Atlantic Council
Global Energy Forum

World Energy: The Road to the Future


Introduced By:
Frederick Kempe,
President and CEO,
Atlantic Council

Special Keynote Address By:
H.E. Khalid al-Falih,
Minister of Energy, Industry, and Mineral Resources,
Kingdom of Saudi Arabia


Location:  Al Maryah Ballroom, Four Seasons, Al Maryah Island, Abu Dhabi, United Arab Emirates

Time:  1:10 p.m. Local
Date:  Thursday, January 12, 2017

Transcript By
Superior Transcriptions LLC

FREDERICK KEMPE:  Well, I’ve never been introduced with what such stirring music before.  Excellencies, ladies and gentlemen, this is a very, very special session, one that we’re absolutely delighted about. 

Before I introduce our keynote speaker, let me make a quick logistical point.  The hotel staff at this moment is preparing a buffet lunch for everyone, just outside the ballroom, so any of you who thought we were not going to feed you, it is a false rumor.  After this session, please help yourself to the buffet and then feel free to bring your lunch back in for the next session on the topic of renewables, which will begin here at 1:50. 

            Now I am pleased to welcome a very distinguished guest for our next session.  It is my honor to introduce His Excellency Khalid al-Falih, the minister of energy of the Kingdom of Saudi Arabia, who has graciously agreed to deliver a keynote address at this, our inaugural Atlantic Council Global Energy Forum.  In the energy world, as you know, the minister is one of the most followed and listened-to voices.  No one has more insight, experience, wisdom, and authority on the set of issues that we’ve been talking about today thus far and tomorrow. 

            With nearly one-fifth of the world’s proven oil reserves, Saudi Arabia is the world’s largest producer and exporter of oil in the world.  Yet the kingdom, thinking strategically about a future where oil’s preeminence may diminish, has embarked upon an ambitious Vision 2030 agenda to diversify its economy away from upstream oil production.  Indeed, economic diversification in Saudi Arabia’s energy sector is the topic of a paper that the Atlantic Council is launching today.  The report “The End of Saudi Arabia’s Addiction to Oil,” by Dr. Francois Seznec, details the policies to expand the kingdom’s capabilities and downstream markets.  This is one of the more dramatic and transformative moments in the Saudi economy and in the Saudi oil picture.

            Renewable energy has also massive potential for the kingdom, as every drop of oil or molecule of gas that is not consumed domestically is one more that is available for the petrochemical sector or imports.  And if the Paris Climate Agreement to which the KSA is fully committed is to be implemented, demand for oil may drop well before supplies run out.

            We also have had interesting conversations this morning, Mr. Minister, about whether in a Trump presidency you might have a burst of shale gas production in the United States again that could change the picture some as well.

            Minister al-Falih is one of the visionaries behind the courageous policies the kingdom’s undertaking.  His experience demonstrates he’s up to the challenge.  No one has more expertise in Saudi Arabia’s energy sector or a better understanding how to run it.  Before being appointed to lead the Energy Ministry, Mr. al-Falih was the chairman of Saudi Aramco, the pinnacle of an impressive career that has spanned over three decades.  He is the holder of the kingdom’s highest honor, the King Abdulaziz Medal for his service to the nation.  What I particularly respect is his passion about education, human resource development, and science and technology ventures, especially as they relate to Saudi youth.  He serves on the boards of King Abdullah University of Science and Technology, Prince Mohammad Bin Fahd, American University of Sharjah, Massachusetts Institutes of Technology, CEO Advisory Board, and the Prince Sultan Abdulaziz Fund for Women’s Development.  So, despite all the burden that he carries in his work every day, he devotes all this time to the education, the further education in particular of Saudi youth.  It is an honor to turn the podium over to you, Mr. Minister.  (Applause.)

            MINISTER KHALID AL-FALIH:  (In Arabic.)

(Continues in English.)  Thank you, Fred, for that too generous of an introduction.  It is kind of you, but it makes my work harder.  You’ve set the bar a bit too hard, or too high.  But it is indeed an honor for me to be addressing your esteemed audience. 

I want to start by thanking you, Governor Huntsman, for bringing the Atlantic Council and its reputed expertise and convening power and ability to analyze and impact policy going forward here to us in the region, to the GCC.  And you can tell from the attendance from the GCC that we’re extremely energized by having your inaugural global energy forum held here in the great city of Abu Dhabi in the UAE.

