A new chapter

Following the first meeting of the Saudi Society for Energy Economics Saudi Arabia’s Minister of Petroleum and Mineral Resources Ali Al-Naimi reveals how he thinks the organisation will address some of the challenges facing the energy industry.

“The oil sector's contribution has not been restricted to the growth of the basic petrochemical industries, but has been extended to include their diversification”
-Ali Al-Naimi

Now that we are in the process of establishing a society concerned with the energy industry, I should focus on the role of the Saudi petroleum sector on the premise that it represents a central hub of the energy industry, contributing to the consolidation of the foundations of our national economy for over seventy-five years. This sector still makes up the bulk of our gross domestic product. Its contribution to the GDP has amounted on average to 35 percent during this decade. The sector also accounts for the greater share of the Kingdom’s exports and some 86 percent of government revenues.

Great as this contribution is to the Kingdom on an overall economic level, the oil sector also makes feedstock and fuel available from crude oil, in addition to providing products, natural gas and natural gas liquids, for industry and utilities, benefiting the petrochemical industries, mining industries, cement industry, power generation industry, water desalination and other industries. Availability of feedstock and energy at affordable prices has been a great incentive for expansion in these industries and the registering of high growth rates. The industrial sector grew by six percent annually, thereby multiplying the percentage of its contribution to the GDP.

Diversification
The oil sector’s contribution has not been restricted to the growth of the basic petrochemical industries, but has been extended to include their diversification. The combined efforts of the petroleum and industry sectors have culminated in the expansion of secondary and specialised chemical industries. This has been followed by the launch of the industrial clusters, an endeavor blessed with the direct support of our wise leadership. A Council of Ministers’ decision was issued in this regard in support of this trend, to identify and attract investments to those industries in which the Kingdom enjoys a relative advantage and which are associated in one way or another with the oil industry, including metal industries and the auto supplies industry, such as tires and other products, in addition to the packaging and packing industries. These industries are regarded as suitable for meeting the Kingdom’s needs for two particular reasons: first, they have the potential to create many jobs in line with the objectives of the national industry strategy, and, second, they maximise the benefits from the Kingdom’s relative advantages, including the abundant availability of basic petrochemicals, phosphate and aluminum. The industrial clusters program seeks to attract, facilitate and develop a number of pivotal projects in these four clusters by 2013. The anticipated total investments by the private sector in all the projects of these clusters are estimated at SR40 billion. Additionally, the projects will contribute SR90 billion to the GDP annually and create some 160,000 employment opportunities by 2020.

The growth in demand by industries and utilities for fuel and feedstock has resulted in the expansion of the Kingdom’s natural gas industry in all its various stages – exploration, production and processing – in tandem with the progressive growth in oil production and refining. Saudi Aramco’s efforts managed to yield an increase in discovered gas reserves from 184 trillion cubic feet in 1990, almost one-quarter of which was in the form of non-associated gas, to 267 trillion cubic feet in 2008, more than half of which is in the form of non-associated gas, notwithstanding cumulative production of some 97 trillion cubic feet during the period. Saudi Aramco’s programme increased the percentage of non-associated gas out of total gas production from 25 percent to about 58 percent. Further gas reserve increases are anticipated from the gas joint ventures. Saudi Aramco’s programmes for reserve development and gas production will continue unabated. For instance, the Karan offshore gas field is expected to boost production capacity by some 1.8 billion cubic feet per day. Similarly, the refining projects, both under implementation and on the drawing board, which are associated with petrochemical complexes, such as the Petro Rabigh and Ras Tanura projects, and other projects in Jubail, Yanbu’ and Jizan, will result in expanded refining capacity and a diversified petrochemical products base. Collaboration between the mining sector and the petroleum industry – implementing the active and planned projects at Ras al-Zawr Port, in preparation for completion of the railway link project connecting the Northern Frontier Area via the Central Province to the Eastern Province – will lead to the exploitation and processing of raw phosphate and bauxite, coupled with creation of an industrial base that combines the oil sector with the minerals and petrochemical industries, expanding from there into more diversified and more specialized industries.

