CERAWeek recap: Ministerial Address with His Excellency Khalid A. Al-Falih

HE Khalid A. Al-Falih, Minister of Energy, Industry and Mineral Resources for Saudi Arabia, talked to the CERAWeek audience about the importance of energy to growing economies and global energy demand. At the conclusion of his remarks, he sat down with Dr. Daniel Yergin for a conversation. Here's part of their exchange:

Dr. Yergin: Khalid, thank you very much for that very clear and incisive speech on several, really key topics. I think you expressed cautious optimism, but warned against irrational exuberance, and I think that is a balance there.

In the autumn, as just before the agreement was put together, you talked about a gentle hand on the wheel in terms of free balancing. How's that gentle hand doing?

HE Khalid Al-Falih: Well, I mean, if you look at the degree of cut - first of all, I think contributions of the participants have been good in their entirety of the individual countries. Some have not lived up to expectations, but as a whole, if you look at the totality, I think the agreement is working well. The total of 1.8, or just under 1.8, million, is not huge compared to the size of the market. So, that's - I think that's my meaning of gentle, because we did not want to cut deeply and create market disruptions, and jolt the market, and we've seen that. We've seen how the market is reacting in terms of price response, in terms of investment, so that kind of intervention is what I meant by being gentle, because had we waited long enough, had we had the patience to wait and had investments being forthcoming, the rebalance would have taken place.

But perhaps, rather than 2017, 2018, and I was quite concerned when we had that discussion about the gentle hand on the wheel, but we can't afford to wait. And that concern, still is somewhat there, although short-cycle investments in shale have responded, the long-cycle investments are still lagging. And I think it's important for the industry to realize that there is a framework for cooperation for working together, to guide the investment cycle forward, and to ensure long-term, not just short-term, we have balances between supply and demand.

Dr. Yergin: So, you use the word historic, and that has been applied to the agreement to bring non-OPEC into it. And I guess the view was simply OPEC could not do it by itself, that the other countries had to be a part of it. How hard was it to do that?

HE Khalid Al-Falih: It was not easy. It was not easy because I think people are fixated in their paradigms, and the paradigm has been that OPEC takes the swings, but OPEC today is about a third of the market and its total production, and it's absolutely not fair, and indeed almost not possible because many of the countries of OPEC don't have the flexibility they once had to cut deeply into their production. Both from economic, as well as from industry integration, some countries like Saudi Arabia has substantial on gas, and some of that gas is associated with petrochemical industries that need the NGLs and the ethane, so we can't do what we did in 80's and 90s by swinging in the millions of barrels to respond to market conditions. And the non-OPEC countries understand this, they've responded. It took more than a year of discussions, freeze/no freeze, cut/no cut, you do this/we just watch, and ultimately, we came together.

Dr. Yergin: Ultimately the message came through.

HE Khalid Al-Falih: Yeah, yeah. So I think, so far so good. There is a learning process, some of these countries have never undertook a cut in their production, some of them had multiple producers, so we're patiently working with them to create a framework for the future that is lasting. So my interest really transcends this market cycle. What we want to do is get both a collection of major producers around the world, as well as consumers. We are also in constant discussions with the IEA, the IEF is very active in bringing producers and consumers together to understand the importance of this action. This is not the consumers extracting money from producer. This is bringing stability, unpredictability, and sustainability for the energy markets. And I believe this framework is not the end, it's the beginning of a framework towards that direction.

Dr. Yergin: Do you - I think you made it clear that it's too soon to say what happens when this agreement comes to an end. Are there certain criteria, key criteria, that you'll be evaluating?

HE Khalid Al-Falih: Well first of all, I think inventories is one and it's been slower work, quite frankly, the first two months of the year than I thought. There is some draw down, we're seeing the structure of the market flipping. You know, encouraging inventory to be sold, we're seeing some arbitrage between East and West, which is indicative that the cuts are biting in some regions. So that's all positive, but we need to bring the inventory level, global inventories well within the 5-year ban, and closer to the average, and look at a day's supply availability. When we meet in May and predict what it's going to be at the end of June, when the agreement runs out, to decide what to do. And quite frankly, I talked about free riders, conformity by all member countries is going to be a criteria.

