Economic Turmoil Unlikely to Affect Saudia Aramco's Mega-Projects

The current global economic downturn will not impede Saudi Aramco mega-projects, Khalid G. Al-Buainain told a group of 300 energy industry professionals.

In fact, a slowdown may actually have benefits from the standpoint of easing tight construction supplies.
Al-Buainain, Saudi Aramco's senior vice president of Refining, Marketing and International, made the remarks Oct. 26 during a meeting of the Society of Petroleum Engineers.

"When it comes to our new crude-oil increments and gas expansion projects, the impact of the present economic turmoil will be minimal," he said. "By and large, our upstream projects are self-financing, or 'corporate financed,' meaning that we are not reliant on the banks or credit institutions to finance our expansion programs. However, the need to bring in additional volumes of oil in a contracting market will be examined carefully."

Saudi Aramco, he said, will continue to support the Kingdom's position as the world's swing producer. "Of course, we already possess substantial spare crude-oil production capabilities, in keeping with the Kingdom's longstanding commitment to maintain 1.5 to 2 million barrels per day in spare capacity," he said.

Softening demand means an extra cushion for project timetables and more flexibility in production, he added.
The company also is involved in several joint ventures with international partners, from export refineries to petrochemical projects, and Al-Buainain expressed optimism that they will be unaffected by the current global economic situation.

"I can tell you that our partners are still highly committed and anxious to see these projects move forward. I think it is realistic to say that financing these mega-projects through borrowing in a tight credit market will be a challenge," he said. "However, because of the uncertain nature of the global financial crisis, it is really too early to tell what sort of fallout there will be for the funding of these projects." He added that the economic viability of the projects is not in question.

The construction boom in the Middle East might cool off because of the slowdown in credit, putting Saudi Aramco in a more advantageous position. "Declining commodity prices that are a byproduct of the global economic slowdown will help to reduce the estimated price tags of these projects, as the cost of materials like steel and copper falls sharply."

Equipment and qualified personnel are also likely to be easier to obtain as other projects in the region are canceled or delayed, both in the industry and in the construction and infrastructure sectors. "As a result, short-term project economics may actually benefit from the current financial turmoil, and companies with a lot of cash will come ahead," Al-Buainain said.

He noted that Saudi Aramco has always based its operations on the long term. “The day-to-day noise generated by the markets doesn't matter very much when it comes to Saudi Aramco's project portfolio.

"No one today could tell you what Dow Jones was doing when we began to produce Ghawar or where the FTSE index was when Safaniya was developed, and, in the future, the world will only remember that Saudi Aramco brought sufficient crude oil, refining and petrochemical capacity on-stream when it was needed, where it was needed -- just as we have done for 75 years," Al-Buainain said.

He said the cyclical nature of the oil market should surprise no one. "Short-term market volatility is nothing new to our industry; as the well-known energy analyst and historian Daniel Yergin has said, 'Cycles of shortage and surplus characterize the entire history of oil'…These chronic boom-and-bust cycles are why successful petroleum enterprises view their activities as a marathon rather than a sprint, and why the oil business is not for the faint of heart or the short of breath. In fact, given the long lead-times involved in petroleum industry projects, we may actually be poised to catch the bounce as the global economy recovers, energy demand picks up, and our new facilities come on-stream."

Al-Buainain said most forecasts predict fundamentals that call for increasing volumes of energy for a continuously developing world.

"Even if the global economic recovery proves to be some way off, the only way these investments don't make good business and economic sense over their useful life spans is if you believe that rising economies like China and India will cease to grow, that the billions of people living in those markets will no longer want to enjoy a more prosperous and affluent lifestyle, that they are not interested in providing greater economic and social opportunities for their children, and that overall energy demand will somehow decrease even as the total population of the planet increases."

In addition to the speech, SPE chapter members honored outgoing board members and paid special tribute to donor companies supporting the organization's Saudi Arabia section.