Address of the Acting for OPEC Secretary General to the 4th Joint OPEC-IEA Workshop

Delivered by Mr. Mohammed Barkindo, Acting for OPEC Secretary General, at the Fourth Joint OPEC-IEA Workshop, Oslo, Norway, 19 May 2006

Thank you Mrs Utseth for those kind words of welcome. For my colleagues and I, it is indeed a pleasure to have the opportunity to visit this beautiful city and I would like to thank our hosts, the Norwegian Ministry of Petroleum and Energy, for making this event possible.

Today’s workshop - the fourth to be held between OPEC and the IEA - reflects how the spirit of cooperation and dialogue has continued to gather pace since the joint initiative was started just a few years ago. It has already proven to be an established forum for improving bilateral relations and promoting a better understanding on a range of important issues. Whereas previous workshops dealt with supply issues, today’s workshop will concentrate on demand. The first workshop, held in Vienna in 2003, looked at oil investment prospects and the needs of the oil sector, while the second workshop, which convened in Paris in 2004, focused on the challenges involved in making the necessary investments available. It also studied the key supply drivers, uncertainties and their implications. Then in Kuwait last year, the third workshop covered the energy outlook and economic prospects for the Middle East and North Africa (MENA) region. Our deliberations today – on demand – therefore represent a further step forward for the initiative and give us the opportunity to closely look at another essential element that has a major influence on oil’s future direction. Our objective is to discuss the key issues and prospects for world oil demand and to pinpoint the challenges and uncertainties, both in the near and long term. There are a growing number of obstacles to accurately assessing global oil demand in the short, medium and long term, and we need to look at how these obstacles can be overcome. Our attention should also be drawn to oil consumption patterns and structures in the key growth regions and how they are evolving, as well as the impact of government policies on energy demand.

The OPEC-IEA workshops offer an important platform for brainstorming on such topical subjects as these. They also form an essential element in the dialogue between producers and consumers. I am pleased to note the increasing understanding that has come to characterize relations between consuming and producing nations in recent years. Studying, discussing and generally getting a better understanding of such issues as future growth patterns and how they will impact on supply, demand and prices can only be of benefit to us all in the long run. And as we go forward, it is vital to find a reasonable balance among the different interests of the stakeholders involved – in particular the producers and consumers.

Given the considerable uncertainties that surround today’s global markets, it is of paramount importance that we develop an outlook for demand that accurately reflects the requirements of the oil market in the near- to long-term. Events over the last few years have highlighted the urgent need to assess and reconsider the methodologies being used to forecast world oil demand. And although considerable efforts have been made to develop a more viable alternative to the traditional forecasting methods and models used, these have only met with limited success. Demand forecasting has become even more problematic in recent years, given the increasing share of oil consumption growth in developing countries. A key factor in determining demand growth is the energy policies of consuming countries. For this reason, a good understanding of policy developments and their potential impact on the major demand growth regions is essential for providing a realistic outlook for demand.

Looking ahead, all the forecasts tell us that there should be considerable growth in oil demand over the next 20 years or so – in tandem with expected global economic expansion. However, there are some uncertainties about the rate of this growth. OPEC’s Long Term Strategy (LTS), published last year, highlights the important role oil will continue to play in meeting future global energy demand. But it also warns of the challenges OPEC could face as a result of certain constraints. A major obstacle relates to the uncertainty surrounding future demand for OPEC oil, stemming from world economic growth, the policies of consuming countries, technology development, and the supply capability of non-OPEC producers. The LTS offers three different scenarios that depict how the future might develop taking into account varying degrees of uncertainty. None of these scenarios is set in stone, but it does give us an important indictor as to how uncertainty will continue to be a major influencing force in the oil market in the years ahead. And it is this very uncertainty that can prove so detrimental to all involved in the oil sector, as past experience has shown. For example, putting new capacity in place is an expensive business, so it is essential we acquire sound and reliable data as to what the required level of future world oil demand will be as over-investment is wasteful, just as under-investment could be damaging. Both are costly in their own way.

