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Saudi Aramco Chief Executive Warns on Oil Supply

Saudi Aramco Chief Executive Warns on Oil Supply thumbnail

The chief executive officer of Saudi Aramco, the world’s biggest oil producer, said Monday that worries such as rising oil-sector costs and global turmoil could lead to a lack of oil supplies down the line, if oil companies fail to make sufficient investments.

“The factors I just highlighted are likely to put downward pressure on supplies over the longer term, if the industry fails to make prudent and timely investments,” Khalid A. Al-Falih said at the Offshore Northern Seas energy conference.

The factors that could threaten global oil supply include rising costs and cost overruns on oil mega projects, Mr. Al-Falih said. He also pointed to manpower shortages, climate change issues, low oil demand growth amid global economic weakness in the short term, and turmoil in oil-producing regions such as Africa, the Middle East and the former Soviet Union.

“For now, however, the market is shrugging them off, and prompt prices are reflective of weaker demand,” said Mr. Al-Falih.

Despite unrest in Iraq and Libya and geopolitical tensions in Russia over Ukraine, oil prices have dropped to $102 per barrel from this year’s peak in June at $115 per barrel. The International Energy Agency reduced earlier this month its 2014 demand growth estimates amid slow global growth.

Mr. Al-Falih said the oil sector’s long-term growth outlook was ‘fairly healthy,’ as global primary energy demand is set to grow by more than a third from the current level by the mid-2030s. However, oil companies are squeezed between rising costs and shareholder demands, he said.

“Industry profitability is plateauing after a banner decade,” said Mr. Al-Falih. “We are seeing project cancellations and a general capital curtailment.”

Mr. Al-Falih said his company had launched a program to reduce its capital cost by 20%, as “even at Saudi Aramco, project costs have roughly doubled over the last decade.”

The world’s oil fields are in decline, so the world needs to replace close to 40 million barrels a day of new capacity within the next two decades, Mr. Al-Falih said. A lot of those resources will be complex and expensive, such as shale oil and gas and heavy oil projects.

“So, to tap these increasingly expensive oil resources, oil prices will need to be healthy enough to attract needed investments,” said Mr. Al-Falih.


10 Comments on "Saudi Aramco Chief Executive Warns on Oil Supply"

  1. Plantagenet on Mon, 25th Aug 2014 8:01 pm 

    It isn’t very likely that the world can replace 40 million barrels/day in the next two decades.

    Its all downhill from here.

  2. SilentRunning on Mon, 25th Aug 2014 8:27 pm 

    >The chief executive officer of Saudi Aramco, the world’s biggest oil producer, said Monday that worries such as rising oil-sector costs and global turmoil could lead to a lack of oil supplies down the line, if oil companies fail to make sufficient investments.

    The problem is: As time goes by “sufficient investments” means that the oil companies have to plow all their profits into looking for future supplies, and then eventually even that won’t be enough.

  3. Perk Earl on Mon, 25th Aug 2014 9:00 pm 

    The problem is oil price needs to rise, not fall, to support continued capex. He refers to the problems rather succinctly but fails to address that wages are flat and with most consumer prices rising, consumers cannot support higher oil prices. In that scenario oil price will continue to fall and as it does high priced marginal oil plays will go offline. There won’t be any 40 mbd of scraping the non-conventional oil bottom of the cask to replace the easy to extract stuff. The economics just are not there.

    Now the argument can be made that higher income individuals can afford to pay more, BUT the merchandise being moved is 75 mbd of crude. Start moving less to just satisfy the wealthy and with less tax money the rest of society falls into decay and chaos will erupt into riots.

    It was refreshing though to hear a Saudi official admit what many of us already know.

