World Oil Outlook 2007

Presentation by Mr. Mohamed Hamel, Head, Energy Studies Department, to the Press Conference launching the "World Oil Outlook 07", at the OPEC Secretariat in Vienna, Austria, 13 September 2007

[Slide 1]
Ladies and gentlemen, good morning.

It gives me great pleasure to present to you today the 2007 OPEC World Oil Outlook.

[Slide 2]
Allow me to turn straight to some of the main take-aways from this publication.

Firstly, it is clear that energy demand is set to grow for the foreseeable future. Moreover, oil is expected to maintain its leading position in the energy mix.

Demand growth is stronger in developing countries throughout the period; however, oil use per capita will remain well below that of OECD countries.

In meeting this demand, the resource base is clearly sufficient, and both OPEC crude and other sources of oil supply will increase. However, there are considerable uncertainties that might affect the demand for OPEC oil in the future. This signifies a heavy burden of investment risk and a large uncertainty over future OPEC member countries’ oil-related export revenues.

In our assessment, we also identify the downstream as being important for market stability, probably more today and in the future than in the past.

The outlook also highlights that increased use of fossil fuels could be made compatible with the protection of the environment, in particular through the use of cleaner fossil fuel technologies, such as carbon capture and storage.

Finally, another feature that emerges from this assessment is the increasing energy and economic interdependence between nations, which is a welcome development, as interdependence is the way forward for enhanced energy supply and demand security.

[Slide 3]
This graph shows how, in the reference case, energy demand increases by an annual average rate of 1.7%, rising by more than 50% by 2030 compared to 2005.

Fossil fuels will continue to provide more than 90% of the world’s total commercial energy needs.

Oil will remain the leading source of energy, with its current share declining only slightly over the next two decades.

Gas is expected to continue to grow at fast rates, steadily approaching coal in its importance in the energy mix, although coal has seen impressive recent growth.

The total contribution of hydropower, nuclear and new renewables will remain relatively modest, despite the extreme high growth rates for some renewables.

[Slide 4]
Turning specifically to oil demand, the reference case sees demand rise by 34 mb/d from 2005 to 2030, reaching 118 mb/d by 2030, which translates into an annual average increase of 1.4 mb/d.

As can be seen from this slide, developing countries are set to account for most of this rise, with consumption doubling from 29 mb/d to 58 mb/d.

Nevertheless, throughout the years to 2030, developed countries will continue to consume more oil than developing nations.

[Slide 5]
However, as shown on this figure, oil consumption on a per capita basis continues to throw up sharp contrasts. As we can see, by 2030, North America will be consuming close to 20 barrels per person annually, and Western Europe over 10 barrels, whereas China will be using just 4 barrels per head, while other Asian countries will be at even lower levels, below two barrels per capita.

[Slide 6]
Focussing upon demand by sector, transportation will be the main source of future oil demand increases, by 18 mb/d over the period 2005-2030, or at an annual average rate of over 0.7 mb/d, slightly higher than over the past 25 years.

In the OECD, transportation demand is expected to continue to rise, by 4 mb/d to 2030, while in developing countries, demand from the transportation sector will rise by 13 mb/d. This illustrates in particular the greater potential for growth of the stock of vehicles in developing countries, where car ownership is still far below those levels seen in OECD countries.

This graph also demonstrates that no significant growth in oil demand can be expected in the electricity generation sector. Some increases are expected, however, in the industrial and residential sectors, for example as urbanisation supports the gradual shift away from traditional fuels.

[Slide 7]
Turning to the supply side, as I have mentioned, we see resources as being sufficient to meet future demand. Ultimately recoverable reserves of conventional oil have practically doubled since the early 1980s. In addition, there is a vast resource base of non-conventional oil to explore and develop.

In meeting the growing demand, both OPEC crude and other sources of oil supply will rise.

The call on OPEC crude by 2010 will likely not exceed 2005 levels in the reference case. In the longer term, OPEC crude oil supply rises, to reach 49 mb/d by 2030. Other sources of oil increase to 69 mb/d by 2030 in the reference case. This means that OPEC crude will account for around 40% of world oil supply by then, not far different from the situation today, while other sources of oil supply will account for close to 60%.

Of these other sources, increases will come mainly from a rise in crude oil supply from Brazil, Russia and the Caspian, and increases in biofuels and other alternatives and Canadian non-conventional oil, compensating for declines elsewhere, in particular the North Sea.

OPEC non-crude supply, primarily natural gas liquids, is also set to rise strongly.

[Slide 8]
The reference case sees more than 10 mb/d of non-conventional oil supply plus biofuels coming from non-OPEC by 2030, 8 mb/d more than in 2005, as demonstrated in this figure.

Biofuels are a welcome addition to the diverse sources of oil supply. Nevertheless, the potential growth for biofuels supply must be balanced against sustainability issues.

The impacts of large-scale production and trade of biofuels must be addressed in terms of land-use changes, competition with food supply and water resources, and impacts upon biodiversity.

Even the impact of large scale biofuels use on air quality in urban areas has not yet been fully assessed.

