Energy Security in an Interdependent World, OPEC's Role & Objectives

A Speech by Dr. Adnan Shihab-Eldin, Acting for the Secretary General to a Roundtable Discussion "Regional Cooperation: Key to Energy Security", New Delhi, January 6, 2005

Excellencies, distinguished guests, ladies and gentlemen,

It gives me great pleasure to extend to you the greetings of HE Sheikh Ahmad Fahad Al-Ahmad Al-Sabah, Kuwait’s Energy Minister, and President of the OPEC Conference, and to thank the organizers for inviting OPEC to participate in this timely and important high-level roundtable discussion on ‘Regional Cooperation: Key to Energy Security.’ I speak on behalf of the President and all OPEC Member Countries in expressing our deepest sorrow and great sadness over the catastrophic earthquake and tidal waves that recently devastated parts of the Asian region, including India. No words can adequately describe the extent of this unprecedented disaster. OPEC Members have been quick to join the international effort to help the countries involved in the relief and recovery efforts, but the sheer scope of the damage inflicted on these areas could take many years to put right.

MARKET STABILITY & OPEC ROLE

(Slide 2) As we venture into 2005, we leave behind us one of the busiest and most eventful years in the history of the oil market, a period which saw crude oil prices soar to record levels. Prior to 2004, following the Asian financial crisis in the late 1990s, the introduction of the OPEC Price Band in 2000 ensured the maintenance of relative stability in the international oil market for 4 years (2000 to 20003). During this period, the price of the OPEC Reference Basket of seven crudes remained comfortably within the range of our price band of 22-28 dollar a barrel.

However, 2004 saw unusual developments on many fronts in the marketplace, in particular the unanticipated demand surge in Asia and the United States, accompanied by geopolitical tensions, refining and distribution bottlenecks, which were exacerbated by the effects of the hurricanes seen in the Americas, and compounded by speculation in the futures markets. Together, these factors pushed prices to record levels in nominal terms, although they were still well below the highs of the early 1980s in real terms (by about 50 per cent).

Consistent with its objectives and the leading role it has always played to stabilize the market, OPEC responded by increasing production to near capacity levels last year. (Slide 3) The official OPEC output ceiling, excluding Iraq, was increased three times during the year - by a total of 3.5 million b/d [- to 27 million b/d.] Actual OPEC production reached around 30 million b/d in the third and fourth quarters, resulting in well over 1 million b/d of excess supply for most of the year. OPEC’s actions, in addition, sent a powerful psychological signal that the Organization was doing all in its power to ensure that markets remained well supplied. Once concerns about OPEC’s production capability dissipated, prices started to fall considerably, and today they are converging more in line with the fundamentals of the market, with OECD stock levels back to normal. [It was against this backdrop that OPEC, at its last Meeting in Cairo in December, felt there was a need to trim-down the one million b/d of overproduction from the market to prevent prices from falling too steeply in the run-up to the second quarter of 2005, when demand traditionally falls significantly.] Today, the price of the OPEC Reference Basket is around the 36 dollar a barrel mark, the average for 2004 [vs. $28.1 average in 2003], and some 30 per cent lower than the highs observed in October last year. At the same time, OPEC Member Countries have speeded up plans designed to boost their spare production capacity to over 2.5 million b/d this year, from the current 1.5 million b/d.

Looking at the outlook for oil in 2005, we foresee a continued and healthy global economic growth rate of 4.1 percent, compared with 4.9 percent in 2004. [Growth will be much faster in developing countries than in the OECD — 5 percent compared with 2.8 percent — while, separately, China is projected to experience 7.6 percent growth. Of the European countries, Russia will see 6 percent growth.] Consequently, the oil demand growth forecast for 2005 stands at 1.6 million b/d. Asia is expected to account for a significant proportion of this growth. OPEC Members will be expected to supply an average of around 28.2 million b/d of oil this year (similar to 2004.)

