Mr. Alfalih’s Remarks, 11th Annual Dinner Meeting

Saudi Aramco and its Role in Saudi Arabia’s Present and Future

by

Khalid A. Al-Falih
Saudi Aramco President and Chief Executive Officer

MIT Club of Saudi Arabia Dinner
Riyadh, Saudi Arabia
Monday, April 19, 2010

Dr. Mohammed Bakr, thank you for your kind introduction. We admire your many achievements in business and public service and for your capable leadership as President of the MIT Club of Saudi Arabia. I wish to commend Massachusetts Institute of Technology and your many outstanding alumni for the transformative role that this great university and you as individuals have played in the Kingdom’s development. Saudi Aramco is privileged to have many talented graduates of MIT in our professional ranks. It also is our privilege to be part of several collaborative projects with MIT, including the MIT Energy Initiative, the Sloan Engine Laboratory Industry Consortium, the MIT e-laboratory, and the Blended Learning Open Source Science or Math Studies (BLOSSOMS) program. Let me also acknowledge the presence of many distinguished guests of the MIT Club.

Today, I would like to address three main subjects: First, I’ll try to introduce Saudi Aramco to you in a manner such that you will be able to see it from up close, and then explain our main strategies; Second, I’ll talk about how Saudi Aramco relates to the Kingdom in a variety of ways; and

Lastly, I’ll share some thoughts with you concerning the Kingdoms longer term challenges, a future economic perspective and what Saudi Aramco is doing in this regard at a strategic level.

A Look at Saudi Aramco from Up Close and its Key Strategies

As you know, Saudi Aramco is the world’s largest producer and exporter of oil and is among the leading players in the global oil industry. For 20 years it has been ranked by Petroleum Intelligence Weekly as the number one oil company and is run as a modern international corporation, competing successfully with the best in the business; and it is this qualitative aspect of our standing in the global oil industry which is the focus of our efforts and the source of our pride. Equally important to the company is our critical obligation to support the Kingdom and its people. Looking from outside, Saudi Aramco may seem opaque to some of you, so I’ll try to show you today who we are, what we do, and how we work.

We consider talent, technology and teaming to be the three most important success factors for Saudi Aramco and for any global energy enterprise, for that matter. Saudi Aramco comprises more than 57,000 men and women, 87 percent of whom are Saudi Arabs, with 13 percent expatriates employed in highly skilled professional disciplines; almost the entire management of the company consists of Saudis.

Our businesses range from exploration and production of oil and gas, oil refining, chemicals and shipping to sales and marketing and support in industrial, personnel, medical, finance, law and planning disciplines. We maintain world class expertise in all these areas.

We believe that talent will increasingly become a differentiating factor among more and less successful companies in the future. Consequently, recruiting, developing and retaining talent is one of our key corporate strategies. We regard learning as a lifelong process and operate programs to enable this pursuit for our employees. We maintain one of the world’s largest corporate training programs, having in-house training of operators, craftsmen and administrative staff. We currently sponsor more than 2,000 students for undergraduate and graduate degrees and specialized programs at more than 200 local and leading international universities.

Talent thrives only in an environment that rewards excellence, effort and achievement. Throughout its history, Saudi Aramco has maintained a corporate culture which encourages individuals and teams to excel; where advancement is based on merit, skill and work ethic; and where employees have the opportunity to go as far as their expertise and drive will take them. That kind of working environment continues to be vital for our business success.

We also believe that technology is a great enabler of more efficient, more reliable, safer, lower cost and more profitable operations. Therefore, we utilize the world’s best technologies in our operations. In fact, we are among the industry’s leaders in deploying new, cutting-edge technologies in our operations. To remain among the leaders in technology, we have two advanced research and development laboratories: one for sub-surface called the EXPEC ARC and the other for surface facilities, the R&D Center. Many of our technologies are also developed collaboratively in partnership with service companies, technology developers and academic institutions. This partnering model sets the stage for a brief discussion of our Teaming strategy.

