Interview of the Month
Saudi Oil Minister Khalid A. Al-Falih was in New Delhi last month. In a freewheeling discussion he talks of issues ranging from oil prices to engagements with India. BS: Do you see the need for extending the output curb beyond 2018? Khalid A: The 24 countries' commitment is to bring the market to balance. Bringing the market to balance and stabilize the market is multi-faceted, it involves inventories, but inventories are also quite a broad category. There are OECD inventories, there're nonOECD inventories, there is a matching for OECD inventories to demand, making sure that all the customers of crude oil find the type of crude oil they want, at the location they want. So, that study is taking place and once we know exactly what the balancing of market will entail, we will announce what is the next step. The next step may be easing of the production constraints. My estimation is that it will happen sometime in 2019, but we don't know when and we don't know how. What we know is that it's going to be done in a way that it will not in any way disturb the balance and undo the hard work since 2016. So, our commitment to a balanced market is beyond the deal, to continue to guide our policy going forward and that will mean that after this production constraint agreement that was extended in November to last through 2018, there will be a new framework to help us keep the market balanced. I think everybody has learnt producers as well as consumers that a market without a steering wheel is very destructive, very damaging to the interest of all and created not only losses to producers, but it also hurt the interest of consumers. It hurt the interest of the oil and gas service industries. We saw jobs being lost. We saw negative impact on the macro economy globally over the reduced demand by oil producers. So, we don't want to go through this again. This is the consensus we are hearing from around the world and will be back to India in April in the IEF and we will have on the same table representation from consumer countries and we will be listening as producers to make sure that we continue to prioritize their interests and our interest of long-term demand and stability of the markets. And the framework beyond 2018 is yet to be determined, but for sure from the Saudi and from the OPEC standpoint, there is a determination to translate the success of 2017 and 2018 partial as it may be into a lasting framework that allows us to avoid instability in the oil markets. I think what we want is an evergreen framework that brings producers from OPEC and non-OPEC together in a market monitoring fashion that allows us to take quick decisions. You cannot predict what 2020 is going to bring. You cannot even predict what the second half of 2018 will have. We have seen repeatedly that the financial crisis have severe impact on oil markets, we have seen that natural disasters, political instability may create disruptions on the supply side. So, both supply and demand have variables that nobody can predict on a FATIATE basis. Events happen and we need to be ready. When I talk of a framework, I talk about a methodology and a commitment that
should events require action to stabilize markets that producers are willing and able and authorize, the governments are committed to get together and take that action. BS: Russia joining OPEC? Khalid A: I cannot speak for Russia and what they are willing or not willing to do. I think OPEC has proven to be a very useful tool for meeting a very important objective for the global energy markets, and therefore for the global economy. And Russia will make its determination on how to work with OPEC, I know there has been and continues to be an active RussiaOPEC dialogue, I happened to be in Moscow a few months ago when that session took place and I addressed the dialogue. As a minimum, that will continue, we welcome Russia elevating its cooperation with OPEC. What I'm talking about the framework is something above OPEC and above the methodology which is just to make sure that major producers who have over 50% of global production and significantly more of the traded oil across board is controlled by the 24 countries that we are talking about. These countries have their interest and the interest of their customers at heart, we need to continue to steward the stability of the market and we will do that through this. BS: Are you concerned about rising oil production in the U.S.? Also what will be the timing of the Saudi Aramco IPO? Khalid A: The rising production in the U.S. is welcome. Over the last 3 years we have about 5 million barrels of capacity increase. If you look at US rise over these last 3 years between the decline we saw in 2015-16 and the rise since then is less than a million barrels. So, a million compared to 5 it fades and in the meantime we've seen significant declines in countries like Venezuela, Mexico. So, the market has been able to absorb that production. Going forward, I think more of that same trends will continue People are already talking about 2018 demand being way in excess of the 1.5-1.6 we saw in 2017. We will see what demand brings. In the meantime the structural depletion and decline in some of the world's large producing basins is a reality that will continue. Some of it can be mitigated with increased investments with better market conditions, but it cannot be stopped. So, we need new production to replace and I think if you put U.S. production in global context, it's quite welcome. It just happens to be light sweet and many of the world's refineries are built for heavier and more sour crude