"Oil Outlook: Challenges and Opportunities"

Keynote Speech by Mr. Mohammed Barkindo, Acting for the OPEC Secretary General, to "Nigeria Oil & Gas 2006", Abuja, Nigeria, 3-5 April 2006

(Slide 1)
Ladies and gentlemen,

Let me begin by thanking the organisers for this invitation to present to an audience back in my home country of Nigeria. After spending much of the early part of this year in a cold and snowy Vienna it makes a welcome change to feel the warmth of Abuja.

The topic I have been asked to present on today – ‘Oil Outlook: Challenges and Opportunities’ – offers me a broad remit of possible discussion points: the outlook for oil production and consumption, recent oil price behavior, the importance of cooperation and dialogue, to name a few. However, it is difficult to focus on one particular topic without touching on the over-arching concern of our industry today, that of ‘global energy security’.

(Slide 2) This vital issue is of concern to us all. Here in Nigeria the revenues from oil are essential to the social and economic development of our citizens, as they are in other OPEC Member Countries, all developing nations. Without energy security this much needed revenue is put in jeopardy. For many in the developing world the energy security issue also wraps itself around energy poverty. Let us remember that today, 1.6 billion people in developing countries lack access to modern energy services. I will return to the critical matter of energy poverty later.

In the developed world the issue has also recently reestablished itself high on the political agenda. The increased visibility of energy security was observed at the recent G8 summit talks in Moscow, where the subject was top of the agenda, and it will also be an important topic of discussion at this month’s 10th International Energy Forum in Doha. It is an issue that has a bearing on today and tomorrow; our futures and our children’s futures.

This renewed focus is unsurprising given the recent upwards movement of energy and non-energy commodity prices, speculative behaviour linked to consumer concerns over the near-term availability of spare production capacity, the exceptionally strong economic and in turn oil demand growth of developing countries, particularly China, India and the Middle East, and the tightness in the downstream sector. Add into this mix, major natural disasters with which the market has had to cope with at short notice, and uncertainties that stem from other disruptive events, and it is understandable why concerns have arisen.

With this broad spectrum of issues, however, it is important that we clarify what the term ‘global energy security’ actually means. It is easy to appreciate how it can mean different things to different people, depending on which side of the fence they happen to be sitting.

First and foremost what needs to be understood is that security of supply and security of demand are two sides of the same coin. One cannot be achieved without the other. For all consumers and producers in this increasingly interdependent world, security resides in the stability of the entire market.

Let us look at the issues surrounding security of supply and demand in more detail and underline the means by which OPEC continues to play a positive role in enhancing ‘global energy security’.

A fundamental question arising in the context of global energy security is whether there is enough supply to meet the projected growing demand for oil. OPEC’s answer to this question is undoubtedly: yes. The idea that oil production is soon to peak needs to be dispelled. This view is recognised by a wide variety of respected oil industry sources.

(Slide 3) Over the long-term OPEC will be relied upon to supply most of the incremental barrel demanded, as non-OPEC supply is expected to eventually plateau, and the Organization’s position on security of supply remains the same as it did the day the Organization was formed in Baghdad in 1960. Its very first resolution refers to the assurance of “an efficient, economic and regular supply” of petroleum to consumers. Today this remains at the heart of OPEC’s existence. We need only look at recent responses by the Member Countries to the need for additional oil to confirm this.

First, OPEC's Member Countries have increased production by around 4.5 million barrels a day since 2002. This has, in turn, led to a steady rise in OECD commercial oil stocks. (Slide 4) Preliminary data for early 2006 showed levels both above last year and the average for 2001-2005.

Secondly, where possible, our Member Countries have accelerated their plans to bring on-stream new production capacity to meet continued demand growth and to reestablish a comfortable level of spare capacity. This spare capacity will be more than adequate to cover oil demand growth throughout this year, when the call on OPEC oil is expected to be slightly lower than in 2005.

