Energy Security: A Global Perspective

Speech delivered by Mr. Mohammed Barkindo, Acting for the OPEC Secretary General, at the London Oil Club, 27 July 2006, London, England

Ladies and gentlemen,

I should like to begin by thanking the organisers for inviting me to address you this evening on the subject of “Energy security: a global perspective”.

My opening remarks, understandably, will be a little different to what they would have been, had I delivered this address at the beginning of this month, due to the rapidly unfolding developments of the past fortnight in the Middle East and the accompanying tragic loss of life, property and economic and social infrastructure.

There were two immediate effects of this turn of events on the international oil market, and they are connected to each other.

First, oil prices reached new record levels in nominal terms, with OPEC’s Reference Basket quickly gaining around US $3 a barrel — rising from $68.66/b on 12 July, when the crisis began, to a peak of $71.71/b two days later. Subsequently, however, they slipped back from this level, averaging $68.71/b on Tuesday this week.

And secondly, there was enhanced concern among consumers about security of supply from the Middle East. This was in spite of the fact that no oil producers are currently involved in the conflict and there has been plenty of crude on the market throughout. Figures released yesterday by the US Department of Energy’s Energy Information Administration confirm this, with commercial crude stocks well above last year’s level, at nearly 336 million barrels.

And, on top of this, OPEC quickly reassured the market about its unwavering commitment to security of supply. Furthermore, there was an irony here, since the new situation arose just before the issue of global energy security was to top the agenda at the forthcoming G8 summit in St Petersburg, which went on to address it.

And there are a couple of other points of significance. First, the events were unexpected in the world at large, certainly in terms of timing and intensity, and therefore, like other economic sectors, the oil market was taken completely by surprise. And secondly, they coincided with the start of the summer driving season in the Northern Hemisphere, a factor which, by itself, can lead to tightness in the products market — even though the market has, of course, been preparing for this in the usual manner and the upstream sector is well-supplied with crude, as I mentioned a moment ago, with stocks above their five-year average in the OECD, currently providing 54 days of forward demand cover.

Finally, this has all been happening against the backdrop of the volatility and rising prices which have dominated market affairs since spring 2004. We are, of course, familiar with the issues here and the effects of an unusual convergence of factors.

To begin with, there was the exceptionally strong world economic growth — at 5.2 per cent per annum in 2004 and 4.7 per cent in 2005, this was well above long-term trend levels. In turn, there was robust oil demand growth, especially in developing countries. Global oil demand surged by 3.0 million barrels a day in 2004 alone — a level of growth not seen since the early 1970s. This moderated somewhat last year, with demand increasing by just under 1 mb/d, although the level has risen again slightly since then.

There was also a significant slowdown in the rate of expansion of non-OPEC supply in 2004 and 2005, and this followed many years of non-OPEC supply growth exceeding that of OPEC, and often at faster-than-predicted rates. However, the rate has picked up again and average non-OPEC supply is expected to rise by 1.2 mb/d this year.

Furthermore, there has been tightness in the downstream sector, which has been putting pressure on not just product prices, but also crude prices. Factors behind this include a lack of timely investment in the downstream sector and increasingly stringent product regulations motivated by environmental concerns.

Also influencing price movements has been increased activity in the futures market, with a new inflow of capital movements by hedge and pension funds. Indeed, open interest contracts in the NYMEX passed the one million mark for the first time in April, with volumes almost doubling since 2003 — this is more than ten times the total oil supply in the world physical market at the present time. Moreover, there have been natural disasters and uncertainties stemming from geopolitical developments.

Thus the sudden, unexpected turn of events in the Middle East has accentuated an already difficult situation in the market. But, at the same time, it has added to OPEC’s resolve to alleviate the continued volatility and upward pressure on prices in a timely and effective manner.

Nevertheless, these events have done little to change the underlying, longer-term realities facing the market, including perceptions about energy security, the theme of this address.

Indeed, we have been heartened by some positive developments on this theme that came out of the St Petersburg summit. As the BBC put it, in a report on its website: “The point of putting energy security top of the agenda was to require the Western world to examine the problem not just from their own viewpoint as energy consumers, but consider also the needs and concerns of those who produce the stuff and transport it”.

We consider this point to be very important. In fact, it echoed the sentiment expressed in the third Ministerial-level meeting of the European Union-OPEC Energy Dialogue in Brussels last month.

