"Price Volatility and Natural Gas Prospects"

Keynote speech by OPEC Secretary General, HE Abdalla Salem El-Badri, to the 7th Doha Natural Gas Conference & Exhibition, entitled "Natural Gas: A Cleaner Fuel for Tomorrow" - Qatar, 9-12 March 2009

Your Excellencies, ladies and gentlemen,

Let me first begin by extending my sincere appreciation to the Emir of Qatar, His Highness Sheikh Hamad Bin Khalifa Al Thani, for sponsoring this conference. It builds on the success of prior gatherings held in this dynamic city of Doha.

In addition, I would also like to thank Qatar’s Deputy Prime Minister and Minister of Energy and Industry, His Excellency Abdullah Bin Hamad Al Attiyah, as well as Qatar Petroleum for inviting me to deliver a keynote speech at this important event.

Qatar is, of course, the right place to talk about natural gas. With vast endowments, the country is a prominent global player. It is a major producer of natural gas and a top LNG exporter.

In addition, now is the right time to be talking about natural gas. With the ongoing financial turmoil and the most significant economic downturn since the Second World War, the impact of the global crisis on energy markets needs serious discussion. There are broad global challenges ahead for both oil and gas.

IMPORTANCE OF NATURAL GAS

Excellencies, distinguished ladies and gentlemen, natural gas is becoming increasingly vital to the overall global energy mix.

With its steady growth and a share of world energy supply that is forecast to reach nearly 25% by 2030, natural gas has very bright prospects.

In terms of both reserves and production, OPEC Member Countries have significant shares of natural gas:

  • In 2007, Member Countries had more than 88 trillion cubic metres (tcm) of proven gas reserves — almost half of total world reserves.
  • The volume of marketed production was 471 billion cubic metres (bcm), with an export share approaching 20% of the world total.
  • In addition, LNG exports alone were about 93 bcm. This is nearly 41% of the world total.

In all of this, Qatar has a remarkable position:

  • In 2007, the country had more than 25 tcm in proven gas reserves — nearly 14% of the world total. This puts Qatar among the top three countries in the world.
  • Qatar also leads with its fast-expanding LNG industry. In 2007, its LNG exports were close to 20% of the world total.

Qatar’s advances are the result of the country’s faithful commitment to both capitalizing on technological innovation, and fostering cooperation between NOCs and IOCs.

I have no doubt that after the current crisis passes, Qatar and our other Member Countries will be well-positioned to continue pursuing their role as catalysts of growth in the evolving global gas markets.

GLOBAL ECONOMIC DOWNTURN

But right now we face a very tough environment.

The global economy has been hit hard by the financial crisis. Economies everywhere are facing recessions and the scale of the contraction has exceeded all expectations.

As everyone knows by now, this crisis has its roots in the advanced economies. But in this interconnected world, it has spread to all countries, including the poorest ones — those who are least responsible for the crisis.

With shrinking industrial activity and a continuing spiral of wealth erosion, the one question that remains is how long this storm will last.

Several leading economies are making substantial fiscal efforts to bail out industries and revive banking systems. But it remains to be seen whether this will be sufficient.

The priority should be restoring confidence — in banking and financial institutions, in businesses and markets, and among consumers. This is the key to making markets work again and to reviving the global economy.

LAST YEAR’S PRICE VOLATILITY

In addition to the current economic downturn, it would be useful to recall last year’s volatility in crude oil prices. Since natural gas complements oil, considering the challenges faced by crude will help us consider the prospects of the gas industry.

Last year, crude prices escalated from the low $80s in January to highs above $145/b in July. They then dropped to lows of $30/b by the end of the year.

A similar pattern was observed in the prices of other commodities, including natural gas and coal.

As OPEC has long argued, this kind of wild volatility is not caused by market fundamentals since the market was well supplied. It is the result of the increasing use of oil and other commodities as an asset class. The speculative funds flowing into — and out of — the commodity futures markets exposed the physical oil market to financial market volatility.

