Energy Security and Supply

A Keynote Address delivered by HE Abdalla Salem El-Badri, OPEC Secretary General, at the Chatham House Conference entitled “Middle East Energy 2008" - Risk and Responsibility: The New Realities of Energy Supply - London, UK, 4 February 2008

Thank you Mr Chairman for your introduction …

Ladies and gentleman, I am delighted to be here today to deliver this keynote address on ‘Energy Security and Supply’.

Let me begin this afternoon by putting forward the question: what does energy security actually mean? Of course, at OPEC we appreciate the importance of energy security and supply, the theme of this session. This is clearly visible in OPEC’s actions, something I will return to later. But I feel that when examining energy security we need to paint a more complete picture.

The reason is that globalisation is bringing us all closer together and there is no avoiding the fact that we live in an increasingly interdependent world. From the energy perspective, there is a shift away from longstanding self-interested views of energy security to a greater appreciation of its broader, more universal nature.

So allow me to put forward a brief OPEC perspective focused on a number of energy security characteristics …

Energy security should be reciprocal. It is a two-way street. Security of demand is as important to producers, as security of supply is to consumers;

It should be universal, applying to rich and poor nations alike, with the focus on the three pillars of sustainable development and in particular the eradication of poverty;

It should focus on providing all consumers with modern energy services;

It should apply to the entire supply chain. Downstream is as crucial as upstream;

It should cover all foreseeable time-horizons. Security tomorrow is as important as security today;

It should allow for the development and deployment of new technologies in a sustainable, economic and environmentally-sound manner; and

It should benefit from enhanced dialogue and cooperation among stakeholders.

Turning to the title of this session — ‘Energy Security and Supply’ — we appreciate that consuming countries’ concerns focus on the secure and predictable flow of energy. With this in mind, and regarding oil, I would like to make two things clear. Firstly, the fact that conventional and non-conventional petroleum resources are plentiful and increasing. For OPEC Member Countries, these resource figures can be viewed in our Annual Statistical Bulletin. And secondly, from OPEC’s perspective, we are ready, willing and able to supply oil – as we have always done.

Our Member Countries continue to increase their production capacity substantially and are accelerating plans to bring on-stream new projects, so as to respond to future demand, both at home and abroad, while offering a comfortable cushion of spare capacity, for the benefit of the world at large. Overall, they have already committed more than $150 billion towards a crude oil capacity expansion of up to 5 mb/d by the end of 2012.

And, where possible, they have been increasing their presence downstream, at home and abroad, to ease some of the severe bottlenecks that have emerged in the refining sectors of consumer countries in recent years. For example, major crude distillation refinery projects in OPEC Member Countries are expected to add over 3 mb/d of additional capacity by 2012, representing an investment of close to $50 billion.

These are huge investments for OPEC Member Countries that have other pressing demand, such as the provision of healthcare, education and basic economic infrastructure.

It is also important to note that petroleum revenue plays a central role in the economic and social development of our Member Countries, with 75 per cent of OPEC’s total export revenue coming from that source in 2006; for many of these countries, the figure even exceeded 90 per cent.

This is why they need assurances of secure oil markets, predictable demand and stable prices, and why, in particular, they have gone to great lengths over the years to achieve these.

Today, the markets continue to be well supplied with crude, commercial crude and product stocks remain within the five-year average, and there has been no recent interruption in crude supplies. However, we do recognise that in terms of price, the current level is not supported by market fundamentals and OPEC is concerned about this situation …The reasons behind this divergence need to be examined.

What is clear is that it is not just about high price levels. It is also about price volatility.

In the near term, this creates a climate of nervousness and uncertainty, eroding confidence among stakeholders in the industry and making everyday transactions more complex and unpredictable. For the longer term, it makes it very difficult to devise and implement effective investment strategies.

The present rising oil prices are being driven largely by market speculators. Oil has become a financial asset, like other commodities. In addition, persistent refinery bottlenecks, ongoing geopolitical problems and fluctuations in the US dollar, also continue to play a role in pushing oil prices higher.

Clearly, nobody gains from such a situation. Volatility is damaging to all responsible parties in the industry, on both the producer and consumer sides. It is because of this that OPEC constantly monitors the market’s activity and continues to seek a balance between supply and demand, as well as a fair, stable price that is acceptable to both consumers and producers.