Teaming refers to our collaboration with partners, suppliers, customers, and other stakeholders. Whatever the extent of a company’s capabilities, no company can or should go it alone these days, simply because the business is just too complex and too multifaceted for any single organization to excel at everything. We have pursued joint-venture partnerships with leading global petroleum companies and now with top-flight chemical enterprises. We also look at our dealings with suppliers, vendors, contractors and service providers as mutually beneficial partnerships. When it comes to teamwork, we look to partner with leading institutions which also take a strategic, long-term view of building capacity and capabilities, and whose strengths and expertise fit well with our own thus creating synergies.

Regardless of companies’ past record of achievements and possession of talent and resources, bad governance can ruin company reputations and indeed put them into peril, as the examples of Enron and many others tell us. Such risks can be avoided only by strictly adhering to good governance, and practice of the highest business ethics. We not only attach great importance to governance and business ethics ourselves but demand the same of our employees as well as our business partners.

Oil and the Economy

Let us take a quick look at the situation of the world oil market today and into the future. Despite a lot of discussion in the media about the rapidly rising role of energy alternatives, we believe that alternatives are starting from a very small base and realistically speaking, their contributions will grow only gradually due to technology, economics, infrastructure and consumer acceptance issues.

Oil will continue to play a key role on the world’s energy scene for the foreseeable future. We subscribe to the consensus view that oil demand will rise from about 86 million barrels per day currently to between 105 and 110 million barrels per day by the year 2030. Even if the share of oil and fossil fuels falls in the energy mix over the coming years due to alternatives gradually gaining ground, the demand for oil and fossil fuels is expected to rise in absolute terms.

To respond to the anticipated growth in oil demand, and taking a long-term view of the business, we have recently completed an upstream expansion program that brought our oil production capacity to 12 million barrels per day, with a spare capacity of roughly 4 million barrels per day. This spare capacity alone equals the exports of two typical large producers of oil, and helps assure oil market stability during unforeseen circumstances.

Oil is a volatile business. You saw this vividly during the past two years as the oil prices shot toward $150 per barrel; then fell below $35 as the world economy was hit by the financial and economic crises; and has since then recovered to exceed $80 per barrel. Oil exports remain the largest source of export revenue for the Kingdom. Depending on oil prices and our export volumes, oil still accounts for 80 to90 percent of total revenue. This major dependence on a single commodity, oil, is not desirable. This is why it is imperative on all of us to work hard on diversification and indeed transformation of our economy.

However, economies take time to transform. Oil will continue to play a major role in the Kingdom’s economy for the medium term, which I would consider to be the next several decades, while industrialization steadily increases and economic diversification grows.

While energy is a key enabler of the Kingdom’s economic development and a major competitive advantage, we need to make sure that we use our precious oil and gas resources efficiently, wisely and minimizing waste. The total domestic energy demand is expected to rise from about 3.4 million barrels per day of oil equivalent in 2009 to approximately 8.3 million barrels per day of oil equivalent in 2028, or a growth of almost 250 percent.

We estimate that through improved efficiency, while maintaining the same economic growth, the increase in energy demand can be cut into half. This is a highly desirable goal because increasing domestic consumption of oil reduces the export availability. If no efficiency improvements are achieved, and the business is as usual, the oil availability for exports is likely to decline to less than 7 million barrels per day by 2028, a fall of 3 million barrels per day while the global demand for our oil will continue to rise. Let us also look at the domestic energy use from another angle, that is, how much energy is required to produce one unit of GDP, indicating how productively energy is being consumed. For example, between 1980 and 2000, China’s energy intensity in terms of BTUs of energy used per dollar of GDP generated fell by 67 percent. Over the same period, the US energy intensity index dropped by more than 33 percent. In comparison, energy intensity for the Kingdom increased by some 138 percent over the 1980 level, which is a serious source of concern. If the economy does not grow faster and if the Kingdom does not improve energy efficiency, by 2028 the intensity increase would reach 227 percent higher than the 1980 level.

The reasons for the increased intensity in the Kingdom include higher energy requirements for a rising population and expansion in the manufacturing sector, but the increase in energy requirements was not matched by an increase in GDP. This issue is receiving Government’s urgent attention, and the focus by the business community would be equally useful and is highly desirable.

