Prospects for Middle East & North Africa Energy - “Oil Reserves, Investments & Demand”

Keynote address by OPEC Secretary General, HE Abdalla S. El-Badri, to the Chatham House Conference, London, UK - 1st February 2010

Thank you, Mr. Chairman.

Ladies and gentlemen: Good morning.

I have the pleasure once more to speak at Chatham House – this time about the Middle East and North Africa, a region to which many OPEC Member Countries belong.

This year, your conference coincides with the celebration of OPEC’s 50th Anniversary.

In 1960, when OPEC was born, the Middle East was already an important and growing crude supply region, while North Africa was in the early stages of developing its newly found oil reserves.

At that time, the five founding members of OPEC held a total of around 200 billion barrels of reserves or two-third of world reserves. On average, they supplied 7.9 million barrels per day of crude to world markets, representing more than one-third of total world production.

Today, fifty years later, OPEC is even more important.

OPEC reserves have multiplied by a factor of five to reach one trillion barrels and its daily production has multiplied by nearly four, to reach 29 million barrels per day. However, its production capacity reached more than 35.2 million barrels per day in 2009.

Of course, this growth is partly due to the fact that OPEC went from having five to 12 members. But even if we limit the comparison to the five original founding members, the growth is still impressive. Their reserves are almost four times larger and their production levels are almost three times greater today than in 1960.

In the downstream, the change is even more dramatic.

The increased importance of OPEC has been accompanied by growing recognition of its positive role, and by more trust and confidence in its actions. This is the result of several factors.

First, OPEC has consistently ensured supplies to the market in a timely manner. Second, a genuine and forward-looking dialogue has helped improve the mutual understanding of producers and consumers.

Ladies and gentlemen,

I would now like to turn to the theme of this session.

There is no doubt that the world today has enough oil reserves to satisfy consumers for decades to come.

But recently, when prices went up, there were some who claimed that oil would soon lose its lead in the energy mix and that oil resources would soon vanish. It is not surprising to hear such claims. It has happened throughout the 150 years of oil’s history.

But this is resource pessimism. And it is, partly, fuelling speculation.

It is true that crude oil resources are finite. But they are plentiful. Estimates from the US Geological Survey of ultimately recoverable reserves have practically doubled since the early 1980s – to 3.4 trillion barrels. Cumulative production to date represents only one-third of this figure.

Improved technology, successful exploration and enhanced recovery have enabled the world to continually increase its resource base to levels well above past expectations. And this will continue in the future.

Recently, Brazil made giant discoveries in the pre-salt section of its off-shore basins. And last year, an oil company was able to drill a well to more than 10,000 metres of depth. Significant discoveries have also been made in new areas.

Currently, more than three-quarters of the world’s proven recoverable crude oil reserves – or one trillion barrels – lie in OPEC Member Countries. This figure will certainly increase in the future, given the under-explored status of most of our Countries and the potential for increases in the ultimate recovery factors.

In managing the development of these resources, OPEC Countries are working towards providing a regular and efficient supply of oil to consumers, while also ensuring a fair return to investors and exercising their permanent sovereignty over these resources. This will benefit present and future generations.

Of course, in addition to conventional oil, there is also a vast resource base of non-conventional oil – such as tar sands, oil shale, gas-to-liquids, coal-to-liquids and biofuels.

It should be clear that the challenge is not – and never was – related to the availability of reserves. The challenge has to do with their deliverability and sustainability.

To turn these reserves into a supply of products, investments are needed, both upstream and downstream.

The oil industry in general – and OPEC in particular – faces three main uncertainties in this regard. They relate to future crude demand, long-term oil prices and inflating costs.

The challenge represented by the future demand for crude has been even greater as the world has faced its deepest, longest and most widespread economic crisis since the Great Depression. The causes of this recession are very well known to all of us, and need not be mentioned again, but the consequences have choked demand for oil.

World oil demand fell dramatically in 2008 and 2009 – by two million barrels per day. It is the first time since the early 1980s that oil demand has declined in two successive years.

