third, there is also tremendous potential to find significant yet-to-be-discovered oil by applying emerging technologies and extending the search to new frontier areas. Finally, we should tap the vast potential of non-conventional resources, where the principal challenges are not finding these resources, but overcoming a variety of technological, environmental and economic hurdles associated with their production and processing into useful supplies. The special challenges facing higher, economic recoveries from the unconventional heavy oil and oil shale resources include the need for cutting-edge R&D and development of ground-breaking technologies, plus the allocation of necessary gas and water resources, besides other issues.

Energy Use Efficiency

Coupled with those four efforts should be initiatives to improve the efficiency of energy use and conservation, complementing energy supplies in order to satisfy the anticipated growth in worldwide demand. If such collaborative efforts are undertaken against a backdrop of healthy oil prices – which improve the economics of previously marginal plays, technical concepts and geological provinces, besides encouraging more efficient use of precious energy supplies – I believe that our ability to meet energy demand growth will be greatly strengthened.

Of course, that’s the upside. If, on the other hand, conventional and non-conventional oil resources fall victim to well-intentioned but ultimately flawed or confusing energy policies, then the necessary investment of time, toil and treasure may not materialize, and a significant proportion of these precious resources might not be recovered. In other words, just because together we can do something doesn’t mean we will, and many of the factors that will promote or hinder increased recovery of oil resources lie beyond the control of the petroleum industry itself – making collective determination and cooperative action essential for our energy future.

Permit me now to share my thoughts on three issues that impact the overall supply security equation, but also deserve special consideration given my topic of uncertainty surrounding energy issues and policies. The first of these is the role of alternative sources of energy, and alternative technologies to replace or rather complement fossil fuels. To begin with, as the world’s population continues to rise and living standards continue to improve, the world’s energy requirements will continue to grow apace. That means that with time we will need to draw upon a variety of energy sources, including alternatives, to help meet demand. However, around the world, there are also some expectations for an unrealistically rapid pace for the development of such resources. If we look at the forecasts made both by the US Department of Energy and the International Energy Agency, we see that fossil fuels will continue to dominate global energy supplies for the foreseeable future. In fact, both bodies predict that the share of fossil fuels will remain in the range of 82-to -87% by the year 2030.

Yet a number of well-intentioned strategies call for a much more aggressive displacement of fossil fuels, despite major technological, economic, infrastructure and public acceptance hurdles remaining in the way of achieving such targets. That has led to considerable confusion over what is realistic when it comes to alternatives, and what the future call on alternatives and conventional sources will actually be. Such uncertainty clearly also has negative implications for the vast investments required to expand supplies of fossil fuels.

In my opinion the world simply cannot afford to leave massive quantities of oil, gas and coal in the ground and move precipitously to unproven alternatives, while still hoping to satisfy future growth in global energy demand. At Saudi Aramco, we’re putting that belief into action, and I would like to reiterate the role that Saudi Arabia plays in supplying energy to the world, and the commitment that Saudi Aramco is making to the future with its ongoing investment program and plans.

Expansion Plans On Course

Despite the wide range of uncertainties I’ve noted, including confusion and uncertainty over energy policies; continuing worldwide shortages of manpower, materials and services; as well as rising costs; we have stayed the course with our investment plans for oil production capacity expansion and a variety of related initiatives that will help increase the world’s energy supply capacity. Over the next five years, we plan to invest some $90bn in our upstream and downstream projects in Saudi Arabia and around the world. As part of that project portfolio, the oil production increments we currently have in progress total about 3mn b/d. Some of this capacity will be utilized to offset natural decline of oil fields while the rest will be employed to expand our production capacity from about 11mn b/d presently to 12mn b/d next year.

At the same time, on the downstream side, as our global refining investments materialize, our worldwide refining capacity will almost double from 3mn b/d presently to about 6mn b/d, which should help alleviate the tightness in global refining capacity. In fact, just up the road our Motiva joint venture is expanding its refinery at Port Arthur by 325,000 b/d to 600,000 b/d, making it the largest refinery in the United States and one of the largest in the world. This expansion will bolster energy security in the US by strengthening the supply of gasoline, diesel, aviation fuels and high quality base oils. Our plans to integrate world-class petrochemical facilities with our refineries at Rabigh and Ras Tanura also continue to make good progress.

After all is said and done, such tangible investments and continued commitment to harnessing proven sources of energy are the key to strengthening energy security amid growing demand. However, market confusion and uncertainty about the future energy mix make such investment decisions more difficult than they should be, instead of reinforcing our ability to meet future energy demand in a responsible, responsive manner.

