Oil and gas: the engine of the world economy
By Dr Maizar Rahman, Indonesian Governor for OPEC, Acting for OPEC Secretary General, on behalf of Dr Purnomo Yusgiantoro, OPEC President and Secretary General, Minister of Energy and Mineral Resources of Indonesia. Tenth International Financial and Economic Forum, Vienna, Austria - 10–11 November 2004
Excellencies, distinguished guests, ladies and gentlemen,
Let me begin by thanking the organisers of the Tenth International Financial and Economic Forum for inviting me to deliver this address on “Oil and gas: the engine of the world economy”.
I shall focus on the oil industry, since this is OPEC’s principal area of interest. However, whenever necessary, I shall add some remarks about gas. Oil has been the world’s major commercial energy source for many decades and the consensus view is that it will maintain this leading role well into the 21st century.
[Slide 2] The pre-eminence of oil has run in parallel with the massive economic advances made in the 20th century and on into the 21st century. It is estimated that industrial production grew by around 50 times during the last century and that four-fifths of this growth happened in the second half of the century, starting with the reconstruction period after the second world war.
[Slide 3] This resulted in an enormous increase in energy consumption.
[Slide 4] Most of the consumption has been concentrated in the OECD countries, although this is beginning to change now, with higher growth rates in the developing countries, including China.
Oil dominated the world energy mix after the second world war, with the OECD accounting for 60–70 per cent of world oil consumption. Total and per capita energy consumption were much lower in the developing countries throughout this period, although this trend is now beginning to change. In both regions, there has been a steady increase in the use of gas.
[Slide 5] Currently, oil accounts for around 40 per cent of the world energy mix. This is because of its unique combination of attributes — sufficiency, accessibility, versatility, ease of transport and, in many areas, low costs. These have been complemented by a multitude of practical benefits that can be gained in an established infrastructure from decades of intensive exploitation and use in the industrial, commercial and domestic fields. Advances in technology make oil a cleaner, safer and more efficient fuel.
[Slide 6] There should be plenty of oil around for decades to come. The world’s oil resource base is not a constraint, with regard to meeting future demand. If we look at cumulative production, as a percentage of the estimated resource base, over the past four decades, we see that this has been relatively stable, and this is likely to remain the case for the foreseeable future. Over and above the world’s proven crude oil reserves, there is still plenty of oil that has yet to be discovered, in regions whose geological structures suggest a high probability of commercially viable reserves.
The world’s proven reserves alone — of around 1,100 billion barrels — will be enough to meet demand for around 45 years, at current production rates, in simple mathematical terms. However, in practice, the situation is more optimistic than this. To begin with, production will not suddenly stop at a finite point; instead, there is likely to be a gradual transitional phase lasting many decades, as occurred when the world moved from the coal era to the oil era. Also, while, on the one hand, annual output is forecast to rise steadily in the early 21st century, on the other hand, recovery rates will also improve, through enhanced technology, improved infrastructure and better accessibility. Moreover, there is “unconventional oil”, such as tar sands, oil shale and heavy oil, and exploitation of this is expected to rise steadily in the future.
[Slide 7] Gas producers share many of the challenges of oil producers. Moreover, order and stability in the oil sector are essential not just for oil, but also for gas. This is because of the linkage between oil and gas prices in many major consumer markets, whereby oil price movements have an influence on gas prices.
Gas currently accounts for around 23 per cent of the world’s commercial energy mix. Gas is the source of commercial energy most favoured by environmentalists, as well as being a reliable and highly efficient source of power generation. Production costs are coming down too. But the transportation of gas remains expensive. As with oil, there are enough gas resources in the world to meet demand for generations to come.
Let us see now how the situation may develop in the future, using the reference case from OPEC’s World Energy Model. Our projections show global oil demand rising by 38 million barrels a day to 115 mb/d by 2025 — an annual average growth rate of 1.7 per cent.
[Slide 8] Oil’s share of the world energy mix will dip slightly during this period, from 40 to 37 per cent.
