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UPDATE 1-FULL TEXT-CERAWEEK-Saudi Energy Minister Khalid Al-Falih's speech
March 7, 2017 / 4:25 PM / 8 months ago

UPDATE 1-FULL TEXT-CERAWEEK-Saudi Energy Minister Khalid Al-Falih's speech

(Adds SABIC in first paragraph of speech)

March 7 (Reuters) - The following is the full text of a speech by Saudi Khalid Al-Falih, minister for energy, industry and mineral resources of Saudi Arabia at CERAWeek in Houston on Tuesday.

“Preparing for the Future: The Imperative of Investment” INTRODUCTION Thank you, Dan, for your kind introduction and for once again assembling a veritable “who’s who” of the global energy industry. CERA Week is highlighted on the calendar of every oil industry leader, and it’s a pleasure to return to your podium once again. Also, Houston is the epicenter of the global energy industry and has been the host of our US operations, Aramco Services Company, Saudi Refining, SABIC and Motiva for many decades, so this is also a golden opportunity to catch up with my colleagues and old friends. I arrived here from Asia where His Majesty King Salman is on an extended tour of that region’s major economies. During our travels, the importance of energy to those growing nations has been a constant theme, which in turn underscores the value of this week’s gathering. LONG-TERM OUTLOOK Ladies and gentlemen, if we look at global demographic and economic trends there is little doubt that global energy demand will grow significantly, despite advances in technology and gains in energy efficiency leading to lower energy intensity. As for the evolution of the global energy mix, the costs of alternatives like renewables and electric vehicles are declining as their technologies and performance improve. In the future they will claim a greater share of a growing global energy market—and we welcome their contributions. But we all know that energy transformations are complex phenomena that take considerable time to unfold. Whether I’m in China, India, Indonesia or Malaysia, as I was last week, I find that neither climate change policies nor technology shifts have quenched their insatiable thirst for oil. Indeed, demand for petroleum imports will continue to grow steadily in the developing world, especially with the decline in their indigenous oil and gas production. Therefore, I am concerned that misguided projections of peak demand and stranded petroleum resources may discourage the trillions of dollars in investments needed to underpin essential oil and gas supplies, during the long transformation of our global energy system. The risks of underinvestment driven by such theories amount to nothing less than compromising the world’s energy security by squandering staggering quantities of our planet’s natural energy endowment. That in turn would create heightened market volatility including damaging price spikes, and more acute energy poverty in the developing world. So for some time I’ve been concerned about worldwide investments falling behind supply development needs. I’m most troubled by lagging progress of long-cycle development projects, which are needed to provide the “base load” of future global supplies. The imperative of adequate future supplies is also why we welcome the return of investors to US shale—regardless of what you may hear. Saudi government policy has always taken the long view of the petroleum sector, whether it’s investing in the Kingdom’s infrastructure; optimizing the productive life of our reservoirs; developing our industry professionals and new technologies; or strengthening the relationships we enjoy with our partners, customers, suppliers and other stakeholders. And that’s why despite the recent downturn, we’ve kept up our capital spending. That has resulted in our drilling rig count remaining near an all-time record as we maintain our maximum sustainable capacity for crude oil and work to double our gas capacity, while also building the world’s largest downstream portfolio. The more of us who embrace this approach of continuing to prudently invest across the petroleum value chain regardless of short-term volatility, the better equipped we will be—individually and collectively—to survive the inevitable market cycles in the long run. At the same time, I want to add that as an industry we must invest more to minimize the environmental impact and carbon footprint of fossil fuels. Such investments will make petroleum use more acceptable and more sustainable in a period of significant technology shifts and growing concern over climate change. SHORT-TERM MARKET Turning to short-term market conditions, there is also cause for cautious optimism as we see the “green shoots” of the recovery, driven by a better outlook on fundamentals coupled with the historic production agreement of three months ago. Let’s look briefly at the fundamentals first. It is true that uncertainty may continue until the trend of inventory drawdowns further asserts itself and the market becomes more comfortable with its capacity to absorb additional marginal supplies. [Ad lib: OECD commercial inventories are still about 300 million barrels above the five-year average, but have been declining in recent months.] Looking at oil demand growth this year, we expect it to remain fairly healthy in the range of about 1.5 MMBD, which is higher than last year’s growth. And on the supply side, while production might increase somewhat in major non-OPEC producers like the US, Brazil and