15th Annual Asia Oil & Gas Conference
ENERGY SECURITY BEYOND THE NEW REALITY
Assalamualaikum Warahmatullahi Wabarakatuh and Good Morning
Yang Berbahagia Dato’ Shamsul Azhar Abbas
President and Chief Executive Officer, PETRONAS
Ladies and Gentlemen,
1. It is indeed a pleasure to have the opportunity to deliver this Keynote Address at this Fifteenth Annual Asia Oil and Gas Conference. I want to welcome all of you – eminent industry leaders, policymakers, and distinguished participants from the oil and gas producing and consuming countries – as we share critical insights on the issues, the challenges, and the opportunities within the oil and gas industry today.
Cautious optimism of a sustained global economic recovery
2. And indeed, there are many challenges and many opportunities. Last year, this Conference took place in the depths of a severe economic downturn. This was the first truly global recession, and no region, no nation, no sector was spared the effects of a downturn that had – in some cases – devastating economic and social costs.
3. In the advanced economies, the destruction of business and personal wealth ran into trillions of dollars, even as millions lost jobs. International trade contracted with terrifying speed while prices of commodities and manufactured goods slumped, affecting many strong manufacturing economies, including Malaysia.
4. So we are glad to gather, this year, on a more optimistic note. While problems still exist in key parts of the world, and we must always be vigilant, it is true that many regions and countries appear to be recovering more vigorously than we had previously dared to imagine. I am delighted to report that the Malaysian economy continues to outperform our expectations. During the first quarter of this year, growth surged to 10.1 percent on a year-on-year basis — the highest in a decade.
5. But let us be clear, downside risks continue to loom large over the recovery. The pick-up in economic activity has been uneven. Governments and central banks must make wise and forward thinking decisions on fiscal and monetary supports. Debt levels remain high around the world and as the recent Greek debt crisis reminds us, in a world more interdependent than at any time in history, it may still be too early to breathe a collective sigh of relief.
6. I believe it will be some years yet before the world fully overcomes the effects of this “Great Recession”. But a number of important lessons must be learned. For one, the globally-synchronous nature of the downturn showed us just how economically interdependent and how intertwined our fates have become. It also reminded us of the value of working in concert — that the “Great Recession” did not turn into another Great Depression was, in my view, the result of globally co-ordinated policy response.
7. And a lesson for all nations – and one that we are acting on here in Malaysia – is that we must be proactive in charting a path for economic growth in the years to come. There is a new economic order, and the nations that will succeed, will be those that plan ahead, seek new sectors, with will to innovate and invest in human capital. Yes, there has been a global crisis. But we would be remiss if we did not seek to renew our economies in response. A return to status quo cannot do.
Malaysia Opens a New Chapter in its Economic Development
Ladies and Gentlemen,
8. Malaysia too has reached a defining moment in its development. Recognising that new economic realities will require reinventing our approach to development, the Government launched the New Economic Model (NEM) earlier this year. Its aim, to transform the country into an advanced, high income nation which is inclusive and sustainable nation by 2020.
9. In this regard, the business and investment community will benefit from this New Economic Model — namely, through enhanced market transparency, a fully liberalised and competitive market environment, an efficient and effective public delivery system as well as greater regional market integration. The Government will increase our efforts to provide policy measures and a political environment that encourage private enterprises, both local and foreign, to pursue new investments in their respective commercial interests. This will not only be confined to a few sectors, but across the whole economy, particularly in areas of long-term strategic importance such as the energy sector.
Oil Prices at $80/bbl — A Norm in the ‘New Reality’?
Ladies and Gentlemen,
10. Why are we committed to strategic investments that support innovation and growth in the energy sector – including oil, gas and renewable energies? Notwithstanding Malaysia’s efforts to bolster economic resilience, as a major trading nation, our prosperity is endemically tied to the health and stability of the global economy. Since we met last June, we have seen oil prices edge steadily upwards to around $80 per barrel — a level not seen in eighteen months. This strengthening has come about despite the fact that demand growth has been fairly modest, particularly in the OECD countries, while global supplies remain ample, as reflected in an OPEC spare capacity above recent historic averages.