            I want also to acknowledge our gracious hosts from the government of United Arab Emirates and Abu Dhabi, in particular their Excellencies Suhail Al Mazrouei and Dr. Sultan Al Jaber, my dear friends.  Thank you very much for coordinating and working with the council to hold this event.  I also want to start by expressing the condolences of my own country and me personally for the tragic and senseless loss of five brave UAE diplomats while conducting a very courageous humanitarian mission in Afghanistan.  And indeed, your loss is our loss, and in fact the world’s loss, and everybody mourns with you.

            But, Your Excellency Suhail Al Mazrouei, as you said this morning when you addressed the opening session, the mega trends in energy have always had profound implications for politics, security, economics, and societies and their development.  The debate you and Atlantic Council are fostering here will be a most welcome addition.  And today I would like to share some thoughts on these mega trends, the way I see them, including the oil markets’ future direction, which I am sure is of interest to many of you.  And I would also like to connect those mega trends with what Fred referred to in his opening introduction, our strategic thinking in the Kingdom of Saudi Arabia and our transformative plan. 

Of course, when it comes to energy, there are several realities that policymakers around the world must face.  Let me focus on what I consider to be the four primary ones.  First, the fact the demand for energy will continue to grow, and it must be met notwithstanding the choice of energy sources.  Today the world’s primary energy demand is about 280 million barrels per day of oil equivalent.  Over the next 25 years, by 2040, we expect it to grow by more than 40 percent.  That is roughly 400 million, as around 2 billion additional people are added to our population, and as all of the population of the planet continues to thrive with reasonable expectations of higher standards of living.  Of course, the pace of energy growth will be moderated by continued efficiency improvement.  Otherwise it would be higher than the number I just quoted.

            The second reality is that the world has come together in unprecedented manner on climate change.  Again, Fred referred to this.  We are entering a new era, and the watershed moment was of course the COP21 Paris Agreement that was reached in 2015 and ratified by the Kingdom of Saudi Arabia last year as well as many of our GCC partners, together, indeed, with over 100 countries that brought that agreement into effect. 

Of course, nations that are the greatest emitters have a proportionally greater responsibility to hold firm to their commitments.  That’s why arguably the 2014 Joint Announcement on Climate Change between the U.S. and China was an even more catalytic moment than signing the Paris Agreement itself.  Certainly, the joint ratification of Paris between these two nations was profoundly symbolic.  However, everyone else must contribute their share.  And that’s why we recognize that we, too, need to do our part in the kingdom to implement this agreement and reduce carbon emissions, especially given our global energy leadership role.  For example, we will diversify our utilities fuel mix, which is entirely fueled by liquids today.  In the coming decades, with renewables and clean natural gas, which will account for around 70 percent of Saudi Arabia’s utility, that will be – and it will be the highest by any G-20 nation.  So gas by itself will be 70 percent.

            But action is not limited to governments.  Companies must also play their part.  And I am particularly excited by the potential of the Oil and Gas Climate Initiative comprising large IOCs, large NOCs.  And our national oil company, Saudi Aramco, has played a key part in this.  Last November, OGCI announced a 1 billion investment to development and commercially deploy innovative low-emissions technologies, and that’s just the sort of industry-led, technology-driven and highly collaborative approach that we need to reach our climate objectives. 

            Third reality is the global potential of renewables, which is staggering.  Just looking at solar, it’s been calculated that every 90 minutes, an hour and a half, 15 billion tons of oil equivalent of energy from the sun reaches the Earth’s surface.  In an hour and a half, that’s more than the planet needs in an entire year.  Similarly, wind could theoretically supply the equivalent of 146 billion tons of oil equivalent of energy every year, which is more than 10 times the world’s current annual primary energy needs.  So the potential supply is massive, and so is the growing demand for clean energy.  The challenge is to bridge the gaps in technology and economics and fully tap this enormous potential.

            The fourth reality – and it’s really a conclusion from the first three – is that despite the potential of renewables, the increased demand I mentioned earlier can only met by using all energy sources, because history tells us the transition to alternatives and renewables and new forms of energy will be long and complex.  Indeed, while the share of legacy fuels in the global energy mix has fallen in percentage terms, the absolute demand for these energy sources continues to rise.  Coal is a case in point.  Looking specifically at oil and gas prospects, which are very important to us here in the region, as you would imagine, while their share in the future energy mix would moderate in percentage terms, it seems certain to remain significant for decades to come, and in fact, oil and gas demand will continue to grow in absolute terms for the foreseeable future.  So I’m not that strong of a believer in peak demand, Fred.  I believe – not any time soon, anyway.  I believe that every drop of oil which can be economically recovered, will be produced and consumed in due course, and its value over time will actually appreciate.  The notion of stranded resources is not one we recognize in Saudi Arabia, and in my opinion is misleading to markets.

