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Challenges Facing a
National Oil Company
in a Global Economy -
MEDFORD,
Massachusetts, April 21, 2006
Ladies and gentlemen, good morning. I am honored to be with you
today at the Fletcher School, and to have this opportunity to
address global leaders of the future, as well as their teachers
and mentors. On a personal level, I must say it is gratifying to
be back in an academic environment in the company of students, for
it brings back some fond memories. It seems like only yesterday
that I was in your seat focusing on my education, looking forward
to building a career and what I thought would be a less stressful
professional life. Let me tell you I was wrong!
I would like take a moment to thank the staff
and faculty of the Fletcher School, and Professor Leila Fawaz of
the Fares Center, for their kind invitation to speak at your
prestigious institution, and for their tremendous hospitality. As
a frequent visitor to the U.S., this is the kind of warm reception
I have found to be typical of our American friends.
Hospitality is also part of our culture in
Saudi Arabia, but that is not the only common ground we share.
Millions of Americans trace their roots to the Middle East, with
many larger U.S. cities, from Los Angeles to Detroit to New York,
boasting more people of Arab ancestry than the cities from which
their forebears emigrated. Some of these Arab-Americans might look
like me, and have an accent like I do. Others have been here for
generations and are completely woven into the American
multi-cultural fabric.
Today, many people in my part of the world look
with admiration at Americans for many reasons, not the least of
which are the human values we have in common, like integrity,
family, and openness... as well as your achievements in
technology, innovation, and education. In fact, it is the dream of
most Saudis to have an American education, although they maybe
courted by other countries. I for one was educated in the US, and
so was my father. My own son is now in the process of selecting
the program he will be attending in the Boston area, having been
accepted by MIT and waitlisted by Harvard.
In addition to the people-to-people ties
between Saudis and Americans, our countries also share a strong
commercial relationship. Our two nations have been doing important
business together for some seven decades, long before the term
"globalization" came into vogue. Saudi Aramco, in fact,
is a product of globalization... not this current wave of
globalization, but an earlier one - one that took place before
World War Two and picked up pace shortly afterward. Saudi Aramco
was at the center of this effort, since the day in 1933 when the
Kingdom of Saudi Arabia and Standard Oil of California -
predecessor to Chevron - signed a concession agreement which paved
the way for the discovery of oil in the Kingdom and the subsequent
development of our nation's petroleum industry. For many decades
thereafter, Aramco was a partnership among four major American oil
companies, which worked closely with the Saudi government to
achieve and maintain the Kingdom's leadership position in
petroleum production. Those companies, and the tens of thousands
of Americans who have worked at Aramco, made tremendous
contributions to our country and its prosperity. That early
stirring of globalization was, and remains, a success.
Certainly those companies prospered from that
famous oil concession, but we recognize the American corporate
involvement within the Kingdom as mutually beneficial. In
fact today, if you were to visit our corporate museum near our
headquarters, you would see how the role of early American
pioneers is prominently and proudly displayed; and within our
communities and facilities, buildings and streets are named after
some of those pioneers.
However today, we are proudly recognized as the
National Oil Company of Saudi Arabia having become a fully
integrated oil and gas company with a global reach, and production
levels exceeding the combined total of our original "Parent
Companies". We have been rated as the number-one oil company
for the last 17 consecutive years by Petroleum Intelligence
Weekly, and we are recognized by industry observers - including
our own peers - as the best-performing NOC in the world. We are
also adapting to a new era of globalization, one with a much
higher global profile, under the auspices of the World Trade
Organization. The Kingdom of Saudi Arabia last December joined the
scores of other nations in the WTO that are working to make us a
truly global community.
The phenomenon of globalization means many
things - for some it means increased competition, while for others
it means unlimited opportunity. One thing is certain - whether a
country joins the WTO or not, we are living into a global village
where boundaries are fading, and no one country - no matter how
big or powerful - can isolate itself from what is happening across
global markets.
One of the effects of globalization is that
events in one part of the world have the potential to profoundly
affect people on the other side of the planet, whether for a day
or for many decades. For example, a production outage in Nigeria
not only impacts its own home market, but also impacts energy
prices worldwide, even in an exporting country like Norway, which
doesn't import a single barrel of Nigerian crude.