LONG-TERM OUTLOOK

Even though global economies are now much more resilient in their ability to absorb the affects of exceptional price movements, producers must endeavour to ensure that adequate and reliable supplies continue to be available in the future at reasonable prices, to meet the growth in demand - especially if the developing countries are to benefit fully from this valuable energy resource, just as the developed countries did in the 20th century. There is a convergence of views that the world’s petroleum resources, with world’s current proven crude oil reserves placed at around 1,100 billion barrels, are still plentiful and will be sufficient to meet demand over many decades to come. Based on our figures, using the reference case from the OPEC World Energy Model (OWEM) (Slide 4) global oil demand is set to rise by 33 million b/d to 115 million b/d by 2025. That represents an annual average growth of 1.6 million b/d, or 1.7 percent, over the next 20 years. [This is based on a global economic growth forecast of 3.6 percent annually up to 2020.]

(Slide 5) While OECD countries will continue to account for the lion’s share of world oil, almost three-quarters of the marginal increase in global demand will come from the developing world. Asian countries will remain the key source of oil demand in the developing states. With this region containing over 50 per cent of the global population, it has emerged as a key player in global markets for commodities, manufacturing and services. (Slide 6) Again, our figures show that up to 2025 the region is expected to account for a rise of 18 million b/d in oil demand, which represents 65 percent of the total in all developing states. (Slide 7) India, along with China, is central to this growth, with the boom in the transportation sector a particularly important factor. (Slide 8) The huge potential for growth is clear from the low density of vehicles in these two countries, which stands at just over 10 vehicles per 1,000 inhabitants, compared with over 500 vehicles per 1,000 inhabitants in the OECD region. Of course, we are fully cognisant of the fact that many factors may constrain the rise in oil demand in the future, but the region is moving at such a pace that one cannot fail to recognise the huge potential it offers.

OPEC will increasingly be called upon to supply the incremental barrel. Its Member Countries, in particular those in the West Asia, have the willingness, the resources, and the capabilities to meet the increasing demand. As they have done so in the past. (Slide 9) OPEC possesses around four-fifths of the world’s proven crude oil reserves, but currently only accounts for only about two-fifths of global output. (Slide 10) In 2025, we project that our Members will be meeting more than half the world’s oil demand, with total production of over 58 million b/d.

In tandem with the oil growth comes gas, which OPEC Member Countries also have in abundance. Again, looking at our estimates, they show that world gas demand will expand by an average of around 3 percent a year up to 2025. That spells good news for our Members, who together possess [over 88.7 trillion standard cubic metres of proven gas reserves,] almost 50 per cent of the global total. And when one considers that their total marketed output today accounts for just 16 percent of the global figure, the room for future development is considerable.

INVESTMENT:

Naturally, one of the primary objectives of OPEC – and for that matter all oil producers - is to ensure that sufficient production capacity is available at all times to meet the forecast rise in oil demand in the coming years. (Slide 11) Investment is needed to meet the increase in demand; to replace exhausted reserves; and to make sufficient spare capacity available to cope with sudden, unexpected surges in demand, or shortages in supply. And just as consumers need security of supply, so do producers require security of demand. The required investment for boosting capacity will be considerable, although not much different than that seen in the recent past – of the order of 100 billion dollars a year. However, it will be much less in OPEC Member Countries than in other producing states, since OPEC oil is more accessible and cheaper to bring to market, yielding more than 4-fold multiple in terms of new productions capacity for same investment. Nonetheless, the exact magnitude of the required capital injection is subject to large uncertainty, due to uncertainty over future economic growth and a number of other factors, including the extent of the industry’s technological development and polices of consuming countries. Over-investment may result in excessive, costly idle capacity, while under-investment may lead to a shortage of crude. Both inevitably, lead to undesirable boom-bust cycles.

