The future of oil and gas and the resultant challenges and opportunities for NOCs

Keynote address by Mr. Fuad Al-Zayer, Head, Data Services Dept. at the OPEC Secretariat, to the "World National Oil Companies Congress, London, U.K., 25-26 April, 2007

Distinguished delegates, ladies and gentlemen,

Let me first begin by thanking the organizers for their kind invitation to deliver this keynote address on “The future of oil and gas and the challenges and opportunities for NOCs”. On a personal level, the theme of this conference is especially dear to me since I worked for an NOC for more than 20 years.

If I were speaking to you four decades ago, our attention would, most likely, be focused on multinational oil companies, notably the so-called “Seven Sisters”. However, the early 70s witnessed the birth of a stronger, high performance NOCs we know today. The fact that this occurred about a decade after the birth of OPEC is no coincidence. During the 60s, OPEC spent a lot of time examining the role of the then weak NOCs, to help them coordinate their activities in the international oil market and undertake appropriate programmes of action. A Landmark declaration statement of petroleum policies in Member Countries encapsulated OPEC concern in 1968, key clauses include that “Member Countries should be in a position to undertake themselves directly the exploitation of their hydrocarbon resources”. During the 70s, the situation changed. Many producing countries nationalized their oil industry, thus reaffirming sovereignty over their natural resources. By 2005, NOCs controlled 77 per cent of global proven oil reserves. Today, 14 of the top 20 oil producers are NOCs or newly privatized NOCs. This includes Saudi Aramco, National Iranian Oil Company, INOC of Iraq, PDVSA, Sonatrach and NNPC from OPEC Member Countries.

I wanted to start with this brief background in order to appreciate the importance of advanced, dynamic NOCs to oil-producing developing countries. In turn, this will help us pursue our discussions today in a more meaningful and rounded manner.

So, what is the outlook of the oil and gas industry today? Overall, we can say that the future of oil and gas is very bright.

On the demand side, all forecasts point to a rise in demand for both oil and gas. Oil demand is expected to rise by an average of 1.4 p% per year, and to make up around 36.5% of the world energy mix by 2030 or about 120 mbpd, according to the OPEC reference scenario. The share of gas, on the other hand, is expected to climb to over 27% cent by 2030, up from over 23 per cent at the moment. Industrialized countries will continue to consume most of the energy, while the bulk of demand growth is expected to come from the Asian developing countries, in particular from the booming economies and populations of China and India, accounting for about 86% of the global demand. As you can see, oil has long been the leading source in the global energy mix, and this is expected to remain the case for the foreseeable future. As a result, NOCs will continue to play a significant role to deliver the additional barrel.

Please allow me to underline that OPEC understands the importance of energy for the social and economic development of the world, in particular for developing countries. We know that societies cannot develop without energy: roads and bridges cannot be built, large-scale agricultural projects cannot be implemented, and the communications infrastructure that is so crucial in enabling citizens to participate and compete, in the global economy cannot be laid without energy. As an organization constituted by developing countries lucky enough to have been endowed with natural resources, we support poorer nations in their quest for realizing their economic growth objectives. Since it was founded in 1976, the OPEC Fund for International Development has extended a total of over US$8.5 billion in development assistance to non-OPEC developing nations.

As for the supply side, we see that OPEC’s role as a world oil supplier is forecasted to rise during the first quarter of the twenty-first century. We fully expect that the petroleum industry will be able to meet these increases in demand. What is notable is the projected shift in the origin of the supply: in the short term, growth of supply is likely to come from non-OPEC countries, but OPEC will be responsible for an increasing share of global oil supplies in the long term. NOCs of OPEC Member Countries are presently undertaking numerous capacity expansion plans that will result in almost 40 mbpd of crude capacity by 2010, an increase of 5 mbpd, underpinned by more than 100 projects totalling US$100 billion.

Moving Downstream, our analysis reveals that tightness in the refinery sector has been the result of tightness across all basic functions of the refineries. OPEC NOCs are also taking on the burden of investing downstream both in their own countries and in consuming countries. OPEC NOCs alone are planning to expand refinery capacities by 5 mbpd.

These two aspects—growth of supply from OPEC Member Countries and increased demand—clearly point to a strengthened role for NOCs in the global oil industry. NOCs will continue to be called upon to provide reliable sources of energy to the world, as they have been throughout the industry’s history. While the industry has been discussing how risky it is for NOCs to control reserves, perhaps it is worth recalling that NOCs have always met demand for every single barrel of oil. Nonetheless, we believe that NOCs are part of a larger whole and will not be able to meet the challenges without collaborating closely with IOCs and other key players. Together, oil companies—whether national or international—are the central driving force in the oil industry, right across the supply chain, from exploration and production, through processing and transportation, all the way to marketing, sale and distribution. Strong partnerships between the public and private sector are to be encouraged, especially given the challenges that the oil industry is facing.