            Ladies and gentlemen, these are the four principal realities facing policymakers, and they clearly demonstrate that business as usual is not an option.  However, there are numerous uncertainties within each of them which could lead us down three different paths, and therefore require us to be flexible and agile and willing to change as we evolve in this transition going forward. 

            The first scenario, or potential scenario that is being discussed is one where alternatives and renewables struggle to make inroads due to weak implementation of the Paris Agreement, lagging technology improvements, and inadequate policy support.  I believe the chances of this happening are very low and that the alternatives and renewables will continue to gain.  Modern renewables have made important strides – make no mistakes about it – and have indeed become a huge business, with spectacular growth in wind and solar, albeit from a very small base to start with.  Electric vehicles, on the other hand, are starting to make steady progress, and we believe will continue to grow.

            The second equally improbable scenario is where alternatives and renewables quickly dominate, including the large share currently occupied by coal and power generation across the world’s developing and developed nations, where we see about 80 percent of electricity in India being generated by coal, about 70 percent in China, even in developed countries like Germany, where 45 percent of electricity is developed – is produced by coal and about a third of U.S. electricity is generated by coal.  Such a renewable-dominated scenario would in fact not only require renewables to rapidly replace coal, but also gas, which is highly unlikely, given the further improvements needs in renewables technology and electricity storage. 

Of course, the biggest challenge that renewables have is the intermittency issue with solar and wind that can only be mitigated by the flexibility and reliability offered by fossil fuels to complement them.  Similarly, in transport, the heavy transport sector is likely to remain dependent on oil for the foreseeable future.  And twice the number of vehicles will be on the roads by 2050, all requiring market penetration levels for electric vehicles which are still a long way from being realistic.

In my view, the most likely scenario is the middle path, where both renewables and electric vehicles do gain share, but where the world will still – needs conventional fuels, fossil fuels and all these sources contribute to the energy mix for quite some time.  I therefore believe we need to continue promoting renewables while also setting challenging cost and efficiency targets, minimize subsidies, especially as technologies improve, and devote major resources to electricity storage and grid integrity.

At the same time – and this is importance for us in the oil and gas industry – we must continue to make timely investments in proven and reliable conventional sources, like oil and gas, to ensure their availably and sustainability during the long transition period to avoid impacting the world’s energy security and to ensure continued economic development for the billions of people who are counting on it.  We also need to keep pushing the envelope of technological advancements and achieve real breakthroughs, including the development of ultra-clean oil and gas.  And as I said earlier, it is essential to have prudent energy policies that reliably deliver adequate, affordable and sustainable energy supplies while this transition takes place.

            Speaking of transitions, and as Fred mentioned, last year we launched our own rapid transformation strategy in the kingdom, which we named Vision 2030.  Economic sustainability is at the vision’s heart, with comprehensive reforms, greater economic diversification by moving the national economy to a position where it relies on multiple economic engines instead of a single commodity; also fiscal responsibility, private sector-led growth and the privatization of the key state-owned enterprises. 

The vision also supports the intent of the Paris Agreement by diversifying our energy mix.  Let me pick a few highlights.  In the fiscal arena, our recent 2017 budget ­included a plan to balance our budget by 2020 while keeping our debt to 30 percent of GDP.  We will achieve this by continuing to optimize our spending efficiency in the government and diversifying our nonoil revenues, including a GCC-wide value-added tax to be implemented next year

            In the domestic energy sector, we have launched significant reforms, beginning with the gradual reregulation of energy prices last year, including electricity, water, and transport fuels.  These price reforms, coupled with the Saudi energy efficiency program, have already started to pay results.  Overall, energy demand, which has been increasing at 5 to 6 percent for a long time, registered only half a percent last year – a significant drop.  Looking ahead, the combined energy and water price reforms alone are expected to save over 200 billion riyals annually by the year 2020.  That is about $60 billion. 