At another level, inexpensive labor in China
and India, coupled with improvements in education, infrastructure
and business practices in those countries, are resulting in the
transfer of thousands of manufacturing and IT jobs from developed
nations, with tremendous implications for the global economy. For
example, in my own industry, last year we saw almost as much
incremental demand from China as we did from all OECD economies
combined.
What's more, with new media like satellite
television, the Internet and email, we're aware of these
developments almost instantly, so that the effect of breaking news
is felt worldwide instantaneously, rather than days or weeks. As a
result, there are no global backwaters anymore.
With accession to the WTO come reforms, and
Saudi Arabia has made many changes to accommodate this exciting
development. The Kingdom has passed laws to pave the way for
foreign investment in Saudi Arabia's robustly-growing economy.
Saudi Aramco is a central component of this effort, as its
importance to the Saudi economy - and the world economy - is
critical. We are a company that has had a global reach for
decades, but this reach accelerated significantly in the late '80s
when Aramco - the Arabian-American Oil Company - was officially
replaced by Saudi Aramco - the Saudi Arabian Oil Company.
Since then, we have established marketing and
refining joint ventures in the United States, South Korea, the
Philippines and Japan. We have sales and marketing subsidiary
offices in Houston, New York, London, the Netherlands, Singapore,
Hong Kong, Beijing, and Tokyo. We have a shipping subsidiary in
Dubai which operates one of the largest and most modern crude oil
tanker fleets in the world, to deliver our crude oil around the
world.
This global scope and reach is an essential
component of our ability to meet the challenges we face in the
decades to come, as we carry out our goal of providing energy to
world markets. The global scope of our operations also illustrates
the ubiquity of the demand for our crude oil. According to the
International Energy Agency - or IEA - over the next 25 years
overall global energy demand is forecast to grow by nearly 60
percent. Because of the abundance of fossil fuels, their proven
performance, and the size and scope of the global hydrocarbon
infrastructure, the IEA expects fossil fuels to meet most of this
new demand, and to remain the dominant energy sources for the
foreseeable future. In fact, it predicts that the proportion of
fossil fuels in the global energy mix will actually increase from
87 percent in 2000 to 89 percent in 2030.
Reliable supplies of energy are a prerequisite
for economic growth. In turn, social development, technological
and scientific progress, and the welfare of nations depend on
economic growth. At the same time, however, we must balance these
needs with environmental concerns and the inevitable reality that
fossil fuels are depletable and eventually, there will not be
enough of them to meet our ever-increasing need for energy. In the
intermediate term, however, I am convinced that there is no
shortage of hydrocarbons to meet demand.
The responsible course in the decades to come,
therefore, is to phase in realistic alternatives to fossil fuels,
while developing and deploying cleaner, more efficient uses of
hydrocarbons and associated technologies. Given the continued
dominance of hydrocarbons, even marginally improving their
environmental performance will significantly benefit the health of
the planet - and I am certain we can go well beyond marginal
improvements.
Reserves are the basic building blocks of the
petroleum industry, and Saudi Arabia stands upon a firm foundation
of 260 billion barrels of proven reserves of crude oil. Those
reserves account for roughly a quarter of the world's proven oil
reserves, and we continue to identify new resources. In fact just
this week we announced a significant new gas discovery in the
Arabian Gulf.
Saudi Aramco can now produce more than 10.7
million barrels of oil daily. When you add in the production of
other companies operating in the Kingdom, Saudi Arabia's total
capacity reaches more than 11 million barrels of oil a day, not
counting our production of other liquids such as condensates and
gas liquids.
Saudi Aramco's maximum sustained production
capability currently includes a surplus capacity of one-and-a-half
to two million barrels per day, above our planned production
levels. We are the only company which has maintained such a
strategy and our ability to bring our additional production to the
market has been tested repeatedly over the last several years. In
fact, in times of trouble or turmoil, Saudi Aramco's ability to
tap that spare capacity can mean the difference between worldwide
economic peril and global economic prosperity.
