Cooperation between producers & consumers: an OPEC view

Delivered by Dr. Alvaro Silva-Calderón, OPEC Secretary General to the 11th Annual Middle East Petroleum & Gas Conference, Session entitled "OPEC-IEA: Defining a new path of cooperation between producers and consumers", Dubai, UAE, 8 September 2003

Ladies and gentlemen,

Let me begin by thanking the organisers for inviting me to deliver this speech on producer-consumer cooperation at the 11th Annual Middle East Petroleum and Gas Conference, here in Dubai. Dubai, of course, is part of the OPEC family, being one of the seven states forming the United Arab Emirates, and so it is an extra special pleasure for me to speak to you here.

The session I am addressing is called: “OPEC-IEA: defining a new path of cooperation between consumers and producers”. I welcome this opportunity to speak on cooperation, because this topic is of utmost importance to OPEC. The recent advances, that have been made in the relationship between OPEC and the International Energy Agency, are just part of the wide-ranging cooperation that should exist within the industry, and this should involve all the major energy producers and consumers, energy companies, financial institutions and other interested parties. I am sure that the other speaker in this session would agree with this — my friend and opposite number at the IEA, Claude Mandil, who took up the post of Executive Director of the Paris-based agency seven months ago.

I believe he would also support the following general observations I am going to make about the dynamics of cooperation, before we look at the underlying issues in depth.

Cooperation is a means to an end, and not the end itself. In other words, the road must lead somewhere. We have to know where we are going. It is not sufficient just to reach the road.

Cooperation is a two-way process, with suggestions of “give-and-take”, “listening to the views of others”, “seeking the common ground” and so on. For example, consumers who are concerned about security of supply should accept that, conversely, producers are concerned about security of demand.

The word “cooperation” can so easily be used in a routine, almost thoughtless manner. People merely pay lip-service to it. They become complacent. The word loses its vital edge. In reality, however, to be truly effective, the concept of cooperation, as well as its practice, needs to be kept fresh and alive at all times, and well-targeted. We need to take cooperation seriously and endeavour to apply it at all times.

And effective cooperation has a long-term dimension to it. This, in turn, requires perseverance, steadfastness and the ability to successfully handle challenging impulses that may arise along the way; and yet, at the same time, it must accommodate evolving trends.

Failure to heed these general observations can compromise discussions on cooperation, before they have even had a chance to get off the ground.

With this in mind, what are we actually looking at, when we refer to cooperation in the petroleum industry? Why is it important? What do we mean by it?

In its most simplistic form, cooperation should play an important role in the process of getting petroleum to consumers. In any marketing environment, there is the constant quest to improve efficiency and effectiveness and to remain one step ahead of the competition; every tool at one’s disposal should be used in this process, subject to moral and ethical considerations. A healthy relationship between buyers and sellers is crucial, and this rides hand-in-hand with cooperation.

Petroleum is no exception to this. In fact, due to the pre-eminent position of petroleum as an energy source at the heart of the global economy, it is vital to ensure that it reaches consumers in the most efficient and effective manner. Here we encounter such parameters as cost, logistics and security, as well as conflicts between short-term and long-term targets. There are also the benefits crude oil has over other commercial energy sources — accessibility, versatility, transportability, cost, etc — and the rising profile of gas, especially for environmental reasons. On top of this, there is the broader energy vision, embracing such perspectives as sovereign rights, sustainable development and environmentalism. And finally, there are the deep-rooted, longstanding differences, misunderstandings, rivalries — call them what you will — between the different parties in the industry; these are most pronounced between producers, where they are essentially South-based, and consumers, where they are essentially North-based.

When you bring these factors altogether, when you go back to basics and say: “I want to get oil to the consumer” or “I want to get gas to the consumer”, and when you are confronted by the confusion, the conflicts, the complexities and the costs, then the case for cooperation becomes compelling.

How does this apply itself in practice?

Let us begin by looking at the near term.

There are big variations in the extent and the intensity of cooperation, particularly as you move along the upstream/downstream spectrum, which includes exploration, development, extraction, processing, transport and distribution, as well as the sales and marketing that binds these elements together. There can also be critical economic, political and strategic dimensions, as well as the basic geophysical and geographical ones. In the oil industry, the most blatant manifestation of this spectral movement comes in the form of producing countries shifting downstream and international oil companies seeking upstream access.

With the vast majority of day-to-day activities, cooperation takes place as a matter of course, with nobody noticing that it is actually happening. However, sometimes there are notable differences among the parties involved or it is necessary to involve a broader cross-section of the industry in a matter, or it could simply be the case that an in-depth look at an issue is required. Then you become aware of the dynamics of cooperation.

Conferences can provide the means of achieving breakthroughs on such occasions, or for extending our horizons, and they are greatly to be welcomed, especially when, like this one, they have sessions devoted to cooperation.

There are, moreover, two recent notable advances in the cause of cooperation, at an institutional level.

The first is the steady development of the role of the International Energy Forum, which was established in the early 1990s with the specific purpose of enhancing producer-consumer dialogue. Since then, it has gone from strength to strength. OPEC has played a prominent role in its formation and growth. Indeed, the Forum’s permanent secretariat is being set up in one of our Member Countries, Saudi Arabia, while, just a fortnight ago, a Working Group Meeting of this body was held at the OPEC Secretariat in Vienna.

