The Petroleum Industry: New Realities Ahead?

Keynote address by Mr. Fuad Al-Zayer, Head, Data Services Dept. at the OPEC Secretariat, to the OPEC-organized session "The Petroleum Industry: New Realities Ahead?", at the Offshore Technology Conference 2007, Houston, Texas, 30 April - 3 May.

1 May 2007

[Slide 1] It gives me great pleasure to be here today at the Offshore Technology Conference 2007 and to be part of such a distinguished panel of oil industry experts put together by the OPEC Secretariat. On behalf of OPEC, I would like to thank you all for accepting our offer to be part of this panel. All in all, I believe we have all the ingredients for an interesting and insightful session focused on the new realities ahead for the petroleum industry.

So where should I start? Well, before I look at some of the ‘new realities’ this session alludes to, I feel it is appropriate to provide you with some of the consistent and perpetual realities we view when we picture the past, present and future petroleum industry. This also allows me to lay the basic foundation that underpins OPEC’s perspective for the world oil market going forward.

[Slide 2] The first constant concerns resources. We may have had predictions of the end of the oil age for over 100 years, but as I am sure you are all aware resources have continually expanded both geographically and by volume, and we expect this to be the trend for the foreseeable future.

Putting figures to these statements, estimates from the US Geological Survey of ultimately recoverable reserves have practically doubled since the early 1980s, from just 1,700 billion barrels to over 3,300 billion barrels. Almost a 100 per cent increase. This has been driven by innovation, with our industry continually finding new ways to enhance reserves and meet ever rising demand, particularly through technology, successful exploration and enhanced recovery from existing fields. For example, ten years ago the limit of development in the deep water of the Gulf of Mexico was 3,000 feet. Now it is 8,000 feet. We expect to see new technological developments further expand the world’s ultimately recoverable reserves.

[Slide 3] A further constant for the oil industry has been the growth in energy demand. And there will be no departure from this trend. Our reference case projections to 2030 show global energy demand increasing by around 1.7 per cent annually. It also highlights that fossil fuels will continue to provide more than 90 per cent of the world’s total commercial energy needs, with oil remaining the leading source in the global energy mix, although its share may decrease from 39 per cent to 36.5 per cent.

[Slide 4] Regarding oil, the reference case scenario displays world demand rising at an average annual rate of 1.4 per cent during this period, climbing from 84.1 mb/d in 2006 to 118 mb/d in 2030. Developing countries will increasingly capture a higher share, with consumption doubling from 29 mb/d to 58 mb/d. This is under the assumption that no particular departure in trends for energy policies and technologies takes place. For oil, the main source of future growth will continue to be in the transportation sector. With this in mind, the industry is obviously very sensitive to any technology and policy developments in this sector. These are issues I shall return to later.

[Slide 5] And finally, another constant is that OPEC is continuing to respond to the need for additional oil, underlining its longstanding commitment to market stability, which dates back to the establishment of our Organization more than 45 years ago.

Today, OPEC Member Countries (MCs) are investing heavily in maintaining existing capacity and building new capacity, to ensure that markets are adequately supplied at all times and there is a comfortable level of spare capacity.

Going forward, OPEC crude capacity expansion plans already in place are expected to result in almost 40 mb/d of crude capacity by the end of 2010, underpinned by more than 140 projects totaling more than $120 billion. In addition, many MCs are investing in the downstream, both inside and outside of their borders. OPEC is doing its share and is committed to ensuring order and stability in the international oil market, with secure supply, reasonable prices and fair returns to investors. The goal is a market where the fundamentals of supply and demand are balanced.

[Slide 6] Talk of supply and demand fundamentals, leads me nicely onto the ‘new realities’ and the first focuses on where supply will come from. According to our projections, non-OPEC crude oil supply – excluding non-conventionals – is expected to rise over the coming years and reach a plateau of 48 mb/d, before beginning a gradual decline from around 2020. This plateau is initially maintained as increases from Latin America, mainly Brazil, as well as Russia and the Caspian compensate for decreases elsewhere. The outlook is a little more conservative that previous assessments due to the inclusion of Angola in the OPEC grouping.