11. Undoubtedly, this apparent mismatch between prices and supply/demand fundamentals raises questions over whether oil markets have become “overheated”. Some will view current and prospective demand increases – modest though as they are – as being sufficient to justify a new, higher threshold price. Yet others will say that with oil ceasing merely to be a source of energy, higher prices reflect the fact that, as a commodity, oil is today a much sought-after financial asset.
12. Is financial exuberance getting ahead of Reality? Or are we facing a “New Reality” in which $80 per barrel has become the “new” sixty-dollar oil? Indeed, it is noteworthy that despite the recession, industry costs continue to remain stubbornly high by historical standards. But given the rapidly changing industry dynamics, what guarantee is there that we will not have another “new” price anchor in a few years’ time?
13. In my view, we should not let this fixation on what is an “appropriate” price level detract us from the more important task of ensuring that oil prices do not diverge from their underlying market and economic realities. In this respect, proposals for greater oversight of financial markets aimed at preventing price manipulation should be welcomed if they lead to a more efficient and robust price formation. In today’s environment, unjustifiably-high oil prices would risk jeopardising the fragile recovery and undermine the stability of the global economy.
Sustaining Energy Investments Amidst Uncertain Industry Dynamics Key to Energy Security
Ladies and Gentlemen,
14. Whatever our views may be on what constitutes an “appropriate” price level, we can be assured that prices, even at these levels, will come under renewed pressure as the recovery gains momentum. Over the longer-term, population growth trends, urbanisation and industrialisation in the emerging world, will continue to underpin historically-robust growth in energy demand. Under these circumstances, an adequate supply-side response is critical if market stability is to be restored.
15. Today, we may be grappling with an ample supply situation and yet, this should not lull us into a “false sense of security” that supplies will not be an issue for the future. Even moderate growth rates in demand, sustained for a period of several years, will erode any excess capacity down to levels that should give us cause for concern. As always, the main complication lies in the question of timing those investments in a way that would enhance market stability, instead of inducing further volatility.
16. And yet, it is on this all-crucial point that we seem to be unsure of things. Suppliers point to uncertainties in the pace of future demand growth as one of the main reasons for being rather cautious against over-committing investments. Consumers, on the other hand, see exactly this as a potential source of future market instability — in other words, a justification to accelerate the shift into alternative sources of energy. Indeed, these uncertainties feed off one another.
17. Other developments too are exacerbating the uncertainties further. While we all recognise the need to shift towards a low-carbon economy as a major step in mitigating global climate change, progress to date has been measured. In Malaysia we are considering new investments in four main sectors to implement green technologies — namely energy, transport, buildings and water. We will make hopefully wise investments to stimulate innovation and job creation, and our hope is that these will form a significant part of Malaysia’s contribution in support of global energy security.
18. But global energy security will require a holistic approach to innovation in the energy sector. New, game-changing technologies have emerged to unlock the vast potential of alternative supplies — meaning we now have more options at our disposal to meet existing requirements, and to strategise for new ways to meet future ones. In mentioning this, I have in mind the rise of shale gas production in the US that could potentially challenge the existing conventional gas business model. Imagine if this same success were replicated in other major gas-consuming regions — we would certainly then be looking at a re-definition of global gas trade flows on a scale that will have a huge impact on existing producers in the Asia-Pacific and of course the Middle East.
19. How should existing gas exporters then strategise to avoid losing their global competitive positions? If investments in conventional value-chains in gas were to be curtailed as a result of depressed prices while the promise of unconventional gas does not then materialise to its fullest extent, can we turn the situation around sufficiently rapidly to avoid a supply crunch? How can we leverage on our collective wisdom to avoid the perils of such a situation?
20. Indeed, what other disruptive game-changing technologies lurk beyond our predictive horizons? Will plans to commercialise methane hydrates by the end of this decade bear fruit? Will the next ten years bring about a breakthrough in advanced generation biofuels? Is Iraq oil’s a “game changer”? etc, etc.
Energy Security in the “New Reality” Will Require a Renewed Global Policy Framework
Ladies and Gentlemen,
21. Irrespective of the what changes the “New Reality” amounts to or how the industry will transformed as a result, the challenge of ensuring the security of energy supplies will still remain our paramount concern. As I have noted earlier, the crucial element in this respect is adequate and timely investments encouraged through a stable market environment — or at least one that is changing predictably.