Looking at the Chair’s summary of the section on global energy security, which refers to the adoption by the summit of the “St.Petersburg Plan of Action to enhance global energy security”, we welcome the opening remarks: “We … set out our common goals and approaches aimed at ensuring sufficient, reliable and environmentally responsible supplies of energy at prices reflecting market fundamentals.”

We also note the statement that the “dynamic and sustainable development of our civilization depends on reliable access to energy,” and that this “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.” We further concur strongly with the subsequent reference to the need to reduce energy poverty in developing countries.

The Plan of Action picks up on a point that OPEC has been emphasising for a long time, namely the importance of minimising uncertainty to improve transparency over energy market developments, and thus contribute to sound investment decisions and competitiveness. It goes on to state that “regular exchanges of timely and reliable information among all market participants are also essential for the smooth functioning of world energy markets,” and refers specifically to the roles of the International Energy Forum (IEF) and the Joint Oil Data Initiative (JODI). OPEC has played a big part in the development of the ministerial-level producer-consumer body, the IEF, and is one of the six international organizations that set up JODI, whose activities are supervised by the Forum.

All of this indicates a shift away from longstanding narrow, self-interested views of energy security to a greater appreciation of its broader, more universal nature. A more integrated global energy industry is partly responsible for this, with many traditional lines of demarcation between functions and between functionaries becoming increasingly blurred.

However, it also owes a lot to the big advances in dialogue and cooperation in recent years, in recognition of the fact that, if we all want a more stable and better-performing market now and in the future, then we all have a responsibility to try to bring this about.

OPEC itself entered into formal Energy Dialogues with three large regions last year — the European Union, China and Russia — and there are several significant observations from this. First, there has been the eagerness and readiness of the respective parties to engage in meaningful dialogue. Secondly, there is already a much clearer understanding of the respective views of the parties on many important energy issues, including energy security. And thirdly, the dialogues are already producing tangible results. For example, with the EU-OPEC Energy Dialogue, which was the first out of the blocks, about half a year before the others, joint actions have been agreed upon — and, in most cases, schedules set — for in-depth studies on carbon capture and storage, energy policies, refining sector investment needs and financial speculative markets; the two sides are also developing a proposal to establish an EU-OPEC energy technology centre. There has already been a joint round table on oil market developments and future prospects.

In addition to this, as the issue of energy security has gained greater prominence on the international political agenda over the past year or so, in the wake of the recent market volatility, high-level discussions on the topic have taken place on several notable occasions. “Energy security, a shared responsibility” provided the central theme of the Tenth International Energy Forum in Doha three months ago. The issue features prominently in the EU Green Paper on a European Strategy for Sustainable, Competitive and Secure Energy, which was published a month earlier. Energy security was mentioned at the US-EU Summit in Vienna last month. And, in the build-up to this month’s Summit in St Petersburg, there was an International Conference on Energy Security in Moscow in March, followed immediately by a G8 Energy Ministerial Meeting.

In OPEC’s official statement to the G8 Ministerial Meeting, we made the point that “the concept of ‘global energy security’ is so fundamental to life in the 21st century that every effort must be made to clarify its meaning, to gain a consensus on this and to ensure that its true principles are embodied in decision-making processes across the energy sector by at least the major players.” We also said that global energy security has many dimensions and that they include the following.

It should be universal, applying to rich and poor nations alike. In particular, it should seek to honour the spirit of Johannesburg 2002, the UN World Summit on Sustainable Development.

It should be reciprocal. Security of demand is as important to producers as security of supply is to consumers.

It should apply to all energy sources in a manner that is free from prejudicial regulatory and legislative measures, such as the very high levels of taxation imposed on oil products in many consuming countries, in contrast with low taxation, no taxation or even subsidies in other energy sectors.

It should apply to the entire supply chain. Downstream is as crucial as upstream, as we have seen recently, and refinery bottlenecks can have a major impact on steady, secure supplies to the consumer.

It should cover all foreseeable time-horizons. Security tomorrow is as important as security today, and provision must be made for this at all times through sound investment strategies. In recent years, we have seen how concern over security of future supply can significantly impact today's prices.

It should focus on providing all consumers — rich and poor — with the most modern energy products, meeting the highest environmental standards and benefiting from the application of the latest technology.

And it should be openly receptive to dialogue and cooperation among the leading players in the market, to facilitate the market’s sound evolution in a balanced and equitable manner both now and in the future.

As you know, of course, some of what we stated then can be found in the St Petersburg proceedings, in full or in part, to the letter or in the spirit.