(Slide 5) More increases in capacity have been planned — and are being implemented — for the rest of the decade. Together with the expected growth in non-OPEC supply and OPEC natural gas liquids, this means that cumulative world liquids production capacity will rise by around 12 mb/d or more over the next five years — well above the expected cumulative rise in demand of 7–8 mb/d over the same period. This points to significant increases in spare capacity over the coming years. OPEC capacity growth is underpinned by over 100 E&P projects totalling more than $100 billion, which is a demonstration of its long-term commitment to oil market stability, and security of supply.

In addition to these previous and future increases, in September 2005 OPEC also moved to make available to the market spare capacity of around 2 mb/d, should it be called for, following the Gulf of Mexico hurricanes. This decision was made, despite there being ample crude oil supplies with inventory levels lying above their five year average.

(Slide 6) And thirdly, severe downstream bottlenecks in some major consuming countries have been putting pressure not just on product prices, but also crude prices, especially light, sweet blends, at a time when the upstream has been well supplied. Inadequate past investment, increased demand for middle distillates, and increasingly stringent product specifications have been major factors behind this lack of effective global refining capacity. Today investments to the refining sector are also coming at a considerably slower pace than is warranted by expected growth in demand: a more orchestrated effort is clearly required to ensure sufficient capacities are in place in the future.

OPEC's Member Countries, although traditionally associated more with the upstream, have themselves taken the initiative to invest in downstream projects; this has been on their own and in partnership with others. Currently, 0.6 mb/d of refinery capacity is under construction, with an additional 1.9 mb/d planned. However, all of this does not escape the fact that downstream investment is primarily the responsibility of the international oil companies and consuming countries.

To meet future downstream challenges about $160 billion in capacity investment will be required by 2015 and another $150 billion needed for capacity maintenance and replacement of lost capacity. The emerging investment trends suggest that the downstream sector could very well remain a source of market instability over the coming years. It is therefore a pressing area for discussion among all parties, and ways need to be explored that could accelerate expansion plans.

Clearly, such actions, both upstream and downstream, come from an Organization that is committed to security of supply. This involves careful analysis of the market outlook, detailed planning and considerable upfront investment, perhaps diverting funds from other worthy domestic causes, in order to make absolutely sure there is enough oil on the market.

(Slide 7) Turning to security of demand, the mutually supportive partner of security of supply, uncertainty over future oil demand levels translate into a broad range of potential quantities for OPEC oil. Though energy demand is expected to grow, with oil expected to maintain its position as the leading supplier of energy for the next two decades, the levels of demand for OPEC oil may be affected by a variety of drivers. (Slide 8) This includes non-OPEC supply, energy and environmental policies of consuming countries, economic growth, and future technological developments. If there is no particular departure from past trends, oil demand might be expected to grow by something of the order of 1.5 mb/d annually over the next two decades. However, uncertainties are overwhelmingly skewed to the downside. Given the uncertainties, a scenario approach developed at the OPEC Secretariat in the process of developing its Long-Term Strategy suggests that the amount of oil that OPEC is projected to supply over the next 10-to-15 years could range by as much as 10 mb/d or more.

(Slide 9) These uncertainties have of course, huge financial implications and make investment planning a hazardous business given the considerably long lead-times and pay-back periods. By 2015, an estimated uncertainty of $140 billion for required OPEC investment can be envisaged. A range of possible demand and investment scenarios were recently published in OPEC’s Long-Term Strategy document. I should also stress that this $140 billion figure only accounts for upstream investment and would be even higher if we included the development of new infrastructure such as pipelines, storage facilities and ports.

(Slide 10) This clearly demonstrates OPEC's concerns that there is a real risk of wasting much-needed financial resources. Equally important, the emergence of large levels of unused capacity would lead to downward pressures upon oil prices. This would result in a huge loss of revenues, and OPEC Member Countries, as developing countries with keenly felt competing needs for financial resources, would be adversely affected in terms of available resources for such key areas as education, healthcare and infrastructure. Moreover, lower revenues would in turn, negatively affect available resources for future investment, with further subsequent market instability a distinct possibility.

Indeed, without the confidence that demand for OPEC's oil will materialise, the incentive to undertake investment can be reduced, which, in turn, can exacerbate concerns over eventual sufficiency of capacity in the future, and hamper the drive towards long-term oil market stability. It is in this context that there is a call for a ‘road map’ for oil demand.