  4. Northwest Resident on Mon, 25th Aug 2014 9:43 pm 

    A man as intelligent and knowledgeable — and highly placed — as Khalid A. Al-Falih must know the reality that the oil industry is facing when it comes to finding new investment opportunities. What he is saying makes sense within the framework of business as usual, but given the stark realities that BAU is running up against, his words sound a little tired and worn out, as if he felt obligated to give a presentation that doesn’t rock the boat and doesn’t raise any alarms in the minds of all those energy investors. But as he spoke those words, I suspect that Khalid A. Al-Falih was feeling the ground crumbling beneath his feet, and he knows that the problem is much more severe than a simple lack of investment.

  5. Norm on Mon, 25th Aug 2014 11:24 pm 

    Yay! What Plant said. This time he is right.

  6. markisha on Tue, 26th Aug 2014 12:28 am 

    when he said this wow

  7. Musher on Tue, 26th Aug 2014 1:38 am 

    “The world’s oil fields are in decline, so the world needs to replace close to 40 million barrels a day of new capacity within the next two decades,”

    Consider, these words were spoken by a top executive of the world’s largest oil producer. S.A. has a history of gilding the lily in re: to the production of oil insisting that there are more than adequate reserves. This quote, if accurate, is momentous. It should be considered an alarm bell announcing the end of an era and the heralding the beginning of a future that is very likely to be challenging to say the least.

  8. Nony on Tue, 26th Aug 2014 6:27 am 

    SA has big incentives to propogate the view that the world is running out of oil. It helps to keep the price high.

  9. Davy on Tue, 26th Aug 2014 6:56 am 

    Systematically oil cannot deviate much from its current goldilocks range. Our complex interconnected global system is experiencing financial instability especially since 2008. We have repressed normal markets in multiple ways yielding a resulting hybrid capitalism of excessive monetary manipulations, wealth transferring policies, market manipulation, lax rule of law, political corruption, and excessive debt creation. This pseudo capitalism is a great experiment of trial and error of policies that are based upon the weak science of economics. “ALL” markets cycle even pseudo markets. This market will cycle too the question is when and how. We see the equity and debt markets as extended by normal, excepted and time tested financial indicators. We know central banks’ balance sheets are extended with credit and debt creation in all the major economies. In the oil sector we have capex compression from inflationary cost increases that are beyond the direct control of this pseudo capitalistic system and a result of this pseudo capitalism’s policies. The current danger to this pseudo capitalism is confidence. Confidence is a human condition that is subject to randomness, herd behavior, and manipulation. Confidence is liquidity, liquidity is growth and growth results in vital increases to energy intensity and increased complexity. Complexity and energy intensity are vital to a growing population and growing economy for required carrying capacity growth. How long can the repressed financial system of this pseudo capitalism maintain confidence that is vital for mitigation of an increasing capex compression? The systematic inflation element of this capex compression cannot be directly controlled so it is vital that the markets and cost of debt be maintained. The capex compression will go critical if markets fall and low debt cost cannot be maintained. The current oil product production is increasingly occurring with a lower rate of return due to the increasing complexity and cost of extraction and lower quantity and quality of resulting product. This frothy repressed market requires more return on investment to maintain confidence. Diminishing returns are increasingly affecting the ability of the markets to maintain confidence. As markets rise higher the bar becomes higher to maintain confidence. Oil nationals must maintain growing government requirements also and these are directly related to the financial markets. It is only a matter of time before the number shake confidence and the system cycles to a confidence shattering contraction fatally affecting the capex compression equation. A small rise in rates is fatal not only for the oil sector but currently all sectors including governments. In effect all segments are by normal indicators currently insolvent if rates were normalized. The current absolute debt levels is in effect systematic insolvency system wide. Rates cannot go any higher. We are close to a bear market by many financial indicators. Since we have a de facto macro Ponzi scheme of debt creation the confidence factor is the critical element. Confidence is human nature. Confidence can go on until it doesn’t. That is the best prediction one can make on human nature.

  10. markisha on Tue, 26th Aug 2014 9:50 am 

    nony , they have never been saying something like this and they alwayes wanted high crude prices. In my opinion there is something more here

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