And the second is much closer to home, as far as this session is concerned. This is the strengthening of the relationship between OPEC and the IEA. We held our first-ever joint press conference at the 17th World Petroleum Congress in Rio de Janeiro in September last year, when we emphasised the many areas of consensus that existed between our two organisations on energy matters, as well as highlighting our growing level of open and frank communications. On 25 June this year, we organised — again for the first time — a joint workshop. This was on oil investment prospects and took place at our Vienna Secretariat.

Cooperation, in short, is central to OPEC’s thinking — and has been for many years. Without it, the impact of our market-stabilisation measures would be diminished. Our production agreements have been receiving valuable support from many leading non-OPEC oil producers, and the market at large has benefited from this. Moreover, our close relationship with these producers, as well as the feedback we have received from consumers, has assisted us in the drawing-up of agreements which are realistic and practical.

The core of these agreements consists of collective and individual output ceilings for our Members that are aimed at keeping crude oil prices within the limits defined by our price band mechanism, at US $22–28 a barrel for our Reference Basket. This mechanism was introduced three years ago, with a price band that has been carefully calculated to balance the interests of producers and consumers. If prices begin to settle outside the limits of the band, then the mechanism is triggered. The mechanism thus combines the need for flexibility with the need for a realistic target. Since its inception, the Basket has averaged around $26/b, well within the limits of the band, and this has occurred during a period of heavy pressure — upward and downward pressure — on the price structure. The price band mechanism, therefore, has been very successful and has been well-received by the industry.

From all of this, the importance of a high level of cooperation and dialogue to the successful operation of today’s petroleum industry is clear. But what of tomorrow? Some people maintain that cooperation has an even bigger role to play for the future.

The prospects for petroleum are very bright in the early decades of the 21st century. The reference case from OPEC’s World Energy Model (OWEM) predicts that world energy demand will grow by an annual average of around two per cent up to 2020. It sees a marginal drop in oil’s share of the energy mix during this 20-year period, from 40.1 per cent in 2000 to 38.4 per cent. Nevertheless, oil demand will rise from 76 million barrels a day in 2000 to 107 mb/d in 2020.

With non-OPEC oil production likely to reach a plateau, OPEC’s Member Countries will be expected to satisfy most of the projected new demand, due to these countries’ strong resource base of low-cost reserves. OWEM’s projections see OPEC producing 52 mb/d in 2020, a share of almost 49 per cent of global supply.

OPEC is also well-endowed with gas reserves, and these will serve to good effect as the use of gas almost doubles over the next 20 years, according to our projections. Gas’s share of the energy mix will rise from just over 23 per cent in 2000 to 28 per cent in 2020, overtaking that of solids, which will fall to 25 per cent. This is because gas has a more favourable environmental profile among the fossil fuels, and is a reliable and highly efficient source of power generation. It is now relatively low in cost to produce, although still expensive to transport to consumers. In all, about two-thirds of the world’s commercial energy is expected to come from petroleum — oil and gas together — in 2020.

With regard to the understandable calls for the development of renewable sources of energy, notably at last year’s World Summit in Johannesburg, the fact remains that the technology for this is still in its infancy. As was recognised by the Summit, the setting-up of an infrastructure for renewable energy is still too expensive to have a fixed goal attributed to it, at the risk of real, workable solutions. Therefore, while the technology is being developed, all other available, suitable resources must be accessed, enhanced and utilised.

Petroleum is already well-placed to provide such energy. Advances in petroleum technology continue to make oil and gas cleaner fuels, and this is accompanied by improved infrastructure and transport, particularly for gas. The successful development of carbon dioxide sequestration technology will ensure that the use of fossil fuels is entirely compatible with sustainable growth and that they will continue to serve the needs of mankind for decades to come. OPEC can, therefore, make a major contribution to an evolving energy system, which is closely tied to the demands of sustainable development.

However, massive investment is required for this. This relates to not just the upstream sector, but also to the downstream sector and transportation, as well as to the development and application of technology. Our projections estimate spending of nearly $100 billion by 2010 and $209 bn by 2020 for our Member Countries alone, in order to sustain their existing production capacities, as well as cater for the projected large rise in demand. For the high-cost, non-OPEC producers, investment forecasts are much higher — at around $600 bn by 2010 and over $860 bn ten years later.

When looking more closely into investment, we find ourselves facing many areas of uncertainty affecting the clarity and consistency of demand, including changing regulations, fiscal regimes, strategic and political factors, evolving life-styles, natural disasters and, of course, human error. There is the need for stability and harmony in the long term, as well as clarity and consistency about future levels of demand. Meeting the challenges presented by all these factors requires transparency, consultation, meticulous planning, careful scheduling and an underlying sense of equity. This involves all the major energy producers and consumers, energy companies, financial institutions and other interested parties.

In other words, it involves cooperation on an unprecedented, massive, multilateral and sustained basis. We are on the right track for this, with the progress that has been made in recent years, through, for example, the OPEC-IEA relationship, the International Energy Forum, non-OPEC support for our production agreements and such meetings as this. But the stakes are so high that we need to shift up a gear, as far as cooperation is concerned, if the petroleum industry is to continue performing its valuable service to mankind in the coming decades.

Thank you.