Canada, it is likely to be more than offset by natural decline among other non-OPEC producers like China, the North Sea and Mexico. These improving market fundamentals have been boosted by the recent OPEC agreement, augmented for the first time by a new cooperative framework with major non-OPEC producers. Of course, on many occasions in the past, non-OPEC producers have simply reaped the benefits of OPEC supply reductions. But this time around, we made it clear that we will not bear the burden of “free rides,” and both groups are reinforcing one another through voluntary management of their production. All of us realize that such an expanded network of producers with a larger share of global production is the only way to achieve a constructive, stable market for all. Having said this, OPEC remains an important catalyst to the stability and sustainability of the market, which remain the Organization’s highest priorities and have brought its members into greater alignment than at any time in recent memory. But history has also demonstrated that intervention in response to structural shifts is largely ineffective, and I believe we’ve learned that lesson. That’s why Saudi Arabia does not support OPEC intervening to alleviate the impacts of long-term structural imbalances, as opposed to addressing short-term aberrations such as financial crises, economic recessions, unforeseen supply disruptions, or the like. As for the current agreement, it is keeping with Saudi Arabia’s policy of seeking a collaborative framework of production management for a restricted period of time, with the aim of accelerating rebalancing, and then allowing the free market to work. Saudi Arabia has so far led by example by bringing our production below the psychologically significant 10 million barrel-per-day mark—which is well below our maximum production capacity. At the moment it’s a matter of monitoring the markets and conformance of participants, and depending upon our assessment of the first half of the year, we will decide with our partners what to do for the second half. So, in light of improving fundamentals whose effect has been amplified by the OPEC and non-OPEC cooperation framework, I am optimistic about the global market outlook in the weeks and months ahead—though I caution that my optimism should not tip investors into “irrational exuberance” or wishful thinking that OPEC or the Kingdom will underwrite the investments of others at our own expense. In other words, we should not get ahead of the market as informed by our recent experience. Turning to the US oil and gas industry, it’s just as important to note that our collective efforts to reduce global market volatility directly benefit the US industry, which is the bellwether of the global industry. That’s because the US is both the largest market for petroleum and a significant producer, in addition to being the hub for service industry, supply chain and technology creation. SAUDI-AMERICAN RELATIONS Saudi Arabia therefore has a vested interest in the robust health of the US petroleum sector and the broader American economy. Saudi government and private sector investments in the US are vast, and we will continue to strengthen our presence here, including multiple research centers, a number of petrochemical opportunities for SABIC, and Saudi Aramco’s flagship investment in Motiva and America’s largest refinery, just east along I-10 in Port Arthur. The division of Motiva’s assets between Saudi Aramco and Shell will provide a greater degree of autonomy for Aramco to expand the strong platform it has built over nearly three decades in the American downstream sector. Such an expansion is indicative of the alignment between the United States of America under the Trump administration and the Kingdom’s energy strategies and policies. We welcome the new administration’s attention to strategic energy issues, in particular its pragmatic and inclusive approach to developing all sources to build a diverse energy portfolio, and their pro-business and pro-petroleum sector policies. I personally look forward to working with the new administration—especially my friend and fellow Aggie, the Secretary of Energy Rick Perry—for the mutual benefit of our two great nations and indeed for the entire world. And just as the American energy sector continues to thrive and diversify, exciting commercial and investment opportunities are being created back in Saudi Arabia through Vision 2030, our government’s strategic roadmap to an even more prosperous Kingdom and a more robust and diversified national economy. Saudi Aramco was the original bridge between our two nations, playing a pivotal role in establishing deep energy, business and people-to-people relations. As we continue our national journey of wide-ranging transformation, next year’s initial public offering of a portion of Saudi Aramco is the centerpiece of the broader Vision 2030 framework, and I believe that Aramco going public will create many additional opportunities for engagement and investment across the world—but definitely here in the United States. Ladies and gentlemen, let me conclude by simply saying that the future for our industry, our companies and our two countries is both bright and intertwined, and I look forward to working with many of you in this room to realize that potential and take our longstanding partnership to new heights. Thank you. (Editing by Marguerita Choy)

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