CO-OPERATION:

So what of the future for OPEC? Well, the kind of developments we have been witnessing, in the last year especially, again demonstrate the need for concerted cooperation and coordination in our industry. (Slide 12) Only by working together can we ensure that the global oil market is stable, and operates with prices that are fair to both producers and consumers, especially the energy-exporting and energy-importing developing countries in Asia. It remains imperative that all players associated with the industry – producers, consumers, governments, oil companies, and financial institutions - join hands in cooperation. Market order and stability is a shared responsibility for all parties. Advances in dialogue and cooperation among the producers, and the producers and the 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 the Organization’s commitment to this cause. Relations between OPEC and several leading non-OPEC producers have been enhanced and strengthened. In addition to active dialogue and exchanges at OPEC Ministerial Conferences, we are now involved in a series of high level technical exchanges among OPEC and non-OPEC producers. Recent years have also witnessed the development of a closer working relationship between OPEC and the International Energy Agency, to exchange ideas and information and we collaborate with IEA and other international organization in one of the most important collaborative projects to promote the compilation and dissemination of more timely and reliable data on global oil market. All this is indeed a step in the right direction, since there is little doubt that the industry is much better off if there is an underlying consensus on the means of addressing issues that concern all parties.

Excellencies,

Today, the global economy is clearly less sensitive to oil price shocks, compared with the situation seen in the 1970s and 1980s. Yet, the fact remains that an oil market that is stable, with a fair and equitable price, is still the best way forward for attaining global economic prosperity - something OPEC has been professing for many years. And with demand for oil and gas set to increase markedly in the years ahead, there is now an ever-greater need to achieve — and sustain — lasting market order. OPEC has the proven ability to be innovative and constructive in the policies and decisions it takes. The world has recently come to appreciate the benefit of OPEC’s spare production capacity in providing sufficient supplies in times of need. It is now understood just how valuable the investments OPEC Member Countries have made in developing their spare capacities are to the planet’s future welfare. Also recognized and appreciated in contributing to oil market stability is the price band concept introduced by OPEC in 2000.

Today, Globalisation and technological progress have turned our world into a small village, characterized by an increasing interdependence between nations. Our futures are intertwined and we therefore share common destinies. This interdependence is seen as a powerful requisite for establishing lasting security and stability. Dialogue, exchange of views, and understanding, are required for attaining this goal in the future.

CONCLUSION:

Excellencies,

Let me conclude with the following observations:

1. There is a convergence of views that Asia will become more and more important for the petroleum industry in the years ahead, both in terms of supply and demand. Oil trade in this region will increase dramatically in the future.

2. This growth scenario for Asia brings with it tremendous potential and opportunities for development and cooperation.

3. There will be room for increased investment, both in upstream and downstream activities, as well as opportunities for bilateral and possibly multilateral transactions, involving the transit countries, and covering such areas as joint storage farms, refineries, petrochemical installations, and distribution systems, to name just a few. Crossed investments (upstream versus downstream) are a real possibility.

4. Cooperation in Technology Research and Development is also path to be explored, both in upstream and downstream sectors, and in the pursuit of cleaner and more environmentally-sound fossil fuel technologies.

5. Public and private partnerships among Asian countries should be facilitated through the creation of a better framework and improved conditions for enabling increased investment and trade.

6. There is an ever-increasing importance attached to regular dialogue between West Asia oil producers and Asian countries to promote stable and secure energy markets and achieve sustainable development; consideration should be given to convening meetings similar to this one periodically.

7. Concerted cooperation and coordination among all players in the industry are essential for achieving lasting oil market stability.

Much has been achieved over the years, but the learning curve never ends. We can and must benefit from our past experiences and from enhanced dialogue exchanges to analyse the key issues. I believe we are now better prepared than ever to meet the future challenges. If a united front can be established, then we all stand to benefit - and the industry will go from strength to strength, to the benefit of all parties. Oil has played a key role in fuelling the development of the industrialized countries in the 20th century – it should now play just as important a role in supporting the future growth of the economies of the developing world.

Thank you.

Delhi Presentation Slides

Related Slides

Download document