For our part, Saudi Aramco some 13 years ago undertook a rigorous examination of our own energy efficiency and productivity. We have acted upon all the areas where we learned we needed improvement; for example, we now are co-generating electric power, including process steam, at facilities where formerly we drew from the national electricity grid. Since the inception of Saudi Aramco’s Energy Management Program in 2000, through 2008, the company alone has realized fuel savings equivalent to 71 thousand barrels of oil per day.

We welcome opportunities to share with others in the Kingdom the best practices we have learned in energy efficiency. There is much more that all of us could do, for example, in public awareness campaigns, in improving the energy efficiency of new residential and commercial buildings, in the energy efficiency of appliances and equipment, and in enhancing the mileage efficiency of the Kingdom’s fleet of vehicles. In our desert Kingdom, conserving energy also contributes to something as precious as life itself: the water supply. Saudi Arabia is the world’s leading producer of desalinated seawater, the processing of which is particularly energy intensive. Any technological breakthrough that would reduce the BTUs consumed to desalinate water would be immensely valuable to our domestic economy.

The challenge of making desalination more efficient is one of the more exciting strategic opportunities for enterprising researchers. Another profoundly important aim for the long-term future of our sun-drenched land is developing our potential for solar energy. Both King Abdulaziz City for Science and Technology and King Abdullah University of Science and Technology are now engaged in research on water desalination and solar power, and King Abdulaziz City for Science and Technology recently announced a collaboration with IBM to build a solar desalination plant to serve 100,000 people in Al Khafji. With efforts such as these, we hope that the day is not too far away when we’ll see breakthroughs in these fields. Moreover, this week’s announcement of the establishment of the King Abdullah Nuclear and Renewable Energy City here in Riyadh adds yet another dimension to the Kingdom’s determination to make the most of its energy potential.

How Saudi Aramco Relates to the Kingdom’s Economy

Now let me turn to my second theme, which is how Saudi Aramco relates to the Kingdom’s economy.

The challenge to accelerate creation of high quality jobs in the Kingdom is tremendous. Six of every 10 Saudi citizens are under 25 years old. To absorb the influx of young people entering the labor market, Saudi Arabia will need to create nearly 4 million jobs over the next 10 years. The Kingdom’s economy historically has grown between 3% and 5%, while to generate the number of well-paying jobs required for our youth, the economy needs to grow in excess of 8%. This is a tall order. Saudi Arabia’s per capita GDP was $20,300 in 2009, about half of the US per capita GDP of $46,400. We’ll need to increase our per capita GDP to close the gap with developed nations, or at least make sure that the gap does not open up further.

Saudi Aramco is well aware of this challenge, and is making a variety of efforts to contribute for the economy to grow more strongly. The company’s activities have a major impact on the Kingdom’s economy, well beyond providing a large share of export revenues.

Besides massive oil production capacity, Saudi Aramco contributes to the national economy by maintaining a world class Master Gas System that we are continuing to expand. This system supplies valuable sales gas, ethane and NGLs for national industrial development. Our raw gas production capacity, currently at 10.2 billion standard cubic feet per day (BSCFD) will be expanded to 15.5 BSCFD by 2015, by starting up gas increments at Khursaniyah (1 BSCFD, 2010), Karan (1.8 BSCFD, in stages from 2011-2013) and the Wasit Gas Plant (2.5 BSCFD, 2014). Accordingly, our sales gas production potential will increase from 7 BSCFD to 9.3 BSCFD.

Ethane is a highly valuable feedstock. It will be increased from 800 million cubic feet per day to 1.2 BSCFD. Meanwhile, the world-scale production of natural gas liquids will grow from 937 thousand barrels per day in 2010 to about 1.2 million barrels per day in 2015. Our refining capacity spread around the globe currently totals some 3.7 million barrels per day. The development of three new, grassroots refineries at Jubail, Yanbu and Jazan and the large expansion at Port Arthur in the United States will raise this refining capacity by about 1.5 million barrels per day. Domestically, the fuels and feedstocks we provide power the electricity and water utilities, while feeding the chemical and mineral industries, especially the higher value phosphate fertilizers and aluminum industries being developed. Indeed, oil, chemicals and mineral products including high value fertilizers can become three pillar industries that will help us grow more rapidly over the medium term, while other industries complement this growth.