22. Yet, against this backdrop of change and uncertainty, how can we ensure an adequate degree of predictability that safeguards the confidence of industry players sufficiently to make long-term investment commitments? — or to prioritise research efforts on future technologies? This, in my view, is the central energy challenge facing us all today.
23. While change is both inevitable, the collective decisions we take, whether as policymakers or industry players, will determine if those changes take us toward a new stable equilibrium or if they will work to undermine market stability. Inappropriate, inadequate or even incompatible choices will amplify the uncertainties further, erode the confidence to invest and thereby undermine market stability.
24. In this respect, I believe one important step governments should take to create a more conducive investment environment, is to reaffirm their commitment to uphold transparent, well-functioning markets as the ideal long-term guarantor of energy security.
Ladies & Gentlemen,
25. Further to reaffirming their commitment to upholding market-driven solutions, I believe governments should also establish clear and coherent national energy policies that help reduce variability in expectations of future demand growth. Such policies must be grounded in economic realities and be forward-looking, so that they remain fairly stable through time. A reasonable degree of international co-ordination will also prove necessary not only to ensure mutual-consistency across countries, but also to minimise any costs of adapting to the changing industry circumstances.
26. In this regard, I believe that an early multilateral commitment to a global strategy for transitioning to a low-carbon economy is desirable to anchor expectations on both the speed of future energy demand growth, as well as changes on the supply-side. This will facilitate industry to make upfront assessments on the repercussions such a commitment will have on their business environment and thus to strategise for their future growth.
New Global Policy Framework on Energy Security Begins with the Right Institutions for Energy Governance
Ladies and Gentlemen,
27. I am pleased to note recent efforts by various international energy institutions to forge closer ties and promote greater stakeholder dialogue. For Malaysia, although a comparatively small member of the global energy community, we have a proud legacy of being an active supporter of international energy co-operation. Through various energy platforms as well as initiatives at the ASEAN, ASEAN+3 and APEC levels, we take a collective approach in managing our energy security challenges.
28. Despite these welcome efforts, however, I am of the view that something bolder will be required for us to act in concert. To overcome the uncertainties and ensure an orderly adjustment to our energy challenges, we need a platform to directly involve all systemically-relevant countries and ensure it adequately addresses their concerns.
29. Yet, beyond our existing arrangements on international energy governance, it is by no means clear how will emerging economies, from whom much of the future demand increases are expected to come, find their voice? Or indeed, major oil and gas resources owners, on whose supplies we will increasingly come to rely?
30. Without an international energy governance framework that better represents their interests, I believe it will be far more difficult for us to stave off any future energy crisis with the speed and decisiveness we had in confronting the recent economic and financial meltdown.
Ladies and Gentlemen,
31. Before I end, allow me to leave you with some concluding thoughts. If a rethink of the architecture of our international energy governance is a vital first step towards ensuring energy security, one could also, by the same token, ask: Is the current energy structure — producers, consumers, service providers and energy research labs — are they also appropriately geared towards meeting the challenges of securing energy supplies in this “New Reality”?
32. Are the right partnerships being forged between producers and consumers? – between resource-holders and technology providers? If not, what would be a better model for collaboration? Indeed, what partnerships would the oil and gas industry need to forge, so as to help ensure that the shift to a low-carbon economy can be achieved with minimum social costs?
33. I certainly do not have all the answers, nor would it be proper for governments to tell industry what needs to be done. Nevertheless, I believe that, collectively, industry must continue to take the long-term perspective of things in confronting these newfound challenges. Our recent experience has shown us only too well that financial wizardry is no substitute for genuine value-creation in delivering sustained increases in shareholder returns. Indeed, I am of the view that it will be those companies that continue to pursue new, innovative ways of delivering energy while remaining sufficiently nimble to adapt to changes in the business environment — it is these companies that will succeed both financially and in living up to society’s expectations.
34. With governments committing to a stable and conducive environment for industry to flourish, and industry seizing that opportunity to deliver a secure energy future, I am confident we will be able to take these energy challenges in stride and look forward to prosperous future beyond the “New Reality”.
35. On that note, I wish you all the best in your deliberations throughout this Conference.
Wabillahitaufiq Walhidayah Wassalamualaikum Warahmatullahi Wabarakatuh.