Research and development
The Kingdom, which God has blessed with massive petroleum resources, was aware quite early that the existence of those resources per se would not bring prosperity and development in the long run, and that the true litmus test is its ability to efficiently exploit its resources and maximise the benefits from them, promoting and diversifying the economy and linking production and treatment of these resources to other economic sectors. This can be achieved first by building the qualified human resources to manage the petroleum industry, national development and local business. For this very reason, the King Fahd University of Petroleum and Minerals was established over forty years ago as a prominent sign of this trend, which has involved the grooming and developing of qualified national forces. The University has been playing, and continues to play, its role with other Saudi universities in promoting research and cooperation with the research and development centers of Saudi Aramco and SABIC in areas that serve the industry and growth. The relationship between the petroleum industry and development of scientific and technological research did not stop there, but extended to broader horizons through establishment of King Abdullah University of Science and Technology (KAUST) on the west coast, which the Custodian of the Two Holy Mosques envisions as a beacon and monument of science and research transcending the Kingdom and reaching the entire world.

Continuing this approach, high-level approval was secured for the establishment of the King Abdullah Center for Petroleum Research and Studies in Riyadh, for the purpose of conducting environmental studies and scientific and applied research related to the petroleum industry, to support and protect the Kingdom’s interests. This new centre, as envisioned, will serve as another link between the oil sector and the Kingdom’s economic, scientific and technological environment. We are looking forward to the Saudi Society for Energy Economics’ contribution, in concert with other scientific and professional societies, to the center’s research and study plans.

The new economic and scientific opportunities and initiatives doubtless face a host of uphill challenges that must be addressed. On the one hand, our economy is still reliant on oil and its revenues, which are affected by the conditions of the oil market, changes in supply and demand patterns, and price fluctuations. Therefore, the challenge of diversifying our national economy will remain alive and well, and petroleum and its revenues will continue to be the causeway to a diversified economy, a challenge to be met head-on by the Ministry of Petroleum and Mineral Resources and Saudi Aramco, with the involvement of many of the concerned sectors in the Kingdom.

Rising demand
In our effort to maximise benefit from the Kingdom’s petroleum sectors, one of the local challenges we must confront is the increased consumption of petroleum products in the Kingdom since 1990, at an annual rate of five percent, and the ever- growing consumption of natural gas, now at an annual rate of seven percent – both much higher than the 3.4 percent average growth rate of the GDP during the same period. Consumption of all types of energy grew from 3.6 percent during the period 1995-2000 to 5.6 percent during the period 2001-2008. This progressive increase and growth in the intensity of energy consumption in the Kingdom can be attributed to industrial expansion and the fact that prices are much lower than international levels. This energy consumption pattern in the Kingdom will, if it continues, have an impact on both the volume of exports and the Kingdom’s income. This requires us to proceed forthwith to institute a national programme for rationalisation of energy consumption that will take into consideration the Kingdom’s condition, the growth phase it is passing through and the need to optimise utilisation of energy in the various sectors, in order to reflect the real cost of petroleum resources and its conservation for future generations. The last local challenge resides in our ability to develop suitable alternative energy sources to address the growing demand for electrical energy and water desalination associated with population growth and economic development. Fortunately, the Kingdom enjoys a relative advantage that qualifies it to develop renewable solar energy, not only on account of its climate but also due to its extensive surface area. KAUST has already initiated research in this area by establishing a specialised solar energy research center, concluding agreements for the development of solar energy technology with prestigious international centers and investing to supply the university campus in Thuwal with its requirements of solar energy electricity. Solar energy does represent a viable alternative that the Kingdom is in a position to promote, not only to replace petroleum and gas in power generation and water desalination, but perhaps also in the long run to become a source of electrical energy.

Environmental concerns
One last challenge that remains to be addressed at the international level is global environmental concerns, particularly climate change and its impact on the Kingdom in the long run. We have long underscored in international circles concerned with this issue the importance of channeling international efforts to technology research that produces and consumes environmentally friendly petroleum with minimal damage to the environment.
Given the many opportunities for growth of the Kingdom’s energy sector as well as the challenges the sector faces, your new society can and will contribute in confronting these challenges. On the one hand, it can participate in developing the research and studies that will improve performance on this extremely important issue, namely advancing economic diversification in the Kingdom. It can also, in concert with other societies and research centers, contribute to achieving maximum exploitation of our petroleum resources and minimising excess consumption of these depleting resources. It may also contribute to formulating new concepts related to the environment and its relationship to the energy industry, and directing local and international efforts to innovate more solutions to advance the energy industry and have a more powerful impact on the local and regional levels.
In conclusion, I wish to extend my congratulations on the establishment of this society and do hope that its future will be blessed with the same enthusiasm it has enjoyed in its establishment. It is our hope that it will spawn many studies and works, which will assist the Kingdom’s energy industry in achieving its future ambitions and provide further opportunities for prosperity for future generations.