Our vision is nothing less than elevating the Kingdom’s chemical and mineral industries from their current sound positions into world leaders in their enterprises, just as we are in oil. We are doing our best to assist these other two pillar industries by providing reliable and cost competitive supplies of fuels and feedstocks.

While producing commodities in various industrial areas helps the economy, the real benefit comes when these commodities are converted into downstream and finished products that create and sustain well-paying jobs. Light manufacturing downstream by small-to-medium sized firms creates on average 15 jobs per million dollars invested, compared with less than one job created per million dollars invested in capital-intensive commodity industries. Saudi Aramco is building a large industrial park alongside its PetroRabigh refinery and integrated petrochemical project on the Red Sea shore to take petrochemical materials and turn them into downstream products. Similar plans for refinery expansion and petrochemical and conversion industries are in the works on our Arabian Gulf coast.

We have put into place a large program to help manufacturers locally produce many of the materials and services we use in developing our projects, maintaining our plants and running our operations as well as those of other similar process industries. It is in our business plan to obtain more than 50 percent of our materials and services from local sources within the next five years. This will help boost industrialization in the Kingdom.

We have not only focused on Saudization within the Company but have developed a robust program to steadily increase Saudization in the workforces of our contractors. We are also working with the private sector to help train Saudi workers for contractor jobs. Another way in which we are both thinking and acting locally is our program to evaluate small gas accumulations near small population centers. Gas supplies that could become available from such accumulations can help establish industries in small population centers as well as fuel power plants with capacity to meet local needs. This would assist in the better distribution of industrialization and job creation across the Kingdom, and obviate the need for people to move to larger cities to find employment. It also would make a positive contribution in the areas of energy efficiency and productivity.

Education, Personal Initiative, and the Knowledge-Based Economy

The Kingdom’s long-term imperative is to become more and more a knowledge-based economy. While oil in particular, and chemicals and minerals in general, can help the Kingdom industrialize and grow over the medium term, looking strategically, it must be seen that nations do not sustainably raise their standards of living by only selling commodities. Wealth increases in nations that have been at the cutting edge of R&D, technology, innovation and knowledge in general.

In our country, the transition to a knowledge-based economy cannot happen instantly; it will take time – certainly decades and perhaps generations to take hold, the more reason we should start NOW. It will be an added challenge that other nations are ahead of us and moving faster towards the knowledge economy, but with commitment and dedication we can overcome these hurdles.

Clearly, high quality education is essential to lay the foundation for future growth in select knowledge based areas that can be targeted for investment. With four out of every 10 Saudi citizens 14 years old or younger, improvements must begin in primary school where a large proportion of our population needs to receive a high quality basic education before it is too late. And the improvements must continue at every stage through higher education.

A measure of the challenge before us is that Saudi Arabia has fewer than 500 engineers per 100,000 citizens. Jordan and Kuwait have about twice as many engineers per capita; the United Kingdom has about 10 times as many per capita. A comparison of 8th-grade math and science scores shows that Saudi Arabia lags badly behind the average of the top 20 countries in math and science rankings.

Fortunately, the Custodian of the Two Holy Mosques, King Abdullah bin Abdulaziz, is well aware of these gaps and is moving aggressively to promote his vision of high-quality and widespread education in the Kingdom, including the building of institutions of higher learning. The Kingdom’s new budget allocations for building schools and universities are unprecedented, including the Tatweer initiative which will bring a renewed focus on general education improvement including teacher training, math/science curriculum development, improvement in educational environment and increasing extra-curricular activities.

