INCREASING LOCAL CONTENT IN SAUDI ARABIA’S ENERGY SECTOR Yahya Shinawi

1. INCREASING LOCAL CONTENT IN SAUDI ARABIA’S ENERGY SECTOR Yahya Shinawi Director General for Technical Affairs - Eastern Province, Ministry of Petroleum & Mineral Resources Saudi Energy Forum Dammam, Kingdom of Saudi Arabia 20th November 2006

2. An evaluation of Local Content in Saudi Arabia is currently underway . . . . . • The Ministry of Petroleum and Mineral Resources has initiated a study in July 2006 to assess Local Content in the energy value chain and develop recommendations to enhance it • Economic Growth • Employment of Saudi citizens • Active participation from the Chamber of Commerce and Industry – Eastern Province

3. What is meant by Local Content? • Two primary metrics exist • Value Content: that portion of the Selling Price of a product or service associated with work performed in Saudi Arabia • Labor Content: that portion of man-hours, days or years worked in Saudi Arabia to produce a product or service • Greater Local Content translates directly into higher national income and more employment of Saudi nationals

4. Extensive research has been undertaken into Local Content issues . . . . . • 6 oil producing countries were visited to gain a thorough insight as to how energy resources have been leveraged to increase Local Content and develop a sustainable capability for the supply of goods and services • Canada (Alberta/Newfoundland), Egypt, Indonesia, Malaysia, Norway and Venezuela • A total of over 75 meetings held • The team met with stakeholders in each country • Energy ministries and other government entities • Non-governmental regulating bodies • NOCs and IOCs • Industry organizations • Educational and training institutions • Suppliers of energy-related goods and services • A wide variety of items were discussed • Local Content policy development, implementation and monitoring • Local Content metrics • Development of domestic supply capabilities • Stakeholder perceptions on Local Content issues

5. Extensive research has been undertaken into Local Content issues . . . . . (cont’d) • Research into Local Content issues in Saudi Arabia has been wide-ranging • Review of capabilities to meet current and future demand for goods and services in Saudi Arabia • Review of technology requirements for the production of goods and services • Identification of barriers to entry/growth in Saudi Arabia • Assessment of education and training of Saudi nationals • To achieve a thorough understanding of the issues the team has undertaken the following • 3 weeks of meetings with a wide spectrum of stakeholders including government institutions, Saudi Aramco, Sabic, SWCC, SEC, education and training institutions, R&D institutions, financial institutions, IOCs and suppliers of goods and services • Wide-ranging discussions on local content issues including perceptions, approach to implementation and metrics • Collected data on energy sector purchasing requirements, domestic supply capabilities, barriers to entry/expansion, technology, training, R&D, business licensing • Commenced data review, organization and analysis

6. Oil & Gas - Critical to the Saudi Economy . . . GDP, Billion SAR (Current Prices) Oil & Gas Sector as % of Total GDP (RHS) Source: Saudi Arabia Monetary Agency

7. . . . BUT The Economy is Dependent on Imports Billion SAR Source: Saudi Arabia Monetary Agency

8. Saudi Arabia – Current Situation • General agreement among all stakeholders met in Saudi Arabia that the existing approach to Local Content is not effective • Local content ~20% compared to 40% and higher in 6 other oil producing countries • Current Saudi approach is not as thorough as that adopted by other countries • It is evident that a new approach to Local Content is required

9. A variety of Local Content drivers are used in the countries visited . . . . .

10. A variety of Local Content drivers are used in the countries visited . . . . . (cont’d)

11. Application of Local Content Policies Vary by Sector and Country. . . . .

12. Major Impediments to Higher Saudi Local Content

13. Natural resource development can create many economic benefits . . . . . • Saudi Arabia does not maximise the economic benefits from goods and services to support its energy resource development • Experience in the oil producing countries visited demonstrates that an opportunity is being missed in Saudi Arabia • Energy industry stakeholders face a major challenge • A change in mindset is required to overcome existing impediments • Focus on solutions not problems • Learn from past experiences • The energy industry must think and work together • The energy industry has the capacity and capability to develop a suitable vision and meet this challenge

14. An Effective Local Content Policy Will Have Many Benefits . . . . . • An effective Local Content Policy will leverage the value of the country’s natural resources along the value chain for the economic good of the Kingdom Development of world class research institutions Higher employment of Saudi nationals in the energy sector Increased equipment manufacturing and services capability Establishment of regional supply capability for goods and services Income and employment multiplier effect

15. Vendor Development Programs; a primary driver of local content development . . . . . • Success of vendor development programs is dependent upon commitment from all stakeholders – there is an obligation on all stakeholders to contribute • Effective and regular communication among stakeholders is pivotal to the success of vendor development programs • Buyers of goods and services • Communication of future requirements (technical & volume) • Identification of local supply capability • Vendor assistance to ensure ability for sustainable supply exists • Sellers of goods and services • Advertisement of supply capability • Willingness to adapt manufacturing capability • Educational institutions • Development of technical capability based on flexible curricula • Government or its representatives can act as facilitator

16. Petrochemicals Exploration & Development Refining & Processing Power & Water Infrastructure Electrical Maintenance Fabrication Services Training Research Development of Industrial Clusters Can Promote Increased Local Content . . . . .

17. R&D / Technology Transfer are also key drivers of Local Content development . . . . . • Technology transfer • Best achieved by means of hands-on experience under the supervision of experienced personnel • Structured and practical programs to develop local trained staff and attract experienced personnel • Involvement of educational institutions accelerates technology transfer • Research & Development • Active government participation (facilitation, funding etc.) proves effective in supporting establishment of world class, leading edge research institutions that contribute to more efficient development of domestic resources and capabilities • Leadership by resource development companies of applied research and experimental development proves to be more effective than bydirect government involvement

18. Announced Mega Project Spending Will Approach $100 Billion p.a. by 2010 . . . . . Excludes forecast expenditure on projects currently under development Forecast expenditure is based on currently identified projects – as time progresses new projects will be identified that will likely maintain expenditure in the range $60-80 billion/year

19. Expenditure On Pipe, Valves & Fittings Will Be Over $15 Billion Over The Next Four Years . . . . Excludes forecast expenditure on projects currently under development Forecast expenditure is based on currently identified projects – as time progresses new projects will be identified that will could maintain expenditure at these levels $ Billion

20. Benefits of Increased Local Content Supply . . . . . • Local suppliers receive less than 20% of oil & gas sector expenditure in Saudi Arabia • Local content percentages are considerably higher in other countries • Increased local content supply is possible in Saudi Arabia • 40% local content supply for new capital projects in the energy sector by 2010 would result in expenditure of ~ SAR 145 billion/$ 38 billion with local suppliers in that year alone

21. Cost and Reward of Increased Local Content • Local content development will require substantial financial investment of Kingdom resources and commitment from all stakeholders • Saudis require focused training to become competitive with foreign nationals • There is a need to provide assistance and support to new Saudi manufacturing and service companies to enable them to be competitive with established foreign suppliers • Improved R&D and technology transfer • There is a continuing and progressive multi-billion Riyal annual domestic market for goods and services in all energy sectors – the rewards for local suppliers, Saudi citizens and the national economy are potentially huge!!

22. The Ministry’s Local Content study is ongoing . . . . 2006 Saudi Energy Forum Constructive Input By All Stakeholders Will Contribute To The Success Of The Study

23. Potential Solutions Are Under Consideration . . . . .

24. Potential Solutions Are Under Consideration . . . . (cont’d)

25. In Conclusion . . . . . The prize is large, over SR250 Billion. Creation of a sustainable local supply capability for the provision of goods and services requires input, commitment and support from ALL stakeholders . . . . .

26. A Final Message . . . . . WE NEED TO ACT NOW!! YOUR COMMITMENT IS ESSENTIAL

27. If You Would Like To Contribute Please Contact . . . • Ministry of Petroleum and Mineral Resources • Abdullah Al-Jof, Sr. Petroleum Engineer • Mobile No.: 0 505 805 502 • Email: abdullah.jof@mopm.gov.sa • Chamber of Commerce & Industry, Eastern Province • Abdul Aziz Al-Subaie, Investment Specialist • Mobile No.: 0 504 832 513 • Email: asubaie@chamber.org.sa