OPEC & oil in an interdependent world

A speech by Dr Adnan Shihab-Eldin, Acting for the Secretary General, to the 31st Pio Manzù Conference, Rimini, Italy, 28-30 October 2005.

Excellencies, ladies and gentlemen,

Let me begin by thanking the organisers for inviting me to address this distinguished audience.

Responsible parties in the oil industry are as concerned about the long-term fundamentals as they are about current market developments. This is clearly true for the Pio Manzù Centre, just as it is true for OPEC. Indeed, it was only last month that OPEC's Ministerial Conference adopted a comprehensive long-term strategy, to provide a coherent, consistent vision and guiding framework for the Organization's future.

OPEC broadly agrees with the three decisive challenges defined by the organisers in their forward to this conference, relating to growing energy demand, the economic development of poorer nations and environmental harmony. These tie in closely with OPEC's own longstanding aims and objectives, which were reaffirmed last month with the adoption of the long-term strategy.

OPEC is fully committed to market stability at all times, with secure supply, reasonable prices that are equally rewarding to producers, investors and consumers, and consistent with robust economic growth, especially for developing economies. This commitment underlies OPEC's market-stabilisation measures, which are built around maintaining adequate spare capacity and ensuring that this is used to help balance the market and keep it well supplied.

These measures have met with much success over the years, enabling OPEC to handle challenges in a timely and effective manner, such as during the supply disruptions in 1990 and 2003, as well as the recent unexpected demand surge.

But the market developments over the past two years have been more complex, with the initial price rise attributable to the high oil demand growth that started in 2003 and accelerated in 2004, to such an extent that slowing growth in non-OPEC crude oil supply could not keep pace with it. However, the market has been well-supplied with crude throughout most of this volatile period. Indeed, this has been very much due to OPEC's timely efforts to increase both actual oil production - by more than 4.5 million barrels a day since 2003 - and production capacity - so as to rebuild a sufficient level of spare capacity, which now exceeds 2 mb/d. Further increases in OPEC capacity already underway, of over 5 mb/d to more than 38 mb/d by 2010, mean that this healthy state will continue throughout this decade.

However, refinery capacity bottlenecks in major industrialised countries were soon found to be increasingly the generators of pressure on fuel supply to end-consumers, and hence on prices (and for products, in particular), since this was taking place in an often-nervous market with an unusually high level of speculation in futures. This will continue to be the case for a few years, until sufficient new refining capacity is built.

Two further aspects of the foreword are also to be welcomed: the need for ongoing, effective dialogue and the determination of broad policy directions now, rather than in the future. This very much echoes OPEC's longstanding calls over the years for enhanced dialogue and cooperation.

OPEC has, indeed, played a prominent role in advancing dialogue. This includes the establishment of a biennial ministerial producer-consumer dialogue, the International Energy Forum, whose Secretariat has been set up recently in an OPEC Member Country, Saudi Arabia, and the strengthening of dialogue between OPEC and the International Energy Agency. This year witnessed the launch of a formal energy dialogue between OPEC and the European Union, to regularly examine the energy challenges facing the two groups and the first Round Table of Asian Oil and Gas Ministers. OPEC is also in talks about launching formal dialogue with both China and APEC. Moreover, many leading non-OPEC producers attend OPEC's Ministerial Conferences as observers.

There are some areas of the foreword, however, that require clarification.

First, there is the suggestion that world crude oil production may reach its peak in the next decade. While it is true that oil is a finite resource and that production will peak one day and begin to decline, we are many decades away from this happening. It is an established fact that global proven reserves continue to grow on account of new discoveries, as well as reserve growth resulting from advancing technology and improved recovery. This has been as true in recent years as it has been true throughout the modern history of petroleum. For every barrel of oil consumed since the birth of modern petroleum industry a century and a half ago, there is more than one barrel of oil remaining as proven reserves and almost an equal amount of likely growth of reserves in existing fields, as well as another barrel of oil from future new discoveries. This is not to mention the huge potential from unconventional oil resources, like tar sands in Canada, already under development.