Thanks in part to the massive fiscal and monetary intervention by many governments, there are signs that a recovery is under way. But its strength and pace are still highly uncertain. Unemployment in OECD countries is still of great concern. Credit is tight and private sector spending has not recovered enough to fully support economic expansion, without government stimulus.

With all this in mind, we’ve considered various scenarios. In OPEC’s World Oil Outlook published in July of last year, we explored the future uncertainties related to demand and economic growth. Our data show that as early as 2020, demand for OPEC crude could be as low as 29 million barrels per day or as high as 37 million barrels per day.

This translates into an uncertainty gap for upstream investments in OPEC Member Countries of over 250 billion US Dollars. There is, therefore, the very real possibility of wasting financial resources on unneeded capacity.

In the long-term, world oil demand is a bit more encouraging. OPEC’s reference case is expected to grow from 85 million barrels per day in 2008 to nearly 106 million barrels per day by 2030.

But without the confidence that there will be additional demand for oil, there may be no incentives to invest. And if investments are not made in a timely manner, then future consumer needs might not be met.

Despite these challenges, large investments to expand upstream capacity are currently underway in OPEC Member Countries. In 2009, around 30 projects came on stream in OPEC Countries, resulting in 1.5 million barrels per day of net crude and liquids capacity. For the next five years, the completion of another 140 projects is expected to add around 12 million barrels per day of gross crude and liquids capacity.

Therefore, we believe that current investments should be enough to both satisfy demand for OPEC crude and provide a comfortable cushion of spare capacity – of more than 6 million barrels per day by 2013.

OPEC Countries have also invested in expanding downstream capacity, both inside and outside Member Countries. Cumulative investment in downstream capacity in Member Countries until 2015 is estimated around 40 billion US Dollars. This will expand refining capacity by more than two million barrels per day – to more than 10 million barrels per day. In addition, another 25 billion US Dollars are being invested abroad, adding further capacity to the global refining system.

All this points to one of OPEC’s ongoing commitments: investing in production capacity. Such investments help OPEC support market stability.

Permit me to briefly outline what I view as the most urgent challenges facing the oil industry now, namely extreme oil price volatility, inflated costs, and lack of qualified personnel.

The extreme price volatility witnessed in the last three years has generated harmful uncertainties with regard to the long-term price of oil. This has, in turn, negatively impacted the ability of companies, and producing and consuming countries, to plan their investments and budgets.

Since 2007, OPEC has been warning that the large swings in oil prices were mainly driven by non-fundamental factors. But these warnings went unheeded.

Thankfully, things have evolved. There is now dialogue within the framework of the International Energy Forum to mitigate this volatility, a dialogue we welcome. In addition, we consider recent proposals from the CFTC in the US to limit excessive speculation in the futures and over-the-counter markets are steps in the right direction.

Inflated costs faced by the oil industry in upstream and downstream activities are another obstacle to investments. In addition, policies in consuming countries add a further layer of uncertainty.

Finally, we are faced with the lack of qualified human resources. Global enrolment in geology and petroleum engineering courses has been dropping for years and many qualified workers are retiring from our industry. This has become one of our most urgent needs.

Ladies and gentlemen,

Clearly, this is a crucial time.

The world has been evolving towards greater interdependence and more integrated energy markets. And the world will continue to need more and more energy.

It is true that an increasingly diversified range of sources will contribute to satisfy these needs. But oil will remain the fuel of choice.

Considering the fact that everyone has faced daunting challenges with the global economy recently, I cannot emphasize enough the need to work together. The responses of governments to the recent economic crisis have demonstrated the importance of coordinated efforts.

OPEC’s Third Summit of Heads of State meeting in Riyadh in 2007 called for developing existing and new avenues of cooperation with all stakeholders. In this spirit, we are endeavouring to enhance formal and active dialogues with many producing and consuming countries. OPEC is also active within the International Energy Forum, a platform for promoting producer-consumer dialogue.

It is these joint efforts, about which I am optimistic, that will lead us all to a more secure, stable and sustainable world.

Thank you.