Moreover, greenhouse gas mitigation costs using biofuels are extremely high, and, in many regions, the energy and environmental balance of these fuels is negative.

[Slide 9]
Let me turn now to alternative scenarios.

This slide shows estimated required OPEC crude oil under three scenarios, and clearly illustrates the wide range of possible demand levels for OPEC oil.

By 2020, the range of demand of OPEC crude is as high as 41 mb/d or as low as 32 mb/d, that is an uncertainty range of 9 mb/d.

By 2030, while the reference case sees OPEC crude at 49 mb/d, a lower growth scenario leads to only 36 mb/d of OPEC crude being required.

In addition, we see downside risks to demand being more substantial than upside potential.

Moreover, recent pronouncements of ambitious biofuel targets amplify uncertainties for future demand for OPEC oil.

[Slide 10]
Here we see how uncertainties over future oil demand translate into a wide range of possible levels of necessary investment in OPEC member countries. Even over the medium-term to 2010, there is an estimated range of uncertainty of $50 billion for required investment in the upstream, increasing to $140 billion by 2015.

The issue of security of demand is therefore a real one, and is a legitimate concern for OPEC Member Countries. Why?

Well, firstly, there is the very real prospect of wasting precious resources on capacity that would not be needed.

Secondly, a possible effect of the emergence of large levels of unused capacity would be downward pressures upon oil prices, resulting in a huge loss of revenues; and OPEC Member Countries, as developing countries, would be adversely affected in terms of available resources for education, healthcare, infrastructure, and so on.

Thirdly, lower revenues would, in turn, negatively affect available resources for future investment, with further subsequent market instability a distinct possibility.

On the other hand, another implication of this uncertainty can be to raise questions over whether future capacity will be sufficient.

All of this demonstrates the inseparability of security of demand and security of supply.

[Slide 11]
Let me now turn to the important element of the supply chain of refining.

In addition to increased demand for refined products and the resulting need for distillation capacity expansion, there is globally a continued move towards lighter and cleaner products. Thus, the downstream sector will require significant investment to ensure that sufficient distillation capacity is in place supported by adequate conversion and desulphurisation.

However, scenarios for refining needs, as reflected by the orange range in the slide, compared with scenarios for distillation capacity additions in the coming years (represented by the columns) indicate a continuing tightness in the refining sector, at least up to 2010. This is on top of expected persistent tightness in conversion and hydrotreating.

Global downstream investment requirements related to the expansion and maintenance of required refining capacity up to 2020 are projected to be $450 billion in the reference case.

Moreover, inter-regional oil trade should increase by 13 mb/d, with trade patterns evolving towards an increased importance of Asia as a crude and products import hub.

[Slide 12]
Despite challenges that include rising costs, shortages in skilled labour and experienced professionals, rapidly changing policies that put a strong emphasis on alternative fuels, and other policy initiatives that make demand prospects uncertain, OPEC Member Countries are investing in both the upstream and the downstream.

In the upstream sector, over 120 projects amounting to investments of more than $120 billion are expected to increase crude production capacity by more than 5 mb/d by 2012 from current levels.

In the downstream, while the main responsibility for expansion lies with consuming countries, existing projects in Member Countries should result in more than 3 mb/d of additional distillation capacity by 2012, with investment levels exceeding $60 billion.

All of this is a clear demonstration of OPEC’s commitment to supporting oil market stability.

[Slide 13]
No discussion of the World Oil Outlook is complete without addressing the need for environmental protection, one of the three pillars of sustainable development, together with economic development and social progress. The oil industry has a long history of success in developing and introducing cleaner oil technologies, cleaner products, reduced flaring, and so on. Indeed, the trend for more stringent fuel quality specifications is set to continue.

At the global level, expected increases in CO2 emissions give rise to concerns over possible impacts upon the climate. This points to the need for developing, deploying and transferring cleaner fossil fuel technologies. One example is the technology of carbon capture and storage, with its large potential for reducing net greenhouse gas emissions at relatively low cost. To this end, developed countries bear a historic responsibility, and, with the means at their disposal, should take the lead.

[Slide 14]
So, some concluding remarks. Firstly, increasing interdependence between nations is a fact – and it is important to recognise that energy security is a two-way street, with security of demand the flip side of the coin of security of supply.

Climate change concerns mean that we must make the consumption of fossil fuels consistent with a carbon-constrained future.

In the quest for sustainable development, the overriding priority is poverty eradication facilitated, to an extent, by improved access to modern energy services. In this regard, it is useful to recall the role played by our sister organisation, The OPEC Fund for International Development, or OFID. Indeed, you may have noticed the World map in our foyer, which documents the presence throughout the globe of this important organization.

I would also like to reiterate that OPEC is committed to supporting market stability as, indeed, was reaffirmed in its Long-Term Strategy that was adopted by the Ministerial conference in September 2005, copies of which are also available.

Finally, open, positive, pragmatic dialogue with all parties must constitute the main means of turning future challenges into opportunities. The World Oil Outlook can be seen as an integral part of that process.

[Slide 15]
Thank you for your attention, I’d be happy to take any questions you may have.

World Oil Outlook 2007 Presentation

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