Additionally, OPEC’s most recent assessment of the market out to 2030 introduces a specific section on non-conventional oil supply and biofuels from non-OPEC countries In total, more than 10 mb/d of non-conventional oil supply plus biofuels will come from non-OPEC by 2030, 8 mb/d more than in 2005. The most significant growth is expected to come from Canadian oil sands, with some increases elsewhere, primarily in China. From OPEC’s perspective, the amount of crude oil that it is expected to supply increases markedly post-2010, rising to 38 mb/d by 2020 and 49 mb/d by 2030. Thus, going forward, the new reality is that OPEC MCs will be increasingly called upon to supply the incremental barrel.

[Slide 7] This anticipated reference scenario, however, is fraught with uncertainties. This is particularly relevant to those countries slated to step up the plate and meet the expected future demand growth. For example, doubts over future oil demand translate into large uncertainties over the amount OPEC MCs will eventually need to supply, signifying a heavy burden of risk. Out to 2020, scenarios developed by the OPEC Secretariat highlight that the amount of oil required from OPEC could range by close to 9 mb/d.

In monetary terms, the corresponding range for MCs is somewhere between $230 billion and $500 billion, representing a huge uncertainty for MCs upstream investment requirements, all with competing needs in such areas as health, education and infrastructure. In addition, a large amount of idle capacity would put much downward pressure on prices and be detrimental to vital export revenues.

[Slide 8] In fact, the risks have heightened recently. For example, recent policy initiatives that discriminate against oil, involving subsidies for competing fuels and higher tax rates, may see even lower demand for oil products in general, and for OPEC oil in particular. In the EU, Member States have agreed to adopt a binding 2020 target to increase renewable fuel use by 20 per cent. There are also ambiguities as to how each Member State will meet this goal. And the US is promoting the use of ethanol with subsidies and has set out ambitious targets for increasing the use of alternative fuels. The most recent proposal in the US – the Alternative Fuels Standard Programme – sees alternative transport fuel hitting almost 2.3 mb/d by 2017. This is approximately 1.5 mb/d more than what has been laid out in OPEC’s reference case over the same period.

The new reality in this situation leads us to the question: will producing countries need to revisit their investment plans, in the face of policies that lean towards a movement away from oil? Investments in capacity that will just lie idle do not make sense. While OPEC has offered in the past, and will continue to offer in the future, adequate levels of spare capacity for the benefit of the world at large, it cannot be expected to invest in what to all intents and purposes is a back-up security policy in case alternative fuel policy initiatives fail to materialize. It is important that there is more transparency in energy sector policy-making among consumer countries, so that better assessments can be made to undertake the appropriate capacity expansions and prevent the waste of precious financial resources.

[Slide 9] These uncertainties also impact downstream investment. OPEC analysis reveals that tightness in the refining sector, especially in light, clean products for transportation, has increased pressure on oil prices generally. The extent to which refining tightness will ease will depend on the evolution of what is currently a neck-and-neck race between refinery capacity growth and demand growth.

OPEC’s assessment of existing refinery projects indicates that investments, including new units and maintenance and replacement, total $455 billion, with the largest number of capacity additions and investment taking place in the Middle East. As with the upstream, however, timely investment needs to take into account policy initiatives. The new reality is that uncertainties related to the levels of future products demand and non-refined supplies are currently resulting in additional risks, for a sector traditionally characterized by low margins and high volatility.

[Slide 10] Alongside the investment issues I have highlighted, it must also be appreciated that we are presently in a period when costs are significantly inflated, in part, as a result of the low oil price environment ten years or so ago. This led to the implementation of downsizing and cost-cutting strategies in particular in the services sector. According to CERA, upstream costs have increased by 53 percent over the last two years. It leads me to the question: is this cost behaviour structural or cyclical? Whatever the answer, it is a huge challenge facing the industry and an issue that needs to be continually monitored.

