OPEC Statement to the "Caspian Outlook 2008" Conference

Delivered by Mr. Mohammed Barkindo, Acting for the OPEC Secretary General, at the Bled Strategic Forum, "Caspian Outlook 2008" Conference, Bled, Slovenia, 27 August 2006

Excellencies, ladies and gentlemen,

I should like to begin by thanking His Excellency Dr Dimitrij Rupel, the Minister of Foreign Affairs of the Republic of Slovenia, for inviting me to participate in this panel discussion, part of the ‘Caspian Outlook 2008’ conference. The Caspian has for many centuries played an important role in the development of the international oil industry – Marco Polo witnessed the mining of seep oil in the region on his travels in the 13th century and the first modern oil well was drilled close to Baku in the 19th century. The high quality panel I am part of today very much underlines the continued influence of the region.

I find it encouraging to read from the conference correspondence that the newly established Bled Strategic Forum is “conceptualised as a forum for promoting high-level strategic dialogue between leaders … on key issues — regional and thematic — with which Europe of the 21st century will be confronted,” and to tie this in with the accompanying statement of intent that this “event will contribute to the preparation of the Slovenian EU Presidency in the first half of 2008.”

OPEC has long maintained that a sound, sustained, committed and multilateral process of dialogue is indispensable to the future healthy evolution of the world energy sector. We have supported this belief with our actions over many years.

This is typified by the EU-OPEC Energy Dialogue. The establishment of this began in December 2004, with the first dialogue taking place in June last year. It is already producing tangible results, with a much clearer understanding of each other’s views on many important issues, including energy security, and planned joint actions to improve our knowledge of such topics as energy policies and financial markets. The two sides are also developing a proposal to establish an EU-OPEC energy technology centre.

OPEC has recently set up similar energy dialogues with Russia, which is, of course, a significant player in the Caspian region, and with China, which is increasing its investment there. Again, both energy dialogues are broadening mutual understanding and are spawning further collaborative actions.

Energy security has been identified as one of the priorities of the future Slovenian Presidency and, as the conference correspondence states, “energy security will increasingly dominate the global policy agenda.” In fact, it is already playing an increasingly significant role. Energy security provided the central theme of the 10th International Energy Forum (IEF) in Doha in April, a forum in which OPEC has played a leading role, it features prominently in the EU Green Paper on a European Strategy for Sustainable, Competitive and Secure Energy, and it headed the agenda at the recent G8 Summit in St Petersburg. The heavy emphasis on energy security — the theme of this panel — comes as no surprise in the wake of the prevailing market volatility.

This volatility can be viewed in the well documented significant rise in oil prices over the past three years, with the increase influenced by a convergence of factors: exceptionally strong economic growth over the past few years, and, in turn, oil demand growth, with a global increase of 5.4 million barrels a day (mb/d) over the three years to 2005; a slowdown in the expansion of non-OPEC supply; a shortage of spare capacity; tightness in the downstream refining sector, where utilisation rates have exceeded 90 per cent in most regions, which in turn can lead to product shortages if disruptions arise; speculative behaviour – indeed, contract volumes for crude oil on the NYMEX have almost doubled since 2003 and there has been phenomenal growth in hedge and pension funds; as well as additional issues such as Hurricanes Katrina and Rita last year, the recent partial closure of BP's key Prudhoe oilfield in North America and concerns around geopolitical tensions.

What I would like to emphasise is that OPEC is a little uneasy with prices at the present high levels, because as the varied influences suggest, there is much ongoing volatility, the levels are not entirely supported by oil market fundamentals and the influences also contain within them the seeds of further volatility. Extreme price levels, whether too high or too low are detrimental to both producers and consumers.

All this points to the need for a broader-based approach by consumers to energy security — as opposed to merely supply security — and this emerged at the G8 Summit. We obviously welcome this. At the end of the Summit, the Chair stated: “We agreed that dynamic and sustainable development of our civilization depends on reliable access to energy. It is best assured by strengthened partnership between energy producing and consuming countries, including enhanced dialogue on growing energy interdependence, security of supply and demand issues.” The issue of security of demand is very important to OPEC and other producing countries, and we recognise the achievement of the host nation, Russia, in bringing this to the fore.