OPEC attaches great importance to this, which can be viewed in the recent Riyadh Declaration that concluded the Third OPEC Summit of Heads of State and Government in the Saudi capital last November. The “stability of global energy markets” is one of the three principal themes of the Declaration, and the provision of “reliable, affordable and competitive energy supplies” is central to this.

The importance of stability is also clear when we look at energy security and demand. And what I should like to highlight here is that this goes hand-in-hand with energy security and supply. As the Riyadh Declaration also stated, there is a need to “underscore the interrelationships between global security of petroleum supply and the security and predictability of demand.” This is the business we are in.

Demand unpredictability can be viewed clearly when we look at the past. Here, I am talking about the price collapse and the halving of demand for OPEC oil in the 1980s. Many oil-producing countries were hit hard, leaving many heavily in debt and with much idle capacity. With vulnerable, single-product economies, it would take years for them to recover.

Thus, the huge investments OPEC Member Countries are making today, requires any demand uncertainties to be examined in detail. It is easy to see why.

To 2020, scenarios developed by the OPEC Secretariat highlight that the additional amount of oil required from OPEC ranges between 32 mb/d and almost 41 mb/d. In monetary terms, the corresponding range for Member Countries is somewhere between $230 billion and $500 billion, representing a huge uncertainty for Member Countries upstream investment requirements.

Existing policies and new initiatives that discriminate against oil, involving subsidies for other sources of energy, could impact oil demand in the short term but will not solve the overall production of energy security.

We welcome diversity in the overall energy mix, as well as the push to develop renewables. However, we need to give thought to how we proceed. For example, biofuels have recently been given impetus by fiscal and policy incentives, but the sustainability of large-scale supply and use of biofuels is becoming the subject of serious discussion, in terms of competition for land and scarce water resources, biodiversity and impacts on food prices. This I know is something being debated here in the UK.

The situation is also not helped, at the present time, by the low value of the US dollar, which means an erosion of purchasing power, and the uncertainties surrounding the global economy as the world continues to be impacted by the US subprime crisis. In addition, there are rising costs within the industry, as well as shortages of skilled labour.

What this means for producers is that there is a real prospect — in an industry with large upfront investment and long-lead times — of wasting precious resources on capacity that may not be needed. And on the other hand, without the confidence that additional demand for oil will emerge and the market signals that long-run prices are supportive, the incentive to invest can be reduced. This may lead to under investment and a situation where consumers’ needs are not met.

It all underlines the fact security of supply and security of demand cannot be decoupled. It is in our best interests to work together, and share the responsibility for a healthy and stable energy interdependent world.

This statement also touches on one of the other major global issues of the day: the protection of the environment. OPEC has long been active in this area, with regard to both local pollution and climate change and this was also a principal theme of the Riyadh Declaration. Indeed at the Summit, four Member Countries – Saudi Arabia, Kuwait, Qatar and the UAE – announced that they would contribute a total of $750 million towards funding research into energy, the environment and climate change.

Given that fossil fuels will continue to satisfy the overwhelming share of the world’s commercial energy needs and that there are adequate resources, the challenge going forward is clear. It is making sure that the emphasis is placed on how to develop, produce, transport, refine and deliver oil to end-users in an efficient, timely, sustainable, economic, reliable and environmentally-sound manner.

Central to this is technological innovation. Technological progress and innovation have contributed much to the industry in the past, and will continue to do so in the future. Our Organization is an advocate of developing and deploying cleaner fossil fuel technologies, notably carbon capture and storage. It is a proven technology that will not only enhance energy security, but also significantly reduce net greenhouse gas emissions from conventional fossil fuels.

In this regard, it is important to emphasise that developed countries having the technological and financial capabilities, should take the lead in the development and deployment of these technologies, as well as in its transfer to developing countries.

Ladies and gentlemen,

In this address, I have explained how OPEC and its Member Countries are proactively responding to international concern about energy security and supply. In doing so, I hope I have been able to convey to you that we remain committed to ensuring secure, stable, reasonably priced supplies of crude oil to the market at all times, in support of sound economic growth and the general welfare of mankind.

Though, what should also be recognised is that in today’s world none of us can act alone. It is important that all stakeholders work together, and continually dialogue and cooperate. Those of us who are in the energy business have a responsibility to do everything we can to provide energy to those without, and at the same time maintain and enhance security and confidence in the sustainability of the energy system on which the whole world depends.

Thank you for your attention.