Nevertheless, I should like to elaborate upon one or two of the points I have just made, because they impinge upon OPEC’s ability to provide consumers with the crude supply they require in a timely and sufficient manner, and I feel that they are still not well-enough understood by many consumers.

I am referring, in particular, to the reciprocal nature of energy security, and wish to stress that this is important not just for producers, but also for the industry as a whole. Security of supply and security of demand are mutually supportive.

If our Member Countries — which collectively possess the majority of the world’s proven crude oil reserves — are to provide the necessary production capacity as required in the years ahead, in an industry where huge upfront investment is required and the lead-times are long, they obviously need to have as clear a vision as possible of future demand potential. Uncertainty over future demand translates into large uncertainties over the amount of oil that Member Countries will eventually need to supply, signifying a huge burden of risk. Even over the medium term to 2010, OPEC’s projections, based on alternative feasible scenarios, show an estimated range of uncertainty of $50 billion for required investment, increasing to $140 bn by 2015 and as much as $240 bn by 2020.

There is, of course, only so much one can do to predict future economic trends and advances in technology. However, what can prove of immeasurable benefit to investors in the oil industry are more transparency and predictability with economic, energy and environmental policies in consuming countries, since the impact of these on oil demand can be so large that they can severely compromise existing, carefully drawn-up, heavily financed investment schemes in new production capacity. All parties, let me remind you, benefit from the provision of production capacity that is timely and sufficient. The market can be in a sorry state if this does not arise. Everyone in the industry has suffered heavily at one time or another, in this respect. The issue of security of demand, therefore, is a very genuine one for oil-producing developing countries and for the world at large.

Let me look at another issue that crops up in discussions about energy security and also featured in St Petersburg — renewables. We agree that these constitute an important option that needs to be developed at every opportunity. However, in reality, there are still many hurdles to overcome, and it is likely to be decades before renewables acquire a significant share of the world energy mix. Currently, they account for around 11 per cent of the total world energy mix, excluding hydro, and are expected to retain this proportion up to 2025, despite an increase in absolute terms.

Therefore, with due attention to environmental concerns, all other available energy sources must be accessed, enhanced and utilised in the meantime to tackle the dire problems of mankind and support sustainable development.

OPEC shares the view of most analysts that energy supply will continue to rely primarily on fossil fuels in the coming decades and that oil will remain the leading commercial energy source. We see oil accounting for close to 40 per cent of energy demand over the next two decades.

Advances in technology continue to make oil a cleaner, safer and even more desirable fuel. Indeed, the oil industry has a long history of successfully improving the environmental credentials of oil, addressing concerns of local pollution and improving air quality. Our Member Countries are committed to this.

Furthermore, there is the need to meet the challenges imposed by possible climate change, where technological options that allow the continued use of oil and gas in a carbon-constrained world must be considered. One promising example is carbon capture and storage (CCS), applied to large stationary sources of CO2 emissions, such as power stations and industrial sites, which account for over half the energy-related CO2 emissions. CCS can also be used in conjunction with CO2-enhanced oil recovery, which offers a win-win opportunity by not only storing CO2, but also increasing oil reserves in mature fields.

Ladies and gentlemen,

As I suggested at the beginning of this address, the tragic events of the past couple of weeks have highlighted concern among consumers about security of supply in a manner that is reactive and predictable, and yet not necessary, in the light of the essential fundamentals in the oil market at the present time. A broader picture about energy security — as opposed to merely supply security — emerged at the G8 Summit in St Petersburg. And yet, even here, we feel that more confidence could have been expressed about the willingness and the ability of oil-producing developing countries to service the growing world energy requirement in the years ahead.

We find this unfortunate, because of OPEC’s dedicated commitment to this task over many years, as demonstrated by its repeated actions to achieve market order and stability under sometimes the most challenging conditions, as well as its investment in the future, to make sure that the market has the oil it needs as and when necessary in the years ahead.

This is in strict accordance with the central objectives of the Organization, as embodied in its Statute, which was drawn up shortly after OPEC’s establishment in 1960 and whose principles have been reaffirmed in subsequent definitive documents, such as two Solemn Declarations by the Heads of State and Government. Indeed, only last September, OPEC adopted a comprehensive Long-Term Strategy, whose objectives relate to the stability of the world oil market, with fair prices, the security of regular supply to consumers and the security of world oil demand.

I hope that all of the this conveys the clear message about OPEC’s abiding commitment to energy security, as part of a shared responsibility among the global community, as was made clear in St Petersburg.

Thank you.