            We’re also committed to expanding renewables.  We have ambitions to turn the kingdom into a solar powerhouse, with an initial target of 9 ½ gigawatt of renewables in the short term by 2023, and it will continue to grow.  On privatization, of course the most widely talked about example is the public offering of a share in our national oil company, Saudi Aramco, which will be the largest IPO in history.  And we’re still forecasting to do that in 2018.  We also are unbundling the Saudi Electricity Company, the largest utility in the region, into generation, transmission and distribution, and about 65 gigawatt of generation will be split into four generation companies that will be privatized.  All future increments of power generation will be undertaken by the private sector. 

            Outside the energy and mineral sector, we’re considering an IPO of seaports, airports, water desalination.  And even the Saudi stock exchange itself, Tadawul, is planned to be listed in 2018.  It is a breathless pace, but there is no time to waste for us in the kingdom.  Building a sustainable economy for future generations means we must move quickly, on multiple fronts, and do it now.

            Finally, let me be absolutely clear.  Nothing I have said in any way downgrades the importance we place on oil’s role globally and its central role in our domestic economy, now and for the foreseeable future.  That’s why we have been leading global efforts towards balanced markets.  They have been, the markets, through a period of high volatility which has hit producing nations and the energy industry itself extremely hard.  In particular, the uncertainty about the future has impacted investment levels and jobs in the industry, which is a particular concern to me.

            The good news, ladies and gentlemen, is that we have been moving towards a rebalanced market for some time – a bit too slowly for my liking, but we indeed have been moving in that direction.  The even better news is that the pace of rebalancing will be accelerated by the recent production agreements within OPEC and with our partners from outside the OPEC organization.  I have confidence in this collaborative and transparent approach, and I believe these agreements will benefit producing, and for that matter consuming nations alike by bringing stability to global markets, as well as attracting investments that are essential to the world’s long-term energy security. 

            So, ladies and gentlemen, I hope that these remarks help set the scene for your deliberations over the next couple of days as this great gathering continues to debate transitioning to the sustainable future energy we all want and Abu Dhabi is hosting with their sustainability week.  It is incredibly challenging and complex, and it requires the contributions and cooperations of each and every one of us.  Once again, I thank the Atlantic Council and our colleagues from the UAE for bringing us together to debate these issues.  Thank you very much.  (Applause.)

            MR. KEMPE:  Thank you, Mr. Minister.  Thank you very much for that significant and thoughtful keynote.  We have time – I know you have to go to another appointment – we have time for two quick questions which I’ll ask.  First of all, on the oil market outlook for this year, which we’ve talked about also in an opening panel – and I think I’ll give this two parts, though you may want to think of framing it differently – you have a very important OPEC deal with Russia.  How confident are you that it will hold, and would you like to see it renewed after six months?  And then, what sort of role do you think – and that’s sort of the Putin part of the question.  Then the Trump part of the question:  What sort of impact do you think there might come from a Trump administration?  And specifically, we heard from Amos Hochstein earlier.  Trump or no Trump, there might – he’s predicting a much larger surge in shale gas production this year than I’ve heard from either OPEC or from the IEA, and I’m just wondering what you’re expecting there and then the price impact.

            MIN. AL-FALIH:  Is that one question?  (Laughs.)

            MR. KEMPE:  It was – it was a very long question, yes.

            MIN. AL-FALIH:  Well, as you alluded in your question, really there are too many variables at play.  There are some that are more predictable than others.  And of course, our industry has always suffered from issues that you didn’t bring up which are disruptions.  We’ve seen it from natural events, hurricanes, earthquakes and the like, fires in Canada, labor disputes in some producing nations.  And then there are the ones that you could somewhat try to predict, and of course they’re influenced by prices, they’re influenced by investment flows, and they’re influenced by what we know about the natural decline trends in the resources themselves.  So will I be able to predict what will happen in 2017, given all of these variables?  No.  I think the fact is that we can influence – we know that in the sort of intermediate term, two to three years, there will be tightness in the markets, because many projects have been deferred or delayed or canceled in the oil and gas industry.  We know that there is a decline that takes place.  And it’s not insignificant.  It’s in the millions of barrels that will take place every year, and it has to be offset by a steady flow of investment, which I said we want to encourage.  So, 2017, we’re expecting demand to continue to grow at the pace we have seen recently, as well above a million barrels.  We’re expecting some decline from mature basins, the North Sea, Mexico, China.  And the – you know, the total of this will be significant. 

