Balancing the interests of producing and consuming countries

A Keynote speech by HE Abdalla Salem El-Badri, OPEC Secretary General to the High-Level Energy Charter Policy Conference, entitled "The challenges of a changing international energy market" at the Hofburg Palace in Vienna, Austria, 8 November 2007.

Excellencies, ladies and gentlemen,

Let me begin by thanking the organisers for inviting me to this gathering.

I am delighted to be able to participate in this important event, concerning the challenges facing a changing international energy market.

Maybe today, the challenge which comes first to mind is related to the price of oil. It is in all the news and it is indeed a subject of concern, both for consumers and producers alike. I would like to state clearly: OPEC considers both too high and too low oil prices as undesirable. High volatility is to the benefit of no one, except speculators.

The market remains well supplied with crude. There has been no recent interruption in crude supplies, and OECD commercial inventories remain above five-year average levels. They cover around 53 days of OECD consumption, which is more than comfortable.

Are today’s high oil prices the result of a shortage of crude? They are definitely not.

Why then do we have these high oil prices? I believe that, today, the reasons are not related to supply-demand fundamentals. Supply is sufficient and demand growth is moderate.

Other factors are in play, such as persistent refinery bottlenecks, ongoing geopolitical problems, a decline in the value of the US dollar, and most importantly, market speculation. Oil is now a financial asset, as other commodities. Large amounts of money are flowing into the commodities markets to balance portfolio risks and to seek higher returns.

Let us remember: the market faced a dramatic supply interruption in 2005, with the US losing most of its production and refining capacity in the Gulf of Mexico, due to hurricanes. Even then, the market did not witness such sharp price fluctuations as today.

This phenomenon has indeed been recognised as an area of concern to be addressed in our dialogue with the European Union. In this wonderful Hofburg Palace, nearly one year ago, OPEC and the EU held a joint two-day workshop on the ‘Impact of financial markets on the price of oil’, during which we discussed the adverse effects of speculators causing price trends to be exaggerated, such as high and sustained levels of volatility. One of the points that was emphasised was the role of regulation and the need for a supporting policy framework that would benefit all market participants.

We recognise the importance of markets, in particular for price discovery, as well as the need for liquidity. However, we do believe that excessive volatility is damaging to all responsible parties in the industry, on both the producer and consumer sides; in the shorter term, it makes everyday transactions more complex, unpredictable and erratic, while, in the longer term, it is seriously detrimental to effective investment strategies.

OPEC constantly monitors market activity and continues to seek a balance between supply and demand, as well as a fair, stable price that is acceptable to both consumers and producers.

Our Member Countries invest heavily in crude oil capacity, to ensure that markets are adequately supplied at all times and that there is a comfortable cushion of spare capacity, for the benefit of the world at large.

Capacity expansion plans already in place are expected to result in an increase of capacity by 2012 of over 5 million b/d, underpinned by more than 120 projects, and these are estimated today to correspond to more than US $150 billion.

In addition, many Member Countries are investing in the downstream, both inside and outside their borders, to help address the bottlenecks that have been troubling the industry in recent years.

Looking forward, our oil outlook reference case sees world oil demand rising by around 40% to 2030. Developing countries account for most of this rise and the transportation sector will be the main source of future oil demand.

Fortunately, the world’s oil resources are plentiful and sufficient to meet future demand.

In addition to crude, many other sources of oil will increasingly contribute to world supply: non-conventional oil, biofuels, natural gas liquids and others.

OPEC’s share in global oil supply by 2030 will not be very different from what it is today.

In addition, large uncertainties are associated with the demand for OPEC crude oil.

OPEC has the capability and the will to bring this oil to the market, as and when it is needed, but its Member Countries’ investment strategies are confronted by a major obstacle, in the shape of uncertainty over the amount of oil that will be required in the future. Much of this uncertainty stems from consuming countries’ policies.

Uncertainty can prove extremely costly for oil producers, especially with the long lead-times and payback periods involved. OPEC has looked into this matter carefully, and its alternative lower- and higher-growth scenarios show, for example, that, even over the medium term to 2010, there is an estimated range of uncertainty of $50 billion for required investment in the OPEC upstream, increasing to $160 billion by 2015.

It must be noted here that petroleum accounts for 75 per cent of OPEC’s export revenue, averaged out across the 12 Members, and, for five of these countries, it exceeds 95 per cent. Therefore, they are heavily dependent upon oil revenue for their economic and social development and want to be certain that it is invested well, benefiting their citizens, rather than being diverted to expanding production capacity to levels that are ultimately not needed.

This brings me back to the title of my address — “Balancing the interests of producing and consuming countries”. This is essential if the industry is to successfully meet the day-to-day challenges of the market, as well as cater for the needs of the future.

Furthermore, it is the responsibility of all of us, regardless of our position in the supply chain.

Of central importance here are the oil companies. The contrasting roles of national and international oil companies (NOCs and IOCs) have evolved over the past three decades. This has, for example, resulted in differing levels of participation by the IOCs in the upstream sectors of oil-producing countries and an appreciable level of participation by NOCs in the downstream, both domestically and abroad.

Also, the oil industry is more integrated than it used to be, vertically and horizontally, and major advances in such areas as communications, technology, and dialogue and cooperation have eased some of the barriers and structural rigidities that existed in the past.

OPEC attaches great importance to the NOC/IOC relationship. We believe that successful collaboration between these actors can play an important role in helping the industry meet the challenges that face it.

Excellencies, ladies and gentlemen,

Let me close by referring briefly to the important issue of dialogue, which is fundamental to achieving balance within the oil industry. Many advances have been recently made in dialogue. OPEC has formal dialogues with the EU, China, IEA and others. OPEC is also actively involved within the International Energy Forum, which is based in Riyadh and constitutes a key component of producer-consumer dialogue. This evolution is conducive to establishing a consensus on, at least, the major issues that concern all parties — such as market stability, security of demand and supply, investment, and sustainable development.

Clearly, the industry is much better-off when there is such a consensus. It will help us find the right balance in handling such issues and it is essential for the healthy evolution of the oil industry in the years ahead.

Thank you.