Cooperation and the link between oil and gas

Delivered by Dr Alvaro Silva-Calderón, OPEC Secretary General to the 3rd Russian Oil & Gas Week. Session: International energy cooperation. Prospects for investment in Russia

Moscow, Russia, 4th November 2003

Ladies and gentlemen,

I should like to begin by thanking the organisers for inviting me to deliver this address on the subject of cooperation and the link between oil and gas.

The energy world has moved forward a long way over the past decade and a half, from the time it was divided along broad ideological grounds into the centrally planned economies and the market economies, with limited amount of contact between them. Now, energy issues are viewed from a global perspective in a world of constantly evolving economic, social and political norms.

Russia has remained a major player in the petroleum industry throughout. It is now the world’s second-largest oil-exporter and has the world’s eighth-largest oil reserves. It is also the world’s largest gas-exporter and has the world’s largest gas reserves. And, as if this were not enough, it has the world’s second-largest coal reserves.

Russia has the formidable task of realising the full potential of its massive energy resource base. This long drawn-out process has included the replacement of old, inefficient infrastructure, plant and equipment, and the integration of a new competitive work ethic. There are also issues that relate to the size and nature of domestic energy demand in Russia, since these directly affect the petroleum resources which are available for export.

Many uncertainties exist about the pace and the extent of this renaissance of the country’s petroleum industry, and, due to its sheer scale, this has a direct bearing on the energy world as a whole. The process is still in a transitional phase, although a clearer picture is steadily emerging, as this vast country adjusts to the realities of playing a major role on the world energy stage.

OPEC’s principal concern revolves around the effects of all this on the international oil market. We have welcomed the support that Russia has given to our market-stabilisation measures since the early 1990s, and we believe that Russia, in turn, has benefited from the high level of success of these measures.

But some serious issues need to be resolved by all the leading parties in the oil market, if order and stability are to be maintained, with secure supply, steady demand, reasonable prices and fair returns to investors.

The first of these concerns the expectation that the growth in world oil supply will outstrip the growth in oil demand in the coming year.

The second relates to the longstanding trend for non-OPEC producers to gain market share at OPEC’s expense, by accounting for most of the incremental rise in oil demand. This is in spite of the fact that OPEC possesses four-fifths of the world’s proven crude oil reserves and that these are easier and cheaper to exploit than those elsewhere. It also overlooks the fact that OPEC has repeatedly reduced its output to support the price structure, so that the industry as a whole benefits.

And thirdly, there is the need to accommodate the return of Iraqi oil to the international market, even though we do not yet know the rate and extent of this.

On top of these are the usual day-to-day factors affecting the ongoing stability and performance of the international oil market, such as inventory movements, weather patterns, accidents, downstream developments, speculation and so on.

Therefore, it is incumbent upon all of us in the oil sector to ensure that we can accommodate these factors in a manner which is fair and reasonable to all the parties involved, as well as meeting the needs of the larger international community. This is not easy and involves a readiness for dialogue, cooperation and compromise at almost unprecedented levels.

Such a process should begin by ensuring that market fundamentals are observed, particularly with regard to reserve strength and the long-term sustainability of current output levels.

It should also acknowledge the merits of some form of international oil pricing policy, such as OPEC’s price band mechanism, which aims to keep the price of our Reference Basket of seven crudes within a range of US $22–28 a barrel. This combines the need for a flexible policy, which can absorb reasonable day-to-day price fluctuations, with a policy that sets a price range which balances the needs of producers and consumers.

And this process should observe the role of oil in addressing issues of broader human concern, such as meeting the demands of sustainable development, which will see the industry produce cleaner, safer fuels to help preserve the environment and assist in the process of eradicating poverty.

The stakes are high, because, by all accounts, the thirst for oil will continue to grow for decades to come, and this demand must be met in a full and timely manner. OPEC’s research indicates that world oil demand will rise by 41 per cent to 107 million barrels a day in the period 2000–20, and that there will be growing reliance on OPEC oil, due to our large reserve base. Huge investment is required to bring this oil in processed form to the consumer. For OPEC oil alone, this is estimated at nearly $100 billion by 2010 and nearly $200 billion by 2020. For the more costly non-OPEC oil, the figures are much higher.

Russia clearly has an important part to play in all of this, as its oil sector continues its course of restructuring and expansion.

Order and stability in the oil sector are essential not just for this hydrocarbon, but also for gas. This is because of the linkage between oil and gas prices in major consumer markets, whereby, if prices fall in a volatile oil market, they are likely to bring gas prices down with them. Therefore, the case for ensuring that a sound international oil price structure is in place at all times finds further valuable support.

OPEC, like Russia, has a strong base in the gas industry, even though the focus of our Organization is on the oil market. Our Member Countries hold almost half the world’s proven natural gas reserves, with the Islamic Republic of Iran and Qatar being second and third, respectively, to Russia, in global rankings. Algeria and Indonesia also place a heavy emphasis on the gas sector, in their hydrocarbon activities.

Gas producers share many of the basic challenges of oil producers, in ensuring they can meet demand in a full and timely manner. Demand for gas is forecast to rise faster than that of oil, although from a lower base. It is the source of commercial energy that is most favoured by environmentalists, as well as being a reliable and highly efficient source of power generation. Production costs are coming down too.

But the transportation of gas remains expensive, in spite of the big advances that are being made with liquefied natural gas, which are expected to turn it from being a regional to a global fuel. Also, legislation to liberalise energy markets, particularly in the European Union, has been handled without due regard to longstanding agreements with gas suppliers.

These and other issues affecting the gas sector now can find expression in the recently formed Gas Exporting Countries Forum, which has provided a meeting-point for many of the world’s leading gas producers, including Russia and seven OPEC Members. The fact that the composition of this forum includes major producers from both the oil and the gas sectors will clearly encourage harmony within the petroleum industry, which will benefit all of us.

Ladies and gentlemen,

This speech has focused on Russia, the host nation, and OPEC, the Organization I represent, and the links between the oil and gas sectors, in which both sides are heavily involved. Some of these links have their own inherent dynamics, while others need constant nurturing, through cooperation. The important thing is that we must ensure throughout, by means of our actions, that the energy needs of the world community are met in a satisfactory manner, both now and in the future.

Thank you.