The sharp deterioration of the world economy during the second half of 2008, coupled with tumbling equity markets and speculative fund redemptions, then led to a sharp slide in prices. In the last quarter of 2008 alone, they fell by more than $60/b.

Where are we now? Since the beginning of 2009, crude prices have been fluctuating around $40/b.

And as news spreads about stagnant business activity in Europe and depressed economic indicators in Asia and the Americas, we expect to see continuing downward pressure on prices.

IMPACT ON DEMAND

All this is having a considerable impact on worldwide oil demand.

In 2008, global oil demand declined for the first time since the early 1980s. This year, it is expected to shrink by 1.0 mb/d as a slump in oil demand growth in the OECD spreads to other regions of the world.

This points to a troubling scenario in which demand for OPEC crude is expected to drop by 1.9 mb/d from a year earlier, to 29.0 mb/d.

The market, facing a deepening world-wide economic crisis, is also under pressure from prevailing supply and demand uncertainties. This highlights the importance of OPEC’s actions, including its most recent output decision taken at Oran, Algeria.

So OPEC stands firm — ready to pursue its commitment to contribute to market stability.

PRICE EXTREMES ARE DETRIMENTAL

But hampering OPEC’s efforts are the great uncertainties generated by the continuing lack of price stability.

The current low price environment certainly represents a significant loss in revenues for both IOCs and NOCs. But it is also leading to underinvestment in Exploration and Production projects — in both crude and natural gas.

In a low price environment, projects with high marginal costs and long lead times are hit very hard. The reasonable returns needed to make vital investments in capital-intensive projects in this and other industries remain elusive.

And with the current constraints on access to credit and debt markets, and the uncertainty generated by the global crisis, deep budget cuts in our industry simply become unavoidable.

All of which translates into a decline in drilling activities and staff lay-offs around the world. But it has also led to project delays or cancellations in both the upstream and downstream.

In short, underinvestment now may result in market imbalances in the future. And no matter how hard OPEC Member Countries try to contribute to market stability, it cannot be attained without price stability.

Extreme prices destroy demand patterns, make investment decisions difficult and undermine sustainable economic growth. And this applies to gas markets as well.

IMPLICATIONS FOR GAS MARKETS

I’ve been speaking about the challenges facing world oil markets. But what I’ve described mirrors the situation now faced by the world’s natural gas markets.

Like oil, natural gas is experiencing demand contractions in major consuming regions of Asia, North America and Europe stemming from the global economic downturn. In addition, the current low price environment has impacted investment decisions on capital-intensive gas projects, and has strained the development of new, more expensive gas supplies.

Despite these challenges, many OPEC’s Member Countries — like Qatar — with their vast natural gas endowments and rising market share will continue to play an important role in the development of a dynamic global natural gas market.

IMPORTANCE OF DIALOGUE & COOPERATION

But no one is isolated from today’s global challenges. And in times of great adversity and unprecedented challenges, promoting dialogue and cooperation is important.

Such open communication can help us face turbulent events — like the global economic crisis — together.

In this, Qatar has been among the top leaders — not only in promoting technological advances but also in enhancing open dialogue and cooperation between IOCs and NOCs.

Thus, forums such as this one — and the Gas Exporting Countries Forum (GECF) — are increasingly important. They bring together producers, consumers, investors and technology providers to share information, make collective actions more effective and achieve greater transparency and predictability in the gas sector.

In more concrete terms:

  • This means striving together to achieve better data transmission and increased market transparency. It also means better regulatory oversight of markets to avoid harmful price fluctuations.
  • But it also means making efforts to generate energy security — in terms of both supply and demand — through greater predictability of emerging energy policies in consuming countries. This will help assure adequate and timely investments in both oil and gas industries.
  • Finally, joint, coherent efforts are required to confront today’s environmental challenges and to develop innovative technologies for clean energy solutions and carbon abatement.

These are all significant challenges. And in an environment like the one we face today, it may be easier said than done. But it is important that we make the effort.

The challenges are, indeed, great. But the resulting opportunities can benefit us all.

Thank you.