[Slide 9] OECD countries will continue to account for the largest share of world oil demand. However, almost three-quarters of the increase in demand of 38 mb/d over the period 2002–25 will come from developing countries, whose consumption will almost double. Asian countries will remain the key source of oil demand increase in the developing world, with China and India central to this growth.
[Slide 10] At the global level, the transportation sector accounts for about 60 per cent of the rise in demand in 2000–25.
[Slide 11] Turning to supply, overall non-OPEC output is expected to continue to increase, reaching a plateau of 55–57 mb/d in the post-2010 period. This represents an increase of 7–9 mb/d from 2002, although the eventual scale of this future expansion is subject to considerable uncertainty. The key sources for the increase in non-OPEC supply will be Latin America, Africa, Russia and the Caspian.
OPEC will increasingly be called upon to supply the incremental barrel. OPEC has both the capability and the will to do this.
[Slide 12] Around four-fifths of the world’s proven crude oil reserves are located in OPEC’s Member Countries. Moreover, these reserves are more accessible and cheaper to exploit than those in non-OPEC areas. In 2025, OPEC is projected to meet more than half the world’s oil demand, at 51 per cent, with 58 mb/d.
Let us now look briefly at gas. Our Member Countries hold almost half the world’s proven natural gas reserves. According to our projections, world gas demand is expected to more than double in the first quarter of the 21st century, reaching almost 90 mb/d of oil equivalent by 2025. This will constitute an average annual rate of demand growth of around 3.0 per cent. The share of gas in the world energy mix will rise to around 30 per cent in this period.
[Slide 13] OPEC is deeply aware of its role in the evolving international oil market. The Organization’s core values are stable markets, reasonable prices, steady revenues, secure supply and fair returns for investors.
OPEC monitors oil market developments closely for the short, medium and long terms, so as to provide the its Oil Ministers with the necessary high-quality support material for their decision-making.
One of the most basic issues facing OPEC — and, let us not forget, other oil producers too — is to ensure that sufficient production capacity will be available at all times to help meet the forecast heavy rise in oil demand. [Slide 14] Investment is needed: to meet the forecast absolute increase in demand; to replace exhausted reserves; and to ensure that oil producers always have sufficient spare capacity available to cope with sudden, unexpected shortages in supply. Also, the oil must be cleaner, safer and more efficient than ever before.
Furthermore, producers need assurances of stable, predictable markets, just as much as consumers require certainty and consistency with supplies — security of demand is as important as security of supply.
The required investment will be large, although it will not necessarily be different in magnitude to that observed in the past. Also, the cost of investment in OPEC oil is much lower than in non-OPEC oil.
[Slide 15] However, the magnitude of the required capital injection is far from clear, even in the short and medium terms. This is partly due to the wide range of feasible demand growth scenarios, but it is also reinforced by contrasting views on the potential evolution of non-OPEC production. Uncertainties over future economic growth, government policies and the rate of development and diffusion of newer technologies are among the main factors that lie behind this. To illustrate this, if we reduce our global economic growth projections by just one per cent, this will lower the investment requirement for 2010 from a reference case $95 bn to $70 bn — which is a big difference.
To appreciate the significance of all this, one must consider investment lead times that are measured in years rather than months, as well as the importance of “getting it right” i.e. over-investment may result in excessive, costly, idle capacity and under-investment may lead to a shortage of crude and higher prices. In both cases, the losses, especially for producing countries, and the possible, broader associated damage, such as to the world economy, can be huge. Because of the long lead times, it may take years to correct a situation of heavy over- or under-investment.
Clearly, any sound investment strategy must be built upon a solid base. This underlines the need for market order and stability today, with reasonable prices. This is, sadly, not the case at the present time.
[Slide 16] Prices for OPEC’s Reference Basket of seven crudes have recently reached record levels. They rose above US $45 a barrel for the first time ever last month; this compares with the widely accepted average level of $25.8/b from the inception of the OPEC price band in 2000 through 2003.