At Saudi Aramco, we are seeking to do our part to prepare the Kingdoms young people to be responsible participants in a future knowledge economy. Throughout its history, the Company has been a leader in building schools and providing quality education programs for our nation’s young people. During the past year we adopted a new Corporate Citizenship Strategy to streamline and modernize our longstanding efforts in corporate social responsibility. The Four Pillars of our strategy are: economic development, community support, promoting the Kingdom’s transition to the knowledge era, and environmental stewardship.

The Kingdom’s young majority is the prime focus of the signature initiative of Saudi Aramco’s new corporate citizenship strategy: the Youth Talent Development Program. Our goal for this is to reach 12,000 youth by 2012 and as many as 200,000 by 2020 through transformative and engaging programs. We will leverage Saudi Aramco’s capabilities to provide young people with extra-curricular experience to develop the character and skills to excel in the 21st century.

Extra-curricular efforts are essential because Saudi students today up to age 18 spend 60 percent of their time in community or leisure activity and only 10 percent of their time in school. For children in the 10-12 age bracket, we will focus on additional learning opportunities to instill a love of the indispensable disciplines of math and science, skills in which the nation now suffers a serious deficiency. For adolescents in the age group 14-17, we’ll concentrate on character education, critical thinking and moral reasoning.

The goal of many of Saudi Aramco’s corporate citizenship programs is to make volunteerism a national character trait: to make it something people confidently recognize in our society. The culture of volunteerism dovetails with successful entrepreneurship, including the habits of decision making, taking initiative, teamwork, and follow-through.

Saudi Aramco aims to help parents and educators instill in our young people a stronger appreciation for the dignity of work. Combating unemployment will be successful only if our younger citizens embrace a work ethic and employers accept responsibility for promoting employment of Saudis instead of expatriates in such sectors as wholesale and retail commerce, food service and hotel work, as well as the industrial and electronic technology sectors. Employing Saudis in the service industries is essential if we are to gain the 4 million new jobs we need.

In higher education, Saudi Aramco endows 10 professorships in energy-related chairs at Saudi universities. We sponsor numerous other student exchange programs, research collaborations and programs of technical and management advice for universities in the Kingdom and abroad, and we have established a University Relations Division for strategic management of our extensive efforts in support of higher education. The company is proud to have been played a major part in developing our new national treasure, King Abdullah University for Science and Technology. Almost uniquely, this is an interdisciplinary university, without the barriers of traditional academic departments. It is a hive of research collaboration involving major corporate and university partners from around the world.

Related to Saudi Aramco’s support for higher education is another effort in the realm of research, the King Abdullah Petroleum Studies and Research Center in Riyadh, and in the domain of culture, the company’s 75th anniversary gift to the Kingdom, the King Abdulaziz Center for Knowledge and Culture that will be built in Dhahran. With a library, museum and performing arts centers, this will be an unprecedented attraction, a resource for scholars, and a center for cultural education for younger students and the general public from both the Kingdom and other countries.

As a pillar of our corporate citizenship strategy, we hold ourselves accountable when it comes to the issue of environmental stewardship, and the protection of natural ecosystems wherever we operate. Within the Kingdom, we have invested billions in recent years to phase out lead in gasoline, produce low sulfur diesel, minimize sulfur emissions in exhaust gases from our plants and clean up the waste water before it is discharged. This commitment is nothing newour first environmental policy statement dates back to 1963, well before green causes became fashionable.

My Saudi Aramco colleagues and I by nature are optimists, but our optimism is not a basis for complacency. The Kingdom’s needs are pressing and urgent. At Saudi Aramco we want to collaborate and cooperate ever more effectively with each of you and our many other stakeholders in the Kingdom.

I am convinced that this is a moment the Kingdom can seize to leverage our current strength in petroleum to help our youth become world class participants in the global workforce, to diversify our economy, to improve energy efficiency and productivity, to accelerate and sustain economic growth, and to establish Saudi Arabia as the global leader in selected knowledge-based industries. These are not easy goals, but with hard work they can be attained. Just as today’s Saudi Arabia has achieved prosperity and cultural development few could have imagined two or three generations ago, so too can we prepare the way for an even brighter and more exciting future for our nation.

Thank you.

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