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April 19, 2006
Saudi Aramco executive shares his insights on understanding and profiting from trends driving the world oil market
Students and faculty of The Fletcher School/Tufts University filled a lecture hall to capacity to hear the insights and experiences of Khalid A. Al-Falih, Senior Vice President of Industrial Relations for Saudi Aramco, one of the world’s top energy companies. Al-Falih came to Fletcher as part of the International Business Program’s Global Speakers Series in co-sponsorship with The Fares Center for Eastern Mediterranean Studies.
Students and faculty of The Fletcher School/Tufts University filled a lecture hall to capacity to hear the insights and experiences of Khalid A. Al-Falih, Senior Vice President of Industrial Relations for Saudi Aramco, one of the world’s top energy companies. Al-Falih came to Fletcher as part of the International Business Program’s Global Speakers Series in co-sponsorship with The Fares Center for Eastern Mediterranean Studies.
Al-Falih explained the Saudi Aramco’s understanding of the rapidly evolving world market and how it was shaping the company’s plans for the future, while showing how the company’s status as a nationally controlled company influenced its decision making and strategy.
While high oil and gas prices and potential shortages are regular topics for cover stories in newspapers and magazines, Al-Falih explained how current price levels are actually the result of stresses in world supply and pricing systems combined with the impact of demand in new markets.
“Current oil prices reflect a combination of geopolitical uncertainty, high levels of speculative trading, and bottlenecks in the consuming countries. There are not enough tankers, and refining capacity is stretched – these are some of the reasons why we see high oil prices even as the world has large amounts of oil sitting in tanks,” he said.
On the demand side, the huge growth in Asian markets is transforming the demand for energy. “In the past we looked at developed countries as the drivers of demand. “Last year was a turning pint – China accounted for more of the incremental increase in demand than all 30 OECD countries,” Al-Falih said. This was not a one-year aberration, he argued, saying, “The center of gravity in demand has officially shifted to developing Asia, and we believe this trend is going to continue for several decades.”
This tension in world oil markets has made it especially important for Saudi Aramco to make sure its plans for the future allow it to remain the world’s swing producer.
“Our expansion projects are not for more revenues alone - We at Aramco are very cognizant of the impact of oil on societies and the need for stable supplies. We are the only company in the world with excess capacity ready to meet shortages of instability - this is an expensive service, but an important one,” Al-Falih explained.
With these factors helping to drive current high prices, Al-Falih said widespread talk about “peak oil” and the looming exhausting of hydrocarbons was highly overstated. “We think the peak in oil production is still decades away. Technology is helping us expand production, and there are still fields in Saudi Arabia that have not even been developed,” he said.
The company’s history as the product of a partnership between American firms and Saudi Arabia gave it the background to thrive in an increasingly globalized world, Al-Falih stated.
“We at Saudi Aramco have been living globalization for the last seven decades,” he said, pointing to the company’s history in which “thousands of Americans came the kingdom to prospect for oil, invested millions, and transformed Saudi Arabia from an underdeveloped country to the nation it is today.”
Al-Falih also shared his insights into how the Saudi government’s 100% ownership of the company shaped its operating style. While it might seem more straightforward to have only one shareholder, he explained that while most shareholders of public companies are mainly interested in increasing the value of their shares, the government has a much broader range of interests.
“We are entrusted to create value for the kingdom, and that is a much more fuzzy responsibility. It includes job creation, diversification of the larger economy, sharing best practices with other companies in the kingdom,” he explained. “These are the reasons that many oil-producing countries insist on maintaining an exclusive role for national oil companies,” he added.
As a result of these broader interests, “We try to assess our projects in a more holistic way, and we bring much more into our calculations of project viability,” Al-Falih said.
Despite government ownership, “We still try to maintain the same standards as the other [independent oil companies] in our management and operations, and we are constantly looking for areas where we can work to keep our performance ‘best in class’,” he said.
Al-Falih also touched on the role of education, both in US-Saudi relations and in the careers of the students in the audience.
The opportunity to study in an international environment builds the understanding and sensitivities necessary for the modern business world he argued, noting, “In my family we will have three generations educated in the US, while our roots remain in Saudi Arabia.”
He also reminded Fletcher students of importance of not just what they are learning now, but the perspectives and methods they are developing. “Whatever you learn in school is very important to getting you in the door in a company, but what takes you places in your work is the ability to keep learning and developing your skills. The most important thing I learned in school was how to learn,” he said.
Al-Falih jokingly added a final benefit to speaking at a university - “It’s always enjoyable to be among students and academics - it makes one feel much younger.”
By Charles De Simone, MALD '07
Posted by fletcher at April 19, 2006 04:57 PM