So, what are these key challenges facing the Oil & Gas Industry in general and NOCs in specific? The first has to do with technology. Oil companies must continually seek to develop new technologies, for example to enhance recovery from mature oil fields and deep offshore locations. Technological developments have already brought important changes in the industry in the past. For example, with regards to deepwater exploration, 10 years ago the limit of development in the Gulf of Mexico was about 3,000 feet. Today it is 8,000 feet. Technological advances also promise to blur the distinctions between conventional and non-conventional oils by making it easier to extract and refine tar sands. The oil industry has a history of innovation and we are confident that this will continue.

Another challenge facing the industry is that of the rising costs of projects: drilling costs alone have increased by 5% since 2003, with steel prices rising by 40% since 2004.

A related challenge that contributes to high rise projects is that of labour shortage. This has contributed to increasing wages by about 15% in 2005 alone. Over the past 18 months, the situation has worsened mainly due to the early retirement of professionals. While the average age of employees in the oil and gas sector is around 47 years, the average retirement age is just 55. Clearly, the industry as a whole must become more proactive in recruiting and training new engineers, geologists, technicians and managers. Given their close relationship with their respective governments, NOCs can work with governments to facilitate the educational and professional mobility of citizens in this sector. OPEC Member Countries and NOCs are taking action to reduce this shortage by developing programs that facilitate the development of engineering expertise and build a trained workforce capable of contributing to the local economy. This is an area that can benefit a lot from NOC-IOC and NOC-NOC cooperation.

The environment debate poses another challenge, one that the industry takes very seriously. NOCs have been active in combating local pollution—for example through initiatives that prevent oil spills and reduce gas flaring—as well as tackling the larger issue of global warming. OPEC supports the development of carbon capture and storage (CCS) technologies, which hold great promise for making the use of fossil fuels more environmentally friendly. OPEC is committed to reconcile the forecasted rise in hydrocarbon use with a cleaner, safer global environment. The industry has a long history of improving the environmental credentials of oil, in both production and use. This will remain a priority in the future for our NOCs. This also can benefit great deal from NOC-IOC cooperation.

Another challenge facing NOCs relates to uncertainties of demand. Until recently, the matter of energy security has been viewed primarily from the perspective of the need to secure constant and abundant supplies of affordable energy for consumers. The oil industry is beginning to understand that energy security requires a much more comprehensive approach, one that also acknowledges producing nations’ need for security of demand.

Consuming countries are sending mixed signals on future demand. On the one hand, there is a call for security of supply based on expectations that the world economy will continue to grow and that greater amounts of oil will be needed. At the same time, many countries are repeatedly taking measures to move away from fossil fuels. For example, the US Government has launched its “Twenty in Ten” initiative, which aims at reducing gasoline consumption in the United States by 20% over the next decade. While these are decisions that sovereign nations are fully entitled to make, it is worth reminding that OPEC Member Countries have, to date, spent large sums of money to provide ample supply for now and for the future. But, in the light of these uncertainties and out of concern that upstream investments might decrease, OPEC Member Countries might have to review their future capacity expansion plans. After all, it would make no sense for them to channel funds into facilities that might remain idle, especially in developing countries where these funds compete with the provision of basic services to citizens. Long term demand Roadmap is crucial to meeting producers own social & economic interests.

We believe that the key to overcoming the challenges listed above and minimizing uncertainties is through increased transparency, dialogue, partnership and cooperation. Dialogue should be widened and deepened to cover more issues of mutual concern. OPEC is presently engaged in formal Energy Dialogues with the International Energy Agency (IEA), the European Union (EU), China and Russia. We are also strong advocates of the role of the International Energy Forum (IEF) and the Joint Oil Data Initiative (JODI).

Distinguished delegates, ladies and gentlemen,

Please allow me to conclude that, we believe that successful collaboration between national and international oil companies, can play an important role in helping the industry meet the many and varied challenges that lie before it, especially when the consensus view is that world oil demand will continue to rise for many years to come.

The industry will see the emergence of stronger highly competence NOCs that will focuses both on its social obligations to its own governments & citizens; as well as being competence, profitable, and huh performance NOCs, that will continue to be reliable suppliers of energy to the world.

Thank you.