For years, OPEC has maintained some idle capacity, which has also acted as a cushion in the event of emergencies, such as with the hurricanes last year. Where demand is changing rapidly, OPEC may not be able to know what would be required of it and therefore may not be able to plan with a good degree of accuracy, hence the importance of knowing the needs of consumers.

Given the strong movement seen in energy prices over the past three years, today’s renewed concerns over energy security are not surprising. Yet OPEC has done all that it can to keep prices at reasonable levels, including increasing production by some 4.5 million b/d since 2002. The oil market of today is extremely sensitive. A wide range of factors, even seemingly minor and remote events, can affect the price – even though there is no actual supply shortage. In the upstream, we are doing our best to ensure capacity remains comfortably in line with demand, and things are also moving – albeit very slowly – in relieving the constraints in the downstream refining sector. What is of more concern to us is the effect geopolitics and the accompanying hype and speculation are having on prices. It has been estimated that a premium of up to $15/b is being added to today’s crude price as a result of these factors – factors that have no bearing whatsoever on market fundamentals. We feel that the governments of both the producing and consuming countries must do more to ease these political tensions. It is clear that prices will not fall until these anxieties abate. Every report and study one sees confirms there is absolutely no supply shortage. Just one look at how oil stocks have expanded to five-year highs in 2006 tells us that. The market determines the oil price, and if the fundamentals are in balance, then one has to look elsewhere as to why prices are being inflated. Remove the impediment of geopolitical concerns, tensions, and the resulting speculation and the oil price will find its rightful place in the market.

So what of the future? Well there is every indication that the years ahead will be even more challenging than the past as global demand for energy – especially oil and gas – continues to grow. Just as oil played a key role in fuelling the development of the industrialized countries in the 20th century, OPEC is confident it can play just as important a role in supporting the future growth of the economies of the developing world, where the pinnacle of future oil demand lies. Forecasts drawn up by the OPEC Secretariat in Vienna show that OECD countries will still account for the lion’s share of global oil requirements, but some 80 per cent of the future increase in world crude demand over the next 20 years or so will come from developing countries, whose oil consumption will almost double. With that kind of demand scenario, oil will certainly remain the fuel of choice in the foreseeable future. In fact, fossil fuels will be required to meet more than 90 per cent of the world's total commercial energy needs over the next two decades.

On the supply side, it is generally accepted that non-OPEC producers will not be able to match the demand growth forecast over the next 20 years and OPEC Member Countries will be expected to supply the incremental barrel. In fact, by 2025 OPEC production, including natural gas liquids, could be as high as 54 mb/d, compared with 30 mb/d now. In possessing two-thirds of the world’s crude oil reserves, the Organization has the level of resource base capable of comfortably meeting the increase in demand projected. OPEC Members have already expanded their production capacity – a process that is ongoing and will be adjusted as needs dictate. Current plans will see OPEC’s output capability rising to around 38 mb/d by 2010. That is 5 mb/d more than today. This action is testament to the level of responsibility the Organization attaches to satisfying consumers’ needs, as well as helping to ensure that global economic growth remains on track and is not derailed by any shortage of energy.

I can thus assure you that security of supply is – and will remain – one of OPEC’s top priorities, along with supporting oil market stability. However, security of demand also needs to be guaranteed and for that we require enhanced cooperation from the consuming countries. This entails more than just providing accurate and timely data governing consumers’ energy needs. We need to progress to the next stage where future dialogue is more advanced, more structured and embraces important policy and technical issues. It should also be widened to encompass the views of other oil industry players, such as the national and international oil companies and oil service firms, who also have a significant bearing on oil’s future direction. Determining predictability of supply and demand is essential for taking the industry forward in an orderly and structured fashion. It is the reason OPEC has been continually professing the need for regular and meaningful dialogue among producers, and between producers and consumers. We truly see this approach as being the key to forging a better understanding of the interrelated issues and problems facing us all. By holding such workshops as this one, we are able to discuss the major issues and challenges facing us today and in the future. This provides more transparency concerning our respective aims and aspirations, and gives us the knowledge and understanding that will hopefully guide us in making the right policy decisions in the years ahead.

Thank you.