The shared security of supply and demand perspective stresses the importance that the various oil industry participants – OPEC and non-OPEC, producers and consumers, as well as the international oil companies and other intermediaries – make every effort to collaborate and together reduce uncertainties and share the risks.

(Slide 11) In Africa this is no more important than in the Gulf of Guinea. This region has become the most active exploration and production area for oil and gas in the African continent, and one of the most active in the world. Its significance can be viewed in the formation of the Gulf of Guinea Commission and the number of international investors it attracts. Over the last three years supply from the region has increased by approximately 1.2 mb/d and its source as today’s leading supplier of sweet grades only enhances its global importance.

In fact, today oil exports from the Gulf of Guinea make up approximately 15 per cent of the oil imported by the United States, the world’s largest consumer. This is expected to increase as the United States continues its move towards more stringent product specifications. International collaboration, headed by the Gulf of Guinea nations, will be essential to the continued development of this high quality resource.

(Slide 12) OPEC recognises the value of collective dialogue and cooperation for the enhancement of energy security and continues to devote much effort in this direction, with dialogue now being both widened and deepened in an open and constructive spirit. As you may know, the most recent result of this was the establishment, last year, of energy dialogues between OPEC and, respectively, the European Union, China and Russia. Later this month, producers and consumers will meet at Ministerial level at the tenth International Energy Forum in Doha, in order to discuss at length the latest developments affecting the industry. Indeed, close involvement with the International Energy Forum and the establishment of its Secretariat in Saudi Arabia demonstrates clearly OPEC's commitment to this ongoing process.

A good example of this is JODI, the Joint Oil Data Initiative, in which OPEC has been a leading participant from its inception. High-quality information underpins well-functioning markets and can prove crucial on an everyday level and particularly in crisis, when consumer panics can be instigated by a mixture of actual disruptions, rumours and fear. In such situations, all industry participants should collaborate to counter panics with high-quality, timely information. Of particular note here is the need for better data on the evolution of demand and stocks.

(Slide 13) Finally I would like to return to the critical concern I highlighted at the beginning of my presentation today: that of energy poverty. For many in the world, energy security is not about the pumps being full, the public transport infrastructure ticking over, or the car starting up every morning. It is about having the very basic energy services as a means of alleviating poverty. More than half of the countries of the world have less than one car for every ten inhabitants, while there are many countries, including India and China, but mostly in Africa, where there are only one-to-two cars for every 100 of the population. With 1.1 billion people currently living on less than $1 a day, the World Summit on Sustainable Development declared at the highest level a global commitment to establish a strong link between poverty eradication and sustainable development. In fact, it is poverty eradication that comes first on the list of the eight Millennium Development Goals. What goes hand in hand with this is the eradication of energy poverty.

As I have said, 1.6 billion people in developing countries lack access to modern energy services. In addressing energy security, we must therefore ensure that attention remains firmly focused on the current state of energy poverty in developing countries. The overwhelming needs of developing countries must therefore be seen as an international priority.

In Africa, NEPAD spearheads efforts to alleviate the escalating poverty levels and underdevelopment of the continent. For example, NEPAD is working on increasing savings and capital inflows through further debt relief and is looking to strengthen cooperation between African Governments, multilateral institutions and the private sector. The focus is on sustainable development. Oil as a fuel and a means of generating revenue for worthy economic and social development provides an important contribution to this overriding concern.

Whilst it is essential that Africa has organisations such as NEPAD, it must also be recognised that the developed world must make definite progress in fulfilling the many already existing commitments to developing countries, especially in connection with capacity building and transfer of technology.

The energy security challenges for the oil market are to keep supply and demand working in harmony. The challenge of energy security is not something that will go away. It is something that needs to be thought about continuously. And I might add that these thoughts need to lead to actions. In this regard OPEC’s recent actions have displayed a commitment to these challenges as it looks to maintain market stability. Success in meeting these challenges leads us to a major opportunity: poverty and energy poverty eradication across the world. Energy Security will be fundamental to life for all in the 21st century.

Thank you. (Slide 14)

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