[Slide 17] A combination of factors has contributed to this — even though, throughout, the market has remained well-supplied with crude and fundamentals have been sound: higher-than-expected oil demand growth, especially in China and the USA; refining and distribution industry bottlenecks in some major consuming regions, coupled with more stringent product specifications and compounded by the recent hurricanes in the Americas; and the present geopolitical tensions and concern about adequacy of spare capacity to meet possible supply disruptions. Combined, these factors have led to fears about a possible future supply shortage, which, in turn, have resulted in increased speculation in futures markets, with substantial upward pressure on prices.
[Slide 18] To help restore order and stability, OPEC has raised its production ceiling three times, by a total of 3.5 million barrels a day for OPEC-10 (OPEC, excluding Iraq), to 27.0 mb/d. We did this, even though our assessments had indicated that there was sufficient crude in the market and that Member Countries were already producing well above previous ceilings. It was believed that, as well as the actual physical fact of agreeing to these big increases in supply, such actions, in themselves, would also send a powerful psychological signal that OPEC was ready to act in order to help stabilise prices.
[Slide 19] With regard to the ability to meet rising demand in the short-to-medium term, OPEC has spare production capacity of around 1.5–2.0 mb/d, which would allow for an immediate additional increase in production. Furthermore, Member Countries have plans in place to increase capacity by a further 1 mb/d towards the end of this year and by at least another 1 mb/d through 2005. In addition, plans for additional capacity expansion are available and could be enacted soon; however, this capacity would, typically, become available around 18 months after commencement of this process. Nevertheless, it must be pointed out that our latest studies show that, for the third quarter, the market was over-supplied by nearly 2 mb/d and that this trend was being continued into the fourth quarter, although to a lesser extent, due to demand seasonality and other factors.
These are all very big challenges that we are facing. And I say “we”, because I am talking about the oil industry as a whole — producers, consumers, governments, the large oil companies, the financial institutions and any other party that has a significant role to play in the general welfare, the effectiveness, the growth and the general evolution of the industry. Market order and stability is a shared responsibility for all parties.
When OPEC makes its production agreements, it does so in the expressed expectation that non-OPEC producers will actively support our measures, since this will make our decisions more effective, to everyone’s benefit. When OPEC turns its attention to the future, we envisage this as a collective task for the industry and we seek to get as wide a range of views, opinions, information and data as possible. The challenges facing all of us are too large, too complex and too important to be left to individual, concerned groups.
[Slide 20] Big advances in dialogue and cooperation among producers and consumers have been an encouraging feature of the past couple of decades, from large-scale international ministerial gatherings, such as the meetings of the now-institutionalised International Energy Forum, to bilateral or regional contacts that extend across national boundaries. Indeed, the establishment of the Forum’s Secretariat in an OPEC Member Country, Saudi Arabia, bears witness to OPEC’s commitment to dialogue and cooperation. Recent years have also witnessed the development of a closer working relationship between OPEC and the International Energy Agency, to exchange ideas and information. We are involved in a series of joint meetings among OPEC and non-OPEC producers — the most recent was held in Oman last month.
For gas, the recent formation of the Gas Exporting Countries Forum recognises the need for discussion of issues of mutual interest to gas producers and its role is likely to grow in the future. Its membership includes seven OPEC Countries. OPEC welcomes all of this. The industry is much better-off if there is an underlying consensus on the means of handling, at least, the major issues that concern all parties — such as price stability, security of demand and supply, investment, environmental issues and sustainable development.
Excellencies, distinguished guests, ladies and gentlemen,
[Slide 21] We are confident that the petroleum industry will successfully rise to the challenges facing it in an increasingly globalised industry, where technology is enabling us to make remarkable advances in every field of activity and where the orderly, equitable provision of cleaner, safer energy services is seen as an integral part of sustainable development, the eradication of poverty and the general enhancement of mankind.