You may then ask why we are not producing the
additional barrels to bring prices down. It may come as a surprise
to you, in today's current price environment, to find that the
market is currently oversupplied with crude oil, and that
crude inventories are at an eight-year high... the same level of
the most recent oil glut that resulted in a price collapse. In
fact, every month, we offer additional barrels to our customers,
but they decline it because their systems are full! Much of the
support for current prices is derived from geopolitical and
speculative forces, as well as refining system constraints, rather
than oil supply-demand fundamentals.
But in the end, it will be the fundamentals
that have the biggest impact, and the fundamentals tell a story of
steady, increasing oil demand. That's why we are implementing a
very ambitious program to increase our production capacity to 12
million barrels per day by the end of the decade - the largest
capacity expansion program in the industry today, in fact.
Furthermore, we have developed long-term crude scenarios that
would raise our production capacity to 15 million barrels a day,
should the need arise. And we are not limiting our investments to
the upstream. Recognizing the tightness in the refining and
shipping infrastructure, we are substantially expanding our
downstream investments both within Saudi Arabia and abroad to meet
rising demand, including here in the United States.
Production and refining of millions of
additional barrels of crude oil is certainly not simple, but nor
is it our biggest challenge. The capital investments, engineering,
and project management are complex, and the engineering and
equipment supplier market is very tight, resulting in significant
project inflation. Yet these factors are not what occupies so much
of our time. That position of distinction goes to the ongoing,
long-term challenge of developing our human resources. The success
of all our endeavors has always depended on this one critical
issue and will continue to do so.
Saudi Aramco has always recognized that success
is sustainable only if the company is staffed with an empowered
and highly-qualified workforce. I firmly believe that the
distinction we have achieved in the industry is primarily a result
of our successful human capital strategy. Our strategy is simple:
to identify the critical skill sets we require of our people, and
help them develop those skills. But, as with most of our
activities, we take the long-term view. We start this process at
the high school level where we recruit our future employees, and
keep them learning and developing until they reach retirement age.
Every employee we hire, we plan to retain until he or she retires.
Today, more than ever, we need people who are
global thinkers - who know their jobs inside and out, but also see
the bigger picture, how they fit into the Company's overall
mission, and how that, in turn, fits into the even bigger picture
of the global economy. We need people who can work in a
team-oriented environment, where getting things done means
leveraging each other's strengths. We need employees who are
technologically savvy, and can apply the latest technical
advancements to their work appropriately. And, one of the most
important factors in a rapidly-globalizing world economy: we need
our people to be culturally sensitive, able to work with people
from other countries with different social mores and means of
interaction.
As I mentioned earlier, Saudi Aramco is a
product of an early globalization effort. So these human resources
needs have been a factor since the early days of the Company, and
we have invested heavily in training programs and facilities
in-Kingdom. Today, we spend more than 10 million man-hours a year
training our people. The result of our efforts is a world-class,
technology-proficient workforce comprised of over 50 different
nationalities.
In addition to our extensive training programs
and infrastructure, we rely heavily on universities and other
educational institutions. We have hundreds of students at
universities all over the world, including China, Japan, Korea,
Europe, and in the U.S., where thousands of our people - including
senior management - have been educated over the years.
Closer to home for you, we have had 14 Saudi
Aramco-sposored students graduate from Tufts University, in fields
ranging from engineering to radiology to pediatrics.
The type of professional development that these
university ties provide is part of our effort to ensure that our
people have the knowledge and skills to contribute to our
long-term success in this globalizing economy. To face the
increased competition and the increased need for energy that
characterize our future, we must be committed to remaining
best-in-class among our peers. This peer group includes not just
national oil companies - or NOCs - but also privately-held
international oil companies, or IOCs.
As I mentioned earlier, Saudi Aramco began as a
consortium of four major U.S. IOCs. Then there came a smooth
transition to its identity as the national oil company of Saudi
Arabia, allowing the best of both worlds to come together easily
and co-exist. Today, this duality of identity persists, and it is
as much an advantage to us as the reserves we control.