Dr. Yergin: Right, so…

HE Khalid Al-Falih: Saudi Arabia will not allow itself to be used by others and my colleagues have heard that privately, and I'm saying it publicly. This needs - this is for the benefit of all, and needs to be achieved by the contributions of all. So that would be another.

Dr. Yergin: Right. So, the word historic also very rightly, should be applied to Vision 2030, which you talked about at the end of your speech, and can you give some sense to the dimensions of what the objectives are of 2030?

HE Khalid Al-Falih: Well, Saudi Arabia of course is a strong economy today, despite the downturn when the energy industry was forecasting growth in 2017. We have - we are a G20 economy, we have very low debt-to-GDP ratio, one of the lowest in the world. We have high reserves, so we're doing relatively well. But we also see the future. We see a growing population, a very young population. 50% of our people are below the age of 25. They aspire to have not only high standards of living, but high levels of opportunity. And to new economies, we are overly dependent on oil today, and oil has done very well in getting the country from where it was 80 years ago to where it is today. The objective of Vision 2030 is to diversify and transform, to have a smaller, more effective government, and a more vibrant private sector with investments from around the world as well as by Saudi entities. We'll have new sectors coming into the Kingdom and to advanced manufacturing, mining, services, logistics, Saudi Arabia chose a great location, connecting various continents, and that's going to open many venues for investment and participation by global companies. Our energy sector will continue to grow, we're not abandoning, by any means, oil and gas.

Dr. Yergin: You're not going out of the oil business, no?

HE Khalid Al-Falih: We are going to be - we've been in it for 80 years, and my prediction is generations of more Saudis will be leading the global industry in oil and gas. And we take example here in the U.S. I mean, look, many people have written oil and gas and the industry, and declining resources, and the hydrogen economy, and renewables, and all of this, and you see it today. Driving American leadership across the world of manufacturing and so on and so forth. So Saudi Arabia is going to be partnering with the U.S., and in some ways in the footsteps of the U.S., of using energy to power our competitiveness, our growth. So oil and gas will grow, and then we will build other sectors, including renewables, which I referred to, and localization is another key.

There are many colleagues here from the service industry, and we want you to know that Saudi Arabia is not only going to localize its own needs of oil and gas services, and supplies, and equipment, but we are also going to be a hub for providing those to the region and beyond. So I'm inviting everybody to come and invest, be a part of Vision 2030. We'll have all of the ingredients in terms of ease of doing business, competitive position, financing, as well as thriving demand. Not only from within the Kingdom, but from the region.

Dr. Yergin: Well you wear the hat, not only of petroleum, but also Minister of Energy - of Industry, so you're obviously deeply involved in this in many dimensions. And it's still early days, but what do you see as the big challenges in the next few years to move Vision 2030 along?

HE Khalid Al-Falih: You know, I think there is always resistance to change, Dan. I've see it at the corporate level. And certainly people understanding the change process is important, and having change management embedded into our government entities, and we're doing that. We're doing that at our Council of Economic and Development Affairs, CEDA, we're doing it with a number of new bodies that have been created, and centers that have been created in the government's system of the Kingdom, to support change management. The old adage of "no pain, no gain," which you use here in the U.S. is very much at play. The front end of a long-term change process, unfortunately, is the pain, because you have to go through a change. And that is taking place. But, the response so far from the population, from the private sector, from international partners, has been overly positive. We're adjusting, and I think the good thing about the system we have built to implement Vision 2030 is we're going to constantly have a feedback loop, and adjust our process going forward, but the destination is the same.

Dr. Yergin: Right.

HE Khalid Al-Falih: It's a much bigger, much more vibrant, much more diversified, private-sector driven, Saudi economy with the youth of the Kingdom, men and women taking the lead, and the government in the back supporting them.

Dr. Yergin & HE Khalid Al-Falih continue to discuss the IPO of Saudi Aramco. View the full session, including HE Khalid Al-Falih's ministerial address and subsequent conversation with Dr. Yergin on www.ceraweek.com.

This is an excerpted from CERAWeek 2017 and has been professionally transcribed as accurately as possible. Please note, some words and phrases may have been unintentionally excluded.

Posted 9 March 2017

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.