OPEC’s Strategy in Facing the New Energy Challenges

A Ministerial Address delivered by HE Dr Edmund Maduabebe Daukoru, OPEC Conference President & Minister of State for Petroleum Resources of Nigeria, at the Working Lunch of the 2006 World Economic Forum, Davos, Switzerland - 26 January 2006

Excellencies, ladies and gentlemen,

Thank you for inviting me to contribute to this Working Lunch/Ministerial Address at the Davos Energy Summit.

The title of the summit - “Managing Tectonic Shifts” - has, as its principal focus, the major developments that have been manifesting themselves in the energy industry over the past few years. These have been particularly apparent in the oil sector, the obvious leading sector in the energy industry and the one which relates directly to OPEC and its contribution to the global economy.

How do we see the new energy challenges, insofar as they relate to the oil sector?

Let us look at the events of the past two years in the oil market.

There has been the challenge of meeting exceptionally high levels of growth in oil demand from large emerging economies, especially China and India, as well as from some developed economies, such as the USA. High oil demand by itself is good news: it is a reflection of a healthy world economy, better social progress in many parts of the world, and, maybe, some success in poverty eradication, as this inevitably translates into higher energy intensity.

The challenge, however, is not only in the upstream, but also in the downstream. The upstream has been remarkably responsive, even in times of large weather-related supply disruptions, as we witnessed last year in the USA. On the contrary, it is now widely accepted that the price volatility of the past two years has been driven much more by downstream bottlenecks in consuming countries than by shortages upstream.

For the past three years, the market has been well-supplied with crude — thanks to OPEC’s timely actions. Yes, it is true that, in 2004, spare capacity reached its lowest level since the 1970s; but, with this behind us now, we can expect a comfortable cushion upstream to cope with rising demand for the foreseeable future — from both OPEC and non-OPEC producers. The positive role of spare capacity that OPEC offers to the benefit of the world at large will, I am sure, become more widely recognised with the passage of time.

Recent events have highlighted once again another challenge, and this is the need to reduce the impact of speculative activity on volatility and price levels. Unrestrained speculation can greatly exaggerate the impact of external events on the market, to the detriment of producers and consumers alike and with damaging repercussions further afield in the global economy.

However, if there is one outstanding challenge that has emerged — or, more accurately, re-emerged — it is the need to prevent rapid upheavals from occurring in the market in the future. The century began with three years of high market stability, which was to the satisfaction of all responsible parties, But, since then, we have been experiencing a very different and much more volatile situation.

This is by no means a new phenomenon. We have seen time and again throughout the 150-year history of the modern petroleum industry big swings in the market’s fortunes in the space of months, and sometimes even weeks, and this has been very damaging to the industry. Is there really a means of preventing this in the future? In posing this question, I am looking beyond partisan views. Phenomena such as these can become endemic to the industry, if left without an effective, central guiding influence.

I have isolated these challenges, because they have come to the fore in the volatile conditions of the past two years, and can, in that sense, be described as “new”. However, we have a broader vision of the challenges and some of these date from the foundation of OPEC 45 years ago, while others are closer in time. We recently reviewed these challenges and prepared a long-term strategy for our Organization, which was adopted last September, to provide a coherent, consistent vision and framework for the future.

The strategy is comprehensive in scope and covers a wide range of objectives, such as: achieving and maintaining fair, stable prices; meeting future demand; ensuring security of supply; and promoting the legitimate interests of Member Countries in multilateral agreements.

The strategy also identifies the key challenges that may constitute constraints for OPEC in the attainment of its constructive global objectives. These include uncertainties surrounding future oil demand, stemming from, inter alia, the prospects for the world economy, consuming countries’ energy and environmental policies, and technological developments. They also concern the supply side, taking into account the resource limitations, potential non-OPEC production, and the extent and timing of required investment, together with the associated uncertainties.

Dialogue among producers and between producers and consumers constitutes a crucial element of the strategy. It recommends that such dialogue should be widened and deepened to cover more issues of mutual concern, such as demand predictability. security of supply, market stability, investment, technology and the downstream.

The strategy covers many other areas that relate to the sound development of the oil industry in the future, upstream and downstream, utilising the latest technology to produce fuels that are cleaner, more efficient and environmentally friendly.

The point I am trying to make in all of this is that OPEC has been around a long time and has a long institutional memory in oil matters. We know that it is in the best interest of our Member Countries to ensure that the market operates smoothly and effectively at all times, in balance with the interests of the other stakeholders in the industry. We have demonstrated our commitment to market stability repeatedly over all time horizons, and have shown that we have had the vision, the responsiveness and the flexibility to cope with new situations as they arise. But we cannot work miracles, as we have seen recently, when factors beyond our influence or control have been primarily responsible for the price volatility in a market well-supplied with crude. Market order requires the support of all parties.

Thus, while OPEC has its own strategy in facing energy challenges, old and new, this will only be truly effective if it is accompanied by a spirit of cooperation between oil producers and consumers.

Thank you.