We believe that the agreement that you refer to between us and OPEC and non-OPEC will hold.  There is a lot of speculation, and people are jumping too fast based on nine days or 10 days of media speculation about who’s producing at what level.  But I have the full trust and confidence of my colleagues.  We took a year debating whether to do this or not.  And the reason we took that long is because everybody intended, once they sign up to it, to implement it.  If the intent was not to comply, then people would have jumped and signed a lot earlier.  So I am – I am confident that the combination of capping production by about 25 countries and then growth and demand, as well as decline in mature basins, that the markets will continue to balance and the prices will respond accordingly.  I don’t have a specific price target that we’re after.  All we want is financial flows to go back into the market, jobs to go back, service industries to come back to its healthy levels.  We realize that three-digit prices that we saw earlier this decade fueled too much activity and investment in oil resources that were too expensive and unsustainable to be produced in the intermediate terms.  At the same time, we saw prices that are below our current levels to be equally unsustainable.  We saw the most efficient and profitable companies go into the red.  So that tells you.  You don’t have to be brilliant to realize that those levels of prices will not sustain continued production at 95 to 100 million barrels in the years to come.  The agreement we have is for six months for the specific reason that we don’t know what is going to happen by mid-year, and then we will consider renewing it. 

Now, in terms of specifically with Russia, we have had lengthy discussions with our counterparts in Russia.  We realize the two countries combined are close to 22 million barrels of liquids, and we are by far the largest exporters of Russia.  So our cooperation and collaboration not just in 2017 but for the long term is essential for market stability.  Regardless of what we do with the six-month agreement, we have a bilateral protocol that allows us to continuously monitor markets and exchange views and exchange data, and that certainly will continue.  And if there is a need to bring non-OPEC countries with OPEC in the second half of 2017 or beyond, the Russian-Saudi relationship and cooperation I think will play – as it has the last few months – will play a key part in bringing those two groupings together for the interest of all.  I want to say it once again – our interests as responsible producers – and certainly Saudi Arabia and our GCC colleagues are with me on this – we want moderation.  We want to reduce volatility.  We cannot eliminate it.  But we also want prices that are supportive of continued production, as well as equally important, continued consumption by our key markets.

MR. KEMPE:  Thank you very much.  I’ll make this question very brief.  You talked a lot about Saudi – the Vision 2030.  So much is at stake for that success.  What is the greatest challenge to its success?  What’s the right price point for oil to help along the success of that project? 

MIN. AL-FALIH:  I mean, our budget is – has been announced, and at current prices we’re in deficit.  So – but I think – I think the key for Vision 2030 is delinking the Saudi economy from the oil price.  We want to do it sooner rather than later.  I think time will tell how quickly we can build the economic engines I refer to – whether it’s mining, logistics, tourism, services, advanced manufacturing, and so on and so forth.  We have a great resource that we have not tapped, which is our people.  Saudi Arabia is a very young people with brilliant young men and women who are able to innovate and to start ventures.  And this is going to be one of the areas we focused on.  You talked about education and science and technology and my interest in them, and I see them essentially every day.  And just like you have done in the United States, and just like we’ve seen in other parts of the world, this is not only a hope, this is the imperative that we have, that we tap and unleash this great resource we have and transition from our reliance on oil. 

But it will take time.  This is – if it was up to us, we would do it sooner, like I said, but I think we’re going to also optimize our investments in oil, manage our relationships to the market in a balanced way to make sure that we continue to use this finite resource that is being depleted to the full benefit of future generations by building the economy of Saudi Arabia in the future.  Naturally, major transformative change is difficult, and the Saudi population has depended for decades on the government as the provider of welfare, of jobs, of security of all type.  Going forward and envisioning the Saudi Arabia of the future where it’s going to be led by the people in terms of economics, I think that transition is not going to be automatic.  There will be some resistance.  So how do we manage the social and economic transition and help the people is the biggest risk, but I assure you Vision 2030 takes it fully into consideration. 

And we are transparent and communicative.  Just a couple of weeks ago, when we announced our budget for 2017, we announced a five-year fiscal program that also talked about fully deregulating energy prices and linking them to international prices.  We talked about introducing new fees on foreign labor to incentivize employment of Saudis.  And all of these are going to be costs and burdens on the citizens.  So the intent is to prepare the population and to prepare the economy, to prepare companies, and there will be no surprises and the people and the government and the private sector, foreign investors will know what to expect and we will travel on this journey together.  ­

MR. KEMPE:  Thank you, Mr. Minister. 

I ask for the audience to stay in its seat.  The minister has to leave for another appointment.  But please join me in giving him a round of applause for a significant and very thoughtful keynote.  Thank you.  (Applause.)