slate. So, it may not really meet increased utilization of existing refineries. It will take time for the refining industry to reconfigure itself to take more of the sweeter crudes coming out of the U.S. So, when you look at these trends settle and look at the macro picture before over-reacting to one small sliver of the oil supply chain, which is the U.S. production. In the meantime, that's why we need to be agile, we need to work together, we need producers to continue cooperating. The JMMC will meet in April in Saudi Arabia and we will look at the trends then, and forecast, give our advise to the ministerial meeting which will take place in June in Vienna. In the meantime, let's just stay steady as we go, continue discipline is my message to my colleagues. We certainly exercise it in Saudi Arabia. We just announced that March we've cut our production and we are keeping our exports below 7m. This is the soft demand season and we are very conscious of this. So, we are able to reduce further. It was interesting to see the U.S. inventories going down in this past week in February. Both API and EIA data show crude draws, which shows that the strategy is working. The discipline in January was exceptional as you saw from the reports coming out of the JMMC. So, I think we are on plan on track and all lights are green as they say as we implement our strategy. We are committed to meeting our commitment on the production constraints. We will balance our domestic and an export as time goes. But as I said we are going through a soft spot on global demand. And we are conscious of this. Sometimes we take extraordinary steps that may not be necessarily applicable for the entire 12 month duration of 2018. So, we will see what the next 3 quarters bring. We have set our production for the first quarter and if you look at the entire first quarter, we are once again well below the production cap that we committed. &7m bbls is for March, but it matches for January and February. BS: IPO by Saudi Aramco? Khalid A: Well, all I could tell about the IPO is that we are committed to the IPO. It will take place. It's good for the kingdom, it's good for Aramco and it's good for global oil industry. And we will announce the details of the listing venues and exact timing in due course. BS: Will crude prices will be an indicator? Khalid A: It's one of the most complex, one of the largest events in financial history. As you imagine the government is looking at multiple factors to optimise the interests, not only for the kingdom, not only for the company, but also for the global financial markets. So, timing will be announced, and I hope everybody is patient as those deliberations take place. BS: Saudi losing grip in India crude market? Khalid A: For us we feel quite comfortable, quite at home in India doing business, and again that goes back to the relationship between the two people before even the modern Saudi Arabia and India were created as nation states. Our values, people-to-people relationships makes doing business in India quite natural for us. Another level is the complimentarity between the 2 countries, the 2 economies. Many of things that are produced in Saudi Arabia are needed in India and vice-versa. So, as I come in my capacity today as minister of energy and industry, I'm not only looking for oil and energy partnerships, but also petrochemicals, fertilizers, power projects in India that are of attraction to the champions of those fields in Saudi Arabia. On the other hand, India is growing at the fastest rates in the G-20, and it is one of the top 8 economies today. So we want to cement the ties and capture those emerging opportunities including India becoming a big investor in Saudi Arabia as well as finding opportunities for Indian exports and the Make in India strategy of Prime Minister Modi to leverage the middle-East largest economy and the anchor of our region with Saudi Arabia. So, all of these were discussed. I had the pleasure and honour of meeting with Prime Minister Modi for an hour yesterday, listening to his wisdom, his guidance on how the relationship should go. Of course, I also carried with me messages from custodian of the two mosques King Salman about his interest and his commitment to taking the relationship to a truly strategic level and building on the success of PM Modi's visit to Riyadh
in 2016. His Royal Highness Prince Mohamuddin Salman follows up on our success and working on the relationship with India almost on a weekly basis. We are building the framework for a strategic relationship that is multifaceted. Oil is an important component, but it's not the only thing. You will be amazed that in my discussions with the Prime Minister, renewables and power took more time than oil. Agriculture took more time than oil as well as the broad relationships. Political, security, economics, investment, creating investment vehicles between the 2 countries. So, it's really a bright future for Saudi Arabia and India. I think the 2 countries can create and alliance of sorts to bring stability also, because bring economic well-being to India to help its region and the same thing to Saudi Arabia. Middle East needs stability and a strong, thriving Saudi Arabia on the economic side will bring stability to the middle-east. And fortunately we know that instability in the south asia region where India is the clear anchor can spell into the middle-east and vice-versa. So, you can't separate the political and the security from the economics. Both countries have visionary leaders that are looking to stabilize our regional eco system but at the same time focussing on