Environmental Protection

Of course, any energy deliberation would be incomplete without discussing the issue of environmental protection and particularly reducing greenhouse gas emissions – the second special-interest topic I would like to address today. These are clearly important and pressing imperatives, though the methods by which they can be achieved while minimizing damage to the world’s economies and societies – particularly in developing countries – remain divisive. Given the world’s concerns over greenhouse gas emissions, global warming, and their potential consequences, this issue deserves our most serious attention. Let me also be clear that as a practical matter, we cannot afford to abandon fossil fuels and still deliver the volume of energy needed to sustain the world’s economic and social development, to alleviate global poverty, and enable countless men, women and children to live more prosperous, healthier, safer and more dynamic lives. Alternatives are simply not ready to shoulder the load, nor will they be in a position to do so anytime soon, given the time and effort needed for them to make a more substantial contribution to the world’s energy supplies.

So, how do we resolve this dilemma of protecting the environment while at the same time meeting the world’s growing appetite for energy? My sense is that the world community needs to reach a consensus on this issue and clearly articulate a future path, so that we can work together. How do we get there? My own recommendation would be fourfold:

1.     Agree that we should continue to develop fossil energy resources while making their utilization cleaner and more efficient;

2.     Craft a consensus on energy strategies that devote sufficient attention to the rational development of alternative sources of energy and technologies, so that the level of their contributions can be increased at a realistic pace;

3.     Enhance the efficiency of energy use and conservation to the greatest extent possible; and

4.     Emphasize a range of both natural and technological solutions to carbon sequestration based on their economics and practicality. I strongly believe that there is vast unrealized potential when it comes to applying futuristic technological solutions to carbon sequestration, and the world may have just scratched the surface on this issue.

Such an energy and environmental roadmap clearly requires the commitment of a wide range of actors ranging across industrial and economic sectors, policymaking bodies, and geographic regions. At the same time, assembling such a vast and varied coalition requires genuine commitment, a pragmatic and practical mindset, and an agreement that we should quit working at cross purposes in pursuit of disparate agendas.

Chinese And Indian Demand

Finally, I want to weigh in on the debate about the degree to which increasing Chinese and Indian demand is affecting energy price volatility, and how these growing economies should be effectively integrated into the global energy system. Of course, rising demand for energy is a natural consequence of expanding economic activities and rising living standards in both India and China. It is equally clear that an increasing share of China and India’s petroleum and natural gas inputs must be obtained from beyond their own borders. But rather than rushing to sound the alarm about this demand growth, we’re better served by acknowledging the legitimacy of these nations’ energy needs; recognizing that this demand must be met on a par with the needs of other global economies; and realizing that the global energy system is robust enough to accommodate this escalating demand.

We should also understand that continued engagement with these two rising economic giants is the best way to shape their energy outlook and policies, and to help ensure that the world’s energy resources are utilized in the most effective and equitable manner. Of course, as major energy consumers and increasingly important economic players, both India and China should be actively involved in the global energy debate, and be invited to put forth their views and perspectives in order to increase the effectiveness of our discussions. By doing so, and by pursuing constructive cooperation rather than cut-throat competition, we will be better positioned to handle these shifting patterns of petroleum consumption and overall energy demand - and indeed to meet the energy challenges which we face.

I strongly believe that between conventional and unconventional liquid fuels, the planet is sufficiently endowed with petroleum resources to meet the world’s growing demand for many decades to come. But I am deeply concerned that if the prevailing confusion involving energy issues continues, and key players scatter in different directions in trying to address those issues based on varying agendas, there is considerable risk that the necessary expansion of energy supplies would be significantly compromised. If my company, and our industry as a whole, is going to invest in and develop the right technologies, make timely investments to expand oil and gas supplies, and continue to provide a reliable supply of energy to the world, we will need the proper enabling environment – including the economic, technological, geopolitical, regulatory, policy and environmental dimensions. But we also need the whole world to arrive at greater clarity as to what it wants and realistically can achieve in terms of a future energy mix; to achieve a greater consensus among producers and consumers about the roles and responsibilities of each in terms of realizing that mix; and finally, to enhance the security of both supply and of demand over the long term.

In the end I’m confident that by adopting a more rational approach to energy issues and the myriad factors which shape them, and promoting a spirit of partnership and shared endeavor among various stakeholders, the world can and will overcome the energy, environmental and economic challenges that lie ahead.

Copyright MEES 2008.