Let me elaborate on what differentiates a
National Oil Company from a privately held IOC. As an NOC, we have
a duty to meet the public service needs of the nation and state
which owns us, while at the same time maximizing profits.
Traditionally, these have been understood as mutually exclusive
goals and IOCs find themselves in a balancing act, stretched
between the imperative of "corporate social
responsibility" and their need to 'maximize' profits.
Some projects may be high in value to society,
but act as a brake on corporate profitability. Others may make
economic sense but provide little lasting benefit to the nation
and its people. Therefore, Saudi Aramco leaves this
one-or-the-other model behind, and we focus our combined resources
and efforts on activities that represent a win-win opportunity. At
Saudi Aramco, we have become accustomed to evaluating all of our
decisions not only from a corporate "bottom line," but
more importantly, we view them from a Kingdom perspective as well.
For example, our current petrochemical project
with Sumitomo Chemical falls into this optimal quadrant. This
project will transform our Rabigh Refinery in Saudi Arabia into an
integrated refining and petrochemical complex. For the Kingdom, it
brings in direct foreign investment, new employment opportunities
and new revenue. For Saudi Aramco, it extends our petroleum value
chain, upgrading oil processing and making our portfolio more
profitable. I think it's important to note here that, although the
project is profitable, it may not have been able to compete with
other investment opportunities available to us. but it provided
the most combined 'value' to the company and the nation.
Another element of our dual identity as an NOC
with IOC traits is the way we compare ourselves to IOCs when it
comes to performance metrics and benchmarks. In each of our
functional businesses, we benchmark with our peers, with the
stated goal of achieving 'best in class' status in all of the
businesses we are in. In addition to being the lowest cost
producer of crude oil for decades, another example of our success
in this area is that we were awarded the 'Project of the Year '
award for two years in a row by the Project Management Institute
for two world-class gas plant mega-projects in Saudi Arabia.
We believe strongly that to remain
best-in-class among our peers is a necessary goal if we are to
continue our success during this current era of globalization and
deliver the most value to our stakeholders. As I've mentioned, a
strong human resources development program is the linchpin for
this goal, but there are other important tools that we have in
place to help us.
For example, our company maintains its
flexibility and proactive approach to handling global business
demands also by ensuring that we have strong corporate
governance . The most important elements of this are our
independent board of directors, strong financial discipline and
controls and an arms-length relationship with our shareholder, the
Saudi Government. We are charged by the Governemnt with maximizing
value from our hydrocarbon business activities, and we are given
the operational freedom to do so.
Related to this are our systems and procedures
that we inherited and developed from our American predecessors,
the IOCs that originally formed Aramco. This is the lubricant that
allows all of our multi-faceted efforts to work together smoothly.
We have maintained those systems and adapted them to our evolving
needs.
Ladies and gentlemen, my goal has been to
provide you with a glimpse into the challenges we face as a
corporation in a rapidly globalizing world economy. I hope I have
succeeded, but let me leave you with one thought before I take
questions from you.
The global economy - characterized largely by
the effects of the WTO - represent the future from a personal
point of view, as well as from business perspective. This will,
one day soon, be your daily reality. You have a tremendous head
start over your peers by having a Fletcher School education under
your belt as you head into your careers. After all, your school is
dedicated to "offer a broad program of professional education
in international relations to a select group of graduate students
committed to maintaining the stability and prosperity of a
complex, challenging, and increasingly global society". In my
view, that mission is as relevant today as it was when it was
conceived 73 years ago.
But make no mistake, the world of work is
unforgiving. In addition to working even harder than your are
doing at school, it will force you to realize that national
borders don't exist as they once did. It will force you to realize
that time zones don't exist. You may have to structure your
schedule to coordinate with "co-workers" who schedule
conference calls at 6 p.m. Singapore time, or who won't work on
Friday at mid-day because of prayer times, or who have to get a
report finished before business shuts down for Golden Week in
Japan.
Granted, we have many challenges today. But out
of these challenges will emerge many opportunities, and I
therefore believe that the future is a bright and promising one. I
thank you for your attention today, and I would be happy to answer
any questions you might have.
Source: Saudi Aramco
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