The industry’s expansion is also being significantly constrained in the area of human resources. A shortage of skilled labour for drilling, engineering, procurement, construction and other services and a downturn in the number of students in energy fields are serious reasons for concern.

[Slide 11] The reality is that as an industry today it often appears that we have an image problem and we are becoming less attractive as a career choice. One of the reasons is that the industry is unfortunately often painted as one in its twilight years or the cause of many of the worlds’ ills. In fact, it is often difficult to fathom just how quickly viewpoints on our industry can change, as this slide underlines. To counteract these often less than positive views, the industry needs to make concerted efforts to help facilitate education and training in energy disciplines. We need to focus on how we can attract, develop and inspire the talented young people who will lead our industry into the future. It is this ‘next generation’ that will be at the fulcrum of our industry’s future technological and economic development.

[Slide 12] My final ‘new reality’, well it is something that has always been a reality, is the protection of the environment, both locally and globally. We can all see that this is becoming an increasingly global challenge, but let me stress that the oil industry has a long history of successfully improving its environmental credentials, for both the production and the use of the world’s leading energy source. For example, in the global environment arena our MCs have invested billions of dollars over the past decades in flared gas recovery projects. This represents a significant contribution to the reduction – by more than half since the early 1970s – of the amount of gas that has been flared per barrel of oil produced.

[Slide 13] What needs to be recognized is that our industry is vital to the future of all countries of this world. So, the creation and nurturing of technology that can be made compatible with the objective of limiting or reducing the level of greenhouse gas (GHG) emissions is a must. We need to look at technological options that allow the continued use of fossil fuels in a carbon-constrained world.

One promising option is carbon capture and storage (CCS), applied to large stationary sources of CO2 emissions, such as power stations and industrial sites, which together account for over half the energy-related CO2 emissions. CCS can also be used in conjunction with CO2-enhanced oil recovery. Last year, OPEC held a workshop with the EU in Riyadh on CCS, a demonstration of its commitment to this technology. It is also joining the IEA GHG R&D Programme.

In the area of CCS and similar technologies, industrialised countries, having the financial and technological capabilities, should take the lead, by promoting large-scale demonstration projects. This includes through the possible use and probable redesign of the Kyoto Protocol’s Clean Development Mechanism (CDM).

[Slide 14] What all these realities point to is the fact we live in an energy interdependent world. It is a two-way street. The role of oil is equally important to the economic growth and prosperity of consuming-importing countries as well as to the development and social progress of producing-exporting countries. The concern of consuming countries for the secure flow of oil at reasonable price is matched by the concern of producers for predictable demand, non-discrimination against their products, access to markets, reasonable and stable prices for their exhaustible resources and adequate revenues for their socio-economic development.

It means that we need to develop and explore, existing and new avenues of cooperation, in the context of an increasingly interdependent world. Efforts at expanding dialogues are something our Organization has, and continues to devote much energy to. The most recent result of this was the establishment of energy dialogues between OPEC and a number of other industry stakeholders: the EU, China, Russia, a number of other non-OPEC producers and the IEA. This year these have already and will be broadened. In late March, there was a meeting with the Asian refinery community in Bangkok, and early talks will be held with Japanese officials from the Ministry of Economy, Trade and Industry in Tokyo.

Ladies & gentlemen,

[Slide 15] In all this talk of realities, perhaps the one word that springs to mind is balance: between the interests of producers and consumers; between security of supply and security of demand; between technologies – old and new; between NOCs and IOCs; between the various energy types; in the promotion of new policies; and perhaps most importantly between the three pillars of sustainable development. The focus is on ensuring healthy economic growth, rapid social progress and environmental protection in a mutually-supportive manner. In this regard, we also cannot forget that 1.1 billion people are currently living on less than $1 a day, almost two billion have no electricity and many people rely on traditional biomass for cooking and heating in unsustainable ways. The new realities for our industry, offers both challenges and opportunities. In the end, if challenges are to be met and opportunities seized, more cooperation is required to develop a more detailed understanding of the long-term development of the industry. OPEC is ready, willing and able to play its part.

Thank you.

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