Speech by OPEC Secretary General to the 14th IEF Ministerial

Delivered by HE Abdalla S. El-Badri, OPEC Secretary General, at the 14th IEF Ministerial, Plenary Session One: 'The new geography of energy: business as usual or a new era for energy supply and demand?', 15 May 2014, Moscow, Russia

[SLIDE 1]
Mr Prime Minister, Excellencies, ladies and gentlemen,
Good morning.

I would like to begin by thanking the Russian Government for hosting this important event, to the International Energy Forum (IEF) for helping organize it, and to co-hosts Iraq and the United Kingdom for their support.

The theme of this session is ‘The New Geography of Energy: Business as Usual or a New Era for Energy Supply and Demand?’   

[SLIDE 2]
Allow me to initially look at the present oil market situation.

Today, we see a relatively balanced market.  And looking at market indicators, we expect this to be the case for the rest of 2014.  There is steady demand growth and enough supply to meet demand, with both stocks and spare capacity at comfortable levels.

OPEC crude production is currently close to 30 million barrels a day.  This is what is required by the market.  OPEC is making sure its consumer’s needs are being met. 

And in terms of prices, they have held fairly steady for the past two years or so, at a level that has been acceptable to both producers and consumers.

[SLIDE 3]
Turning to the future, I will begin by looking at the supply outlook.

There has been talk that the supply side is undergoing something of a ‘revolution’ as new sources, particularly from outside of OPEC, enter the market.  These are developments that some have suggested will transform the oil market forever.

But we need to be careful about what these changes really mean.  It is essential that we put things into some context, and examine the market over all timeframes.

Over the past few years we have seen an upswing in non-OPEC liquid supplies.  However, I should highlight that between 2009 and 2013, OPEC and non-OPEC each provided about 3 million barrels a day of additional production.

In the medium-term, the non-OPEC supply expansion will continue.  We see it increasing by over 4 million barrels a day between 2013 and 2018.  Over the same period it means the call on OPEC liquids remains fairly stable.

Thus, non-OPEC supply will play an important role in the coming few years.  However, this should be viewed as a periodic shift.

This is apparent when looking at the developments of one of the main medium-term drivers for non-OPEC liquids. Here, I am talking about North American tight oil.

This is a welcome addition.  Tight oil adds depth and diversity to the market.  But questions remain over its sustainability in the long-term.  We see North American tight oil, including NGLs, reaching 4.9 million barrels a day by 2017/2018, before declining thereafter.

Many tight oil wells are experiencing sharp decline rates, which means that operators need to ‘drill, drill, drill’ just to maintain production.  And, production costs remain high.

 [SLIDE 4]
In the long-term, non-OPEC supply expansion will slow.  And after 2018, it is OPEC that is expected to supply much of the additional liquids capacity.  OPEC is expected to supply around 11 million barrels a day of additional liquids between 2018 and 2035.  In contrast, the figure for non-OPEC additions is 3 million barrels a day.

While we can expect to see an increase in the importance of non-crude supplies, in general, the long-term oil supply picture could be deemed to be ‘business-as-usual’.  Investments from OPEC and non-OPEC will be required – not only to add new production, but also to maintain existing capacity.

Let me stress that OPEC Member Countries continue to make investments.  However, future investments will be influenced by various factors – such as policies, the price of oil and overall economic conditions.

The upshot of all this is that the MENA region will continue to be the main hub for global oil supply.  And it will be ideally positioned to meet ever-expanding demand from Asia.

[SLIDE 5]
In many respects it is the demand side that will bring about most change.  Global demand is expected to increase by around 20 million barrels a day between 2012 and 2035, with over 88 per cent of this expansion in the developing Asia region.

Moreover, non-OECD oil demand is expected to surpass that of the OECD in the second half of 2014, although oil use per head in non-OECD regions remains much lower.

The shift in demand towards Asia is, of course, nothing new.  It is an ongoing trend.  But the implications of this shift could significantly alter oil trade and the downstream landscape in the coming decades.  For example, the Asia-Pacific region is expected to see an increase in crude and product imports from practically all producing regions, led by the Middle East.

Middle East crude oil exports to the Asia-Pacific are expected to increase from 13 million barrels a day in 2012 to almost 18 million barrels a day by 2035.  Product exports from the Middle East to the Asia-Pacific region also expand, by 1 million barrels a day by 2035.

This demand trend is also expected to see a continued shift in downstream investment away from the OECD to non-OECD regions, particularly Asia and the Middle East.  We are already seeing significant developments and downstream capacity expansion in the non-OECD.  And as demand shifts, other parts of the world are likely to see a combination of some expansion and further refinery closures.

[SLIDE 6]
It is evident from both supply and demand perspectives that the future requires significant investments.  Cumulative upstream, midstream and downstream investment requirements, including maintenance and upgrading, are expected to be around $8 trillion by 2035.

These investments require a stable market environment.  In this regard, I would like to highlight two key issues:

Firstly, there is the importance of continually looking to mitigate extreme price volatility and excessive speculation. 

As I have already mentioned, we have seen prices hold steady over the past two years or so, especially when compared to some of the preceding years.  However, it is important to keep a watchful eye over speculative activities.  This is something OPEC has been discussing with the IEF and the IEA, with the 4th Joint Workshop on the Interactions between Physical and Financial Energy Markets recently held in Vienna.  The Workshop forms part of a wider joint programme of work between our three organizations.

Secondly, we need to think about the relationship between prices and the cost of the marginal barrel.

Given the complexities of the oil market, it is difficult to specify a single number that represents the marginal cost.  But it is evident that the cost of some oil sands projects, tight oil plays, deepwater and Arctic fields are the most likely to represent the marginal cost.

This raises the question: at what price level would some of these projects become unworkable?  For some of these projects, it may not be far below current price levels.

[SLIDE 7]
Of course, we cannot presume the future will turn out to be how we view it today.  History tells us that things rarely stay the same.  And in the years ahead, the market will have to evolve to adapt to ever-changing circumstances.

Today there are uncertainties that we can call ‘known’.  They include the potential impact of UN climate change negotiations; the role of financial markets and oil market speculation; energy policies in some consuming countries; manpower bottlenecks; advances in technology; and rising costs.  And there are also ‘unknowns’ – most often related to geopolitics and severe weather patterns.

Nevertheless, I can underline a number of key takeaways from my speech today:

  • OPEC and non-OPEC oil supply will both be required in the long-term;
  • Supply will come from a wide diversity of sources, and there is plenty of it;
  • The MENA region will remain the world’s major oil supply centre;
  • Oil demand and trade will continue their shift to the East; and
  • The downstream is likely to witness a shift in capacity from OECD to non-OECD regions, specifically the Middle East and Asia.

To conclude I should like to stress that there is no doubt that our future will increasingly be one of interdependence.  We do not live in a world of independent energy nations.

This connectedness – and the ever more complex nature of our industry – points to the need to continually enhance dialogue and cooperation, with innovative thinking, collaboration and swift action between stakeholders, where and when appropriate.  This important meeting symbolizes that.

This can only help all of us to strive to ensure the market stability that we all require – to deliver the goal we all desire: ensuring sustainable energy for all.

[SLIDE 8]
Thank you for your attention.