But, at the same time, we feel that more confidence could have been expressed by the participants at large about the willingness and the ability of oil-producing developing countries to service the growing world energy requirement in the years ahead.

For reasons that are clear to all of us on this panel, the oil industry is, and always has been, a challenging environment in which to operate. The successful functioning of the global economy is heavily dependent upon oil, and so the stakes are always very high.

OPEC has demonstrated repeatedly its commitment to market order and stability, even though, in practice, this can often be very hard to achieve, as the experiences of the past couple of years have shown. Nevertheless, even though we have little influence over the present situation, since the market remains well-supplied with crude and other factors are responsible for the volatility, we persevere with our efforts to achieve stability, with secure and regular supplies of oil.

Yet it must be recognised that security of supply must go hand-in-hand with security of demand as a means to achieve market stability, as without the confidence that demand for oil will emerge, the incentive to undertake the necessary investments can be reduced. In the oil industry, investment requirements are very large and subject to long lead-times and payback periods. Scenarios developed by the OPEC Secretariat highlight that even over the medium-term, out to 2015, uncertainties over future oil demand translate into an investment uncertainty of around $140 billion.

To illustrate OPEC’s commitment to market stability and energy security, let me highlight our Member Countries recent actions that have led to an increase in production of around 4.5 mb/d since 2002. OPEC’s Members upstream capacity is on course to be around 33.3 mb/d by the end of the year, as against 30 mb/d in 2003. Placed alongside an expected OPEC output of 28.1 mb/d in 2007, the Organization’s level of spare capacity will exceed 10 per cent, which should help to moderate prices. Though it should be noted this represents a significant cost to Member Countries. Going forward capacity growth is underpinned by more than 100 projects totalling $100 billion. Moreover, these projects are in addition to energy infrastructure investments.

On top of this, and in response to the bottlenecks in consumer products markets that have been having such a big impact on oil prices, our Members have also increased capacity and investment downstream, on their own and in partnership with others. Present estimates show that this will result in, at least, 2.5 mb/d of additional refinery capacity by 2010. We therefore believe that OPEC should receive more recognition from consumers for our active commitment to energy security.

Notwithstanding this, we are acutely aware of the growing world energy requirement, OPEC Secretariat research highlights that oil demand is expected to increase by 1.3 mb/d in 2006, and the fact that every effort must be made — on a broad front and in a realistic manner — to service this in the years ahead. This is both to meet the needs of established consumer societies and to contribute meaningfully to the sustainable development of less-advanced economies and the eradication of the dire poverty that afflicts many nations of the world. It needs to be remembered that for many developing nations, poverty and the associated energy poverty, are the key components of energy security. We should never forget that 1.1 billion people are currently living on less than $1 a day, 1.6 billion people in developing countries currently lack access to modern energy services and almost 2 billion have no electricity.

Clearly the Caspian basin, with its abundant oil and gas resources, has an important role to play in this process. In fact the Caspian nations of Kazakhstan, which has OPEC observer status, Azerbaijan and Turkmenistan, are expected to see significant production growth rates out to 2011; from around 2.2 mb/d in 2006 to more than 3.5 mb/d in 2011. Today, the region’s growth is no longer constricted by a lack of pipelines. For example, the single biggest route from the Caspian thus far, the Baku-Tbilisi-Ceyhan (BTC) pipeline with a capacity of 1 mb/d, started operation in May this year. Accordingly, we can well understand the interest the EU shows in the region, as well as the benefits this development and regional cooperation brings to the countries of the Caspian basin.

At OPEC, we believe and should like to see contributions from the Caspian and other regions being considered as complementary to OPEC’s contribution, rather than in some way substituting for it. As such, we welcome initiatives to enhance dialogue between OPEC and non-OPEC producers, as well as consumers.

Finally, turning to the longer term, I would like to underline that OPEC’s strong resource base, with nearly four-fifths of current proven world crude oil reserves and nearly half its natural gas, assures it of a capability to service the global energy requirement well into the 21st century to match its enduring commitment to the task of market stability and energy security.

Thank you.