Nonetheless, we must not be complacent. We should continue to sharpen our knowledge and use our existing resources more efficiently. We should also seek to develop new energy sources, side by side with existing ones. There is ample time to do this economically, efficiently and in an orderly fashion.

With regard to other energy sources, the share of gas is rising steadily in the world energy mix, but it will be decades before its total contribution reaches that of oil. In contrast, coal's share is falling steadily. In some consuming countries, there is a rethink about nuclear, but notable increases are not expected for a long time, given the need for enhanced safety and improved safeguards. Renewables constitute an important option that needs to be developed and encouraged at every opportunity; but, in reality, starting from a low base, it is likely to be a long time - decades, rather than years - before renewables acquire a significant share of the world energy mix, even with the most ambitious double-digit growth rates, such as for wind power.

There will be enough oil reserves to meet continued world oil demand growth, which we forecast to reach 110 mb/d by 2025; most of the growth is in developing countries, for the transportation sector. With more than 75 per cent of proven global crude reserves, OPEC itself has the resource base to meet the growing oil requirement for decades to come, to ensure that the market remains well-supplied with crude, at reasonable prices that are compatible with robust growth in the world economy. We are also seeking to produce oil that is cleaner and more efficient than ever before, so as to meet the increasingly stringent demands of the modern consumer in rich and poor countries alike. Sequestrating CO2 in depleting oil fields for the enhanced recovery of oil is one example that can contribute effectively to address the climate change concerns.

OPEC will continue to pursue sound investment strategies, to provide the required oil as and when it is needed. However, many uncertainties make such planning difficult, in an industry where lead times can be very long and capital requirements enormous. Future economic growth rates, consumer government energy and environmental policies, technological advances and the oil price path lie at the heart of these uncertainties. Every effort must be made, therefore, to reduce such uncertainties and share the risks involved among the principal parties in the market. In short, the availability of reserves is not the issue for now; rather, it is more a question of timely deliverability.

Finally, the foreword raises the important issue of security of oil supply. This is a longstanding issue and came to the fore in the 1970s, when market conditions were very different, as were perceptions of events. If one looks back over the past two decades, one would find that, even when there have been supply difficulties in producing countries, OPEC has acted quickly to make good the shortfall in the market.

The last thing oil-producing developing countries want is an unstable oil market. The revenues they receive from petroleum sales are essential for financing their economic and social development, to an extent that may not be fully appreciated by established industrialised nations. This is in addition to the part that must be reinvestment in the upstream to meet rising demand. It is in the best interests of these producing countries to ensure that every possible measure is taken to achieve - and maintain - market stability at all times. The advantages of a sound oil market extend well beyond OPEC's Members, since there are, indeed, more than 30 oil-exporting developing countries, including at least ten in Africa, among them some least-developed countries, and a sound oil market can make a significant contribution to sustainable development and the eradication of poverty in these countries.

With regard to the take from oil, let me point out that, collectively over the past ten years, the G7 countries' oil product tax revenues were higher than the petroleum revenues received by OPEC's Members. Only in 2004 did this picture change somewhat. To put this in context, the combined GDP of all OPEC's Member Countries, with a total population of more than 600 million, is less than that of individual major consuming countries, such as the UK or Italy.

Excellencies, ladies and gentlemen,

Let me conclude by emphasizing that, in the 21st century, the undeniable benefits from oil, on development and economic growth, should and can be extended to, and be felt in, the world at large, especially in developing countries, which have, for the most part, missed out on these benefits in the past. To achieve this requires an open, frank approach to dialogue and cooperation among all the parties concerned, based on a careful, objective examination of all the main issues and facts. This is why OPEC welcomes the opportunity to participate in conferences like this, and commends the Pio Manzù Centre for making this possible.

Thank you.