the internal economies of our countries and driving them into the new economies of the future. Cooperation on all fronts is key. Coming back to oil, we are not bothered by short-term fluctuations of volumes. We've seen refiners react to buy opportunities that they get from time to time. But at the end of the day we know from 8 decades of supplying the world with energy that our partners will find the value in long term stability. Stability of the volumes being there, stability of the quality being there, and predictability on what the supplier and in this case Saudi Aramco is committed to. So, together with me is a strong delegation from Saudi Aramco that met with their customers here to cement the supplier relationship. Saudi Aramco controls about 25% of the high quality conventional oil reserves and if you look at the global reserve base, there are start and they are not really competitive with what Saudi Aramco is offering. The geography and being able to deliver oil to India and the broad slate of grades that Aramco offers, that is five grades, is unmatched by any other suppliers. So, I think ultimately that will prevail in terms of the long-term trend. We are not looking at India as 4 million market, we are thinking of India as an 8 million barrels a day market with the high growth rate that we are seeing and the number of refineries being built. So, the focus is not short at our footsteps, we are focussing on miles down the line as we run together with the Indian industry towards meeting the energy needs of the 1.3 billion people that are fast joining the middle class. I would say specifically we spent 99% of our discussions on oil talking about future projects. In fact I don't recall talking to anybody about volumes in 2017 versus 2016 versus 2018. That is a very tactical issue that the companies can talk. What I'm here to advance our long-term commitments, both as my hat as minister and hat as chairman of Saudi Aramco that we want to be part of the landscape. This morning we had a one hour meeting about the commitment of Aramco to the 1.2 million barrels per day west coast refinery. Agreements have been already signed that allows discussions to start on the configuration of the refinery, on design basis and pre-feasibility studies. So, that discussion is ongoing. I left the meeting to talk to you and beyond this, Aramco is also looking at other opportunities to buy into existing refineries in India as well as upgrades of existing refineries. So, there are at least 3 different tracks which I cannot reveal more specifics. One is the greenfield west coast refinery, which is already public, but there are discussions with expansions as well as buying stake into major existing refinery assets. All of these are illustrated commitments by the Kingdom and the company to be not only a supplier, but an investor in India at an unmatched scale. And India is open for partnership, open for business, we welcome that, we welcome Prime Minister Modi's probusiness environment, we believe in it, we believe it's here to stay and have told Aramco team to assign zero political and regulatory risk to India and treat it as part of Saudi Arabia. The projects will have risks, the markets will have risk, but India has no risk. And we are here to invest, we are here to grow, we are here to be part of India's landscape and we will be received with open arms and we don't take that for granted. We will match that with commitment, with action and with unmatched flow of FDI. BS: Are you mirroring the strategy you have adapted in rest of Asia, like when you buy a stake you lock in some kind of supply agreement as well? Khalid A: Absolutely. India doesn't need our charity. India is a rich country and is getting richer by the day by capabilities and the resources of India. And a good part of working with India and Indians is that they understand the principles of business and there will be no windfall out of this that is not normal, but at the same time these investments have to be bankable. And at the same time we have found around the world that if you lock in the crude slate and match it from the reservoir all the way and bring that stability in refining basis and you don't fluctuate and change your crude diet, that translates into significant dollars in the long-term. For the refinery itself, regardless of its owners, we have refineries around the world that we are trying to wind them off the Saudi crude and they refuse. We have a refinery in Asia that is running 100% on Saudi crude, S-Oil. We are asking them to release some of the Saudi crude. We are asking them why don't you take 65% of Saudi crude and buy some of the available crude opportunistically. But they are saying 'no'. The refinery is addicted to Saudi crude and refuse to take a single barrel from the open market. And it's the most profitable in Korea. So, I think that speaks to itself. U.S. refineries are extremely profitable once they run steadily on a crude diet that they can predict. So, nothing is going to be run on 100% crude in India, at least that's not our desire. But we need to know what to build the refineries for. Our crude if you look at the specifications from 8 years ago to today, because of the size of the reservoirs managed by Aramco, predictable within a fraction of 1% in terms of its gravity and content and so on and so forth. So, it makes refining it more profitable to the entity. So, that value is brought into the country, predictability and high quality and of course competitive pricing by Aramco and predictable pricing. So, that translates into value.
Saudi Oil Minister Khalid A. Al-Falih