Aramco chief executive Khalid Al Falih said that oil prices should be market driven. Hamad I Mohammed / Reuters
Aramco chief executive Khalid Al Falih said that oil prices should be market driven. Hamad I Mohammed / Reuters

Saudi Aramco’s CEO trumpets investment plans for oil and gas amid falling prices



Saudi Arabia will maintain an ambitious rate of investment in its hydrocarbon sector to meet forecast global demand increases over the next decade, despite the weaker oil prices which have hit its economy this year, according to a leading Saudi oil executive.

Yesterday, the head of Saudi Arabia's state-owned national oil company, Aramco, said it plans to invest US$40 billion a year over the next 10 years to keep its oil production capacity steady and double gas production.

The Aramco chief executive Khalid Al Falih said he expects more of the company’s capital spending to be directed towards offshore projects and expects rising costs across the oil sector to underpin oil prices, according to Reuters.

If prices stay low it will discourage the more expensive production and ultimately constrain supply.

Speaking at a conference in Stavanger, Norway, Mr Al Falih said: “To meet forecast demand growth and offset [global output] decline, our industry will need to add close to 40 million barrels per day of new capacity in the next two decades.”

He added “Although our investments will span the value chain, the bulk will be in upstream, and increasingly from offshore, with the aim of maintaining our maximum sustained oil production capacity at 12 million barrels per day, while also doubling our gas production.”

Saudi Arabia ranks fifth in the world in natural gas reserves, with 291 trillion cubic feet of proven reserves, and eighth in production, at about 3.6 billion cubic feet last year, according to the US energy information agency.

Oil prices have weakened this year, despite turmoil in hot spots that are important for oil, especially Libya and Iraq. The threat to supplies has been offset by weaker-than-expected demand in Europe, China and elsewhere, so benchmark oil prices have fallen by more than 10 per cent from their June peak above $115 a barrel.

The declining oil price has put pressure on Saudi Arabia’s economy. Analysts at Capital Economics estimate that the Saudi economy slowed to a growth rate of 4.3 per cent in the second quarter of this year, compared to 4.7 per cent in the first, with the slowing oil sector the main culprit.

Nonetheless, Saudi Arabia and Aramco remain committed to a market-based approach. Mr Al Falih said that neither Opec nor the International Energy Agency – the main think tank for rich oil-consuming countries – should try to control oil prices. Fundamental industry problems, such as rising costs, difficult technical challenges, and diminishing oil discoveries would support oil prices in coming years, he said.

“I share … the belief that this is a market-driven business,” Mr Al Falih said.

“It’s not Opec, the IEA, and consumers that should be in the business of trying to control the market … To tap these increasingly expensive oil resources oil prices will need to be healthy enough to attract needed investments … and long-term prices will be underpinned by more expensive marginal barrels.”

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Co-founders of the company: Vilhelm Hedberg and Ravi Bhusari

Launch year: In 2016 ekar launched and signed an agreement with Etihad Airways in Abu Dhabi. In January 2017 ekar launched in Dubai in a partnership with the RTA.

Number of employees: Over 50

Financing stage: Series B currently being finalised

Investors: Series A - Audacia Capital 

Sector of operation: Transport

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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Director: Juan Carlos Medina
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Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
 
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
 
Round 3: February 7-9, Dubai Autodrome – Dubai
 
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
 
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia