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15TH ANNUAL ASIA OIL & GAS CONFERENCE

(Speech by Prime Minister, Dato Sri Mohd Najib Bin Tun Haji Abdul Razak at Kuala Lumpur)

It is indeed a pleasure to have the opportunity to deliver this Keynote Address at thisFifteenth Annual Asia Oil and Gas Conference. I want to welcome all of you - eminentindustry leaders, policymakers, and distinguished participants from the oil and gasproducing and consuming countries - as we share critical insights on the issues, thechallenges, and the opportunities within the oil and gas industry today.

Cautious optimism of a sustained global economic recovery

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 firsttruly global recession, and no region, no nation, no sector was spared the effects of adownturn that had - in some cases - devastating economic and social costs.

In the advanced economies, the destruction of business and personal wealth ran intotrillions of dollars, even as millions lost jobs. International trade contracted with terrifyingspeed while prices of commodities and manufactured goods slumped, affecting manystrong manufacturing economies, including Malaysia.

So we are glad to gather, this year, on a more optimistic note. While problems still existin 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 toimagine. I am delighted to report that the Malaysian economy continues to outperformour expectations. During the first quarter of this year, growth surged to 10.1 percent ona year-on-year basis the highest in a decade.

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 makewise and forward thinking decisions on fiscal and monetary supports. Debt levelsremain high around the world and as the recent Greek debt crisis reminds us, in a worldmore interdependent than at any time in history, it may still be too early to breathe acollective sigh of relief.

I believe it will be some years yet before the world fully overcomes the effects of thisGreat Recession. But a number of important lessons must be learned. For one, theglobally-synchronous nature of the downturn showed us just how economicallyinterdependent and how intertwined our fates have become. It also reminded us of thevalue of working in concert that the Great Recession did not turn into another GreatDepression was, in my view, the result of globally co-ordinated policy response.

And a lesson for all nations - and one that we are acting on here in Malaysia - is that wemust be proactive in charting a path for economic growth in the years to come. There isa new economic order, and the nations that will succeed, will be those that plan ahead,


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seek new sectors, with will to innovate and invest in human capital. Yes, there has beena global crisis. But we would be remiss if we did not seek to renew our economies inresponse. A return to status quo cannot do.

Malaysia Opens a New Chapter in its Economic Development

Malaysia too has reached a defining moment in its development. Recognizing that neweconomic realities will require reinventing our approach to development, theGovernment launched the New Economic Model (NEM) earlier this year. Its aim, totransform the country into an advanced, high income nation which is inclusive andsustainable nation by 2020.

In this regard, the business and investment community will benefit from this NewEconomic Model namely, through enhanced market transparency, a fully liberalized

and competitive market environment, an efficient and effective public delivery system aswell as greater regional market integration. The Government will increase our efforts toprovide policy measures and a political environment that encourage private enterprises,both local and foreign, to pursue new investments in their respective commercialinterests. 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?

Why are we committed to strategic investments that support innovation and growth inthe energy sector - including oil, gas and renewable energies? Notwithstanding

Malaysias efforts to bolster economic resilience, as a major trading nation, ourprosperity is endemically tied to the health and stability of the global economy. Since wemet 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 thefact that demand growth has been fairly modest, particularly in the OECD countries,while global supplies remain ample, as reflected in an OPEC spare capacity aboverecent historic averages.

Undoubtedly, this apparent mismatch between prices and supply/demand fundamentalsraises questions over whether oil markets have become overheated. Some will viewcurrent 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 ceasingmerely to be a source of energy, higher prices reflect the fact that, as a commodity, oil istoday a much sought-after financial asset.

Is financial exuberance getting ahead of Reality? Or are we facing a New Reality inwhich $80 per barrel has become the new sixty-dollar oil? Indeed, it is noteworthy thatdespite the recession, industry costs continue to remain stubbornly high by historicalstandards. But given the rapidly changing industry dynamics, what guarantee is therethat we will not have another new price anchor in a few years time?


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In my view, we should not let this fixation on what is an appropriate price level detractus from the more important task of ensuring that oil prices do not diverge from theirunderlying market and economic realities. In this respect, proposals for greateroversight of financial markets aimed at preventing price manipulation should bewelcomed if they lead to a more efficient and robust price formation. In todaysenvironment, unjustifiably-high oil prices would risk jeopardizing the fragile recovery andundermine the stability of the global economy.

Sustaining Energy Investments Amidst Uncertain Industry Dynamics Key toEnergy Security

Whatever our views may be on what constitutes an appropriate price level, we can beassured that prices, even at these levels, will come under renewed pressure as therecovery gains momentum. Over the longer-term, population growth trends,

urbanization and industrialization in the emerging world, will continue to underpinhistorically-robust growth in energy demand. Under these circumstances, an adequatesupply-side response is critical if market stability is to be restored.

Today, we may be grappling with an ample supply situation and yet, this should not lullus into a false sense of security that supplies will not be an issue for the future. Evenmoderate growth rates in demand, sustained for a period of several years, will erodeany 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 thatwould enhance market stability, instead of inducing further volatility.

And yet, it is on this all-crucial point that we seem to be unsure of things. Suppliers pointto uncertainties in the pace of future demand growth as one of the main reasons forbeing rather cautious against over-committing investments. Consumers, on the otherhand, 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, theseuncertainties feed off one another.

Other developments too are exacerbating the uncertainties further. While we allrecognize the need to shift towards a low-carbon economy as a major step in mitigatingglobal climate change, progress to date has been measured. In Malaysia we areconsidering new investments in four main sectors to implement green technologies

namely energy, transport, buildings and water. We will make hopefully wiseinvestments to stimulate innovation and job creation, and our hope is that these willform a significant part of Malaysias contribution in support of global energy security.

But global energy security will require a holistic approach to innovation in the energysector. New, game-changing technologies have emerged to unlock the vast potential ofalternative supplies meaning we now have more options at our disposal to meetexisting requirements, and to strategies for new ways to meet future ones. Inmentioning this, I have in mind the rise of shale gas production in the US that couldpotentially challenge the existing conventional gas business model. Imagine if this same


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success were replicated in other major gas-consuming regions we would certainlythen be looking at a re-definition of global gas trade flows on a scale that will have ahuge impact on existing producers in the Asia-Pacific and of course the Middle East.

How should existing gas exporters then strategies to avoid losing their globalcompetitive positions? If investments in conventional value-chains in gas were to becurtailed as a result of depressed prices while the promise of unconventional gas doesnot then materialize to its fullest extent, can we turn the situation around sufficientlyrapidly to avoid a supply crunch? How can we leverage on our collective wisdom toavoid the perils of such a situation?

Indeed, what other disruptive game-changing technologies lurk beyond our predictivehorizons? Will plans to commercialize methane hydrates by the end of this decade bearfruit? Will the next ten years bring about a breakthrough in advanced generation

biofuels? Is Iraq oils a game changer? Etc,

Energy Security in the New Reality Will Require a Renewed Global PolicyFramework

Irrespective of the what changes the New Reality amounts to or how the industry willtransformed as a result, the challenge of ensuring the security of energy supplies willstill remain our paramount concern. As I have noted earlier, the crucial element in thisrespect is adequate and timely investments encouraged through a stable marketenvironment or at least one that is changing predictably.

Yet, against this backdrop of change and uncertainty, how can we ensure an adequatedegree of predictability that safeguards the confidence of industry players sufficiently tomake long-term investment commitments? or to prioritise research efforts on futuretechnologies? This, in my view, is the central energy challenge facing us all today.

While change is both inevitable, the collective decisions we take, whether aspolicymakers or industry players, will determine if those changes take us toward a newstable equilibrium or if they will work to undermine market stability. Inappropriate,inadequate or even incompatible choices will amplify the uncertainties further, erode theconfidence to invest and thereby undermine market stability.

In this respect, I believe one important step governments should take to create a moreconducive investment environment, is to reaffirm their commitment to upholdtransparent, well-functioning markets as the ideal long-term guarantor of energysecurity.

Further to reaffirming their commitment to upholding market-driven solutions, I believegovernments should also establish clear and coherent national energy policies that helpreduce variability in expectations of future demand growth. Such policies must begrounded in economic realities and be forward-looking, so that they remain fairly stablethrough time. A reasonable degree of international co-ordination will also prove


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necessary not only to ensure mutual-consistency across countries, but also to minimizeany costs of adapting to the changing industry circumstances.

In this regard, I believe that an early multilateral commitment to a global strategy fortransitioning to a low-carbon economy is desirable to anchor expectations on both thespeed of future energy demand growth, as well as changes on the supply-side. This willfacilitate industry to make upfront assessments on the repercussions such acommitment will have on their business environment and thus to strategies for theirfuture growth.

New Global Policy Framework on Energy Security Begins with the RightInstitutions for Energy Governance

I am pleased to note recent efforts by various international energy institutions to forge

closer ties and promote greater stakeholder dialogue. For Malaysia, although acomparatively small member of the global energy community, we have a proud legacyof being an active supporter of international energy co-operation. Through variousenergy platforms as well as initiatives at the ASEAN, ASEAN+3 and APEC levels, wetake a collective approach in managing our energy security challenges.

Despite these welcome efforts, however, I am of the view that something bolder will berequired for us to act in concert. To overcome the uncertainties and ensure an orderlyadjustment to our energy challenges, we need a platform to directly involve allsystemically-relevant countries and ensure it adequately addresses their concerns.

Yet, beyond our existing arrangements on international energy governance, it is by nomeans clear how will emerging economies, from whom much of the future demandincreases are expected to come, find their voice? Or indeed, major oil and gasresources owners, on whose supplies we will increasingly come to rely?

Without an international energy governance framework that better represents theirinterests, I believe it will be far more difficult for us to stave off any future energy crisiswith the speed and decisiveness we had in confronting the recent economic andfinancial meltdown.

Concluding Thoughts

Before I end, allow me to leave you with some concluding thoughts. If a rethink of thearchitecture of our international energy governance is a vital first step towards ensuringenergy security, one could also, by the same token, ask: Is the current energy structure

producers, consumers, service providers and energy research labs are they alsoappropriately geared towards meeting the challenges of securing energy supplies in thisNew Reality?

Are the right partnerships being forged between producers and consumers? betweenresource-holders and technology providers? If not, what would be a better model for


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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 withminimum social costs?

I certainly do not have all the answers, nor would it be proper for governments to tellindustry what needs to be done. Nevertheless, I believe that, collectively, industry mustcontinue to take the long-term perspective of things in confronting these newfoundchallenges. Our recent experience has shown us only too well that financial wizardry isno substitute for genuine value-creation in delivering sustained increases in shareholderreturns. Indeed, I am of the view that it will be those companies that continue to pursuenew, innovative ways of delivering energy while remaining sufficiently nimble to adapt tochanges in the business environment it is these companies that will succeed bothfinancially and in living up to societys expectations.

With governments committing to a stable and conducive environment for industry toflourish, and industry seizing that opportunity to deliver a secure energy future, I amconfident we will be able to take these energy challenges in stride and look forward toprosperous future beyond the New Reality.

On that note, I wish you all the best in your deliberations throughout this Conference.

Thank you.

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