Short- and long-term energy security in the UNECE region: trends and prospects

Speech by Dr Alvaro Silva-Calderón, OPEC Secretary General to the Energy Security Forum, UN Economic Commission for Europe Committee on Sustainable Energy

Discourse Session: Interaction of Energy Security Risks & Financial Markets

Geneva, Switzerland, 20 November 2003

Ladies and gentlemen,

Energy security is so central to OPEC’s way of thinking that we welcome any chance we get to explain our position on this important topic. Thank you, therefore, for giving me such an opportunity today.

OPEC and its 11 Member Countries understand the very real concern many consumers have about energy security. Advanced forms of commercial energy services are essential for life as we know it today in fast-moving, hi-tech consumer societies. These societies would, without any doubt, suffer severe difficulties, if they were deprived of the required large levels of energy. Therefore, it is a matter of utmost importance for these countries to ensure that, at all times, they have access to sufficient quantities of energy, at affordable prices, and, better still, if this energy has sound environmental credentials.

OPEC’s commitment to security of supply in the international oil market can be clearly seen in its Statute, in its decisions, in its actions and in its relations with other parties.

The OPEC Statute, which was drafted shortly after our foundation in September 1960, declares: “The Organization shall devise ways and means of ensuring the stabilisation of prices in international markets, with a view to eliminating harmful and unnecessary fluctuations.

“Due regard shall be given at all times to the interests of the producing nations and to the necessity of securing: a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on their capital to those investing in the petroleum industry.”

These are not empty words. They have acted as the guiding principle behind our decisions and actions throughout our history. Even in the 1970s, contrary to popular belief, the sudden shortages in crude supply that occurred during that decade were the result of external political developments and not OPEC policy.

The most recent visible example of OPEC’s commitment to security of supply occurred earlier this year, with the hostilities in Iraq. Many people had predicted that this would lead to a sudden steep rise in oil prices and a period of protracted volatility. But this did not occur. OPEC ensured that the market was kept well-supplied with oil at all times, together with reasonable, stable prices, in accordance with the terms of our Statute. Indeed, at around the same time, there were serious unexpected cutbacks in output from two other leading oil producers, and the impact of these on world oil prices was again successfully handled by our Organization, with welcome support from some leading non-OPEC producers.

OPEC’s market-stabilisation measures revolve around keeping OPEC output at levels that will help maintain a price range of US $22–28 a barrel for our Reference Basket of seven crudes. Our “price band”, as we call it, is flexible enough to absorb reasonable short-term price fluctuations, as well as defining a price range which balances the interests of producers and consumers. If prices begin to settle outside the limits of the band, OPEC adjusts its production level accordingly, to correct the situation.

The principle of the price band has been well-received by the industry since its introduction three years ago, due to its realistic, practical and transparent nature, although — as one would expect — not everyone agrees with its upper and lower limits.

OPEC was able to introduce such an effective tool because it felt confident about what the market wanted, needed and could live with. While this confidence was partly due to the extensive experience OPEC has of oil market matters, it was reinforced by the rise in dialogue within the industry in recent years, dialogue which has been very much encouraged by OPEC. After all, an important pre-condition for any form of security is to actually talk to each other! This can then lead on to consensus and cooperation on important issues — as, indeed, has been the case.

For those of you who still remain unconvinced about OPEC’s good faith, let me put it another way. A commitment to security of supply is sheer common sense for oil-producing developing countries. The development of our domestic economies is heavily dependant upon the revenue we receive from petroleum sales on world markets. I am not just talking about volumes here. I am also referring to the need for a flow of revenue that is steady and predictable, since this is essential for planning and investment purposes. When looked at in this way, it is clear that oil-producing developing countries value security of supply as much as consuming countries, perhaps even more. We know that, if we rock the boat, then we are likely to be among the first ones to fall overboard.

This brings me onto the important reciprocal concept — security of demand. To obtain steady and predictable revenue, producers need steady and predictable demand. How can they make any plans for domestic development or for investment in future production capacity if their revenue flows are erratic and unpredictable?

It is all very well consumers expressing the wish to diversify sources of supply at their own discretion, to enact legislation to this effect or to radically revise fiscal regimes. But these actions may, in their own right, be detrimental to security of supply, particularly in the longer term, by creating serious doubts about future levels of demand. In the petroleum industry, investment involves long lead times and the life-cycle of some projects can stretch over decades, particularly with regard to gas supply infrastructure. Who in their right mind is going to commit billions to a long-term petroleum project unless they are absolutely certain that there will be a satisfactory return on their investment at the end of the day?

Gas producers with long-term supply agreements with some European countries, for example, have been deeply dismayed by the way the European Union introduces new legislation which affects these producers directly, without involving them in the discussion process and seeking to address their legitimate concerns. How can these producers assess future investment needs when they have to live with such a past experience, which may prove to be very costly for them?

The need for security of demand should by recognised by consumers as much as the need for security of supply. They are different sides of the same coin and therefore should be handled in a balanced manner, as the industry seeks to meet the world energy requirement in an efficient, effective and equitable manner. This energy requirement is substantial and is forecast to continue growing by an annual average of around two per cent up to 2020.

In the case of the petroleum industry, OPEC’s World Energy Model forecasts a 41 per cent rise in world oil demand, from 76 million barrels a day in 2000 to 107 mb/d in 2020. It projects even faster growth for the other major hydrocarbon, gas — 78 per cent — from 42 to 75 million barrels of oil equivalent a day in the same 20-year period. All in all, about two-thirds of the world’s commercial energy is expected to come from petroleum — oil and gas — in 2020.

OPEC’s Member Countries possess about 80 per cent of the world’s proven crude oil reserves and nearly 50 per cent of its natural gas and thus have the reserve strength to cope with the forecast rises in demand in the coming decades. Non-OPEC oil supplies are expected to reach a plateau in the meantime.

However, huge investment is required for this. For OPEC oil alone, the investment is estimated at nearly $100 billion by 2010 and nearly $200 bn by 2020. For the more costly non-OPEC oil, the figures are much higher. How can the industry — especially in developing countries — be expected to make such a massive financial commitment without reasonable guarantees that there will be enough customers to buy the petroleum throughout the projected life-time of the new facilities?

Ladies and gentlemen,

Energy security is a very big subject and I have only touched upon the issues that are of most concern to OPEC. These can be condensed into the assertion that energy security is a two-way process — for the petroleum industry, at least — and that it should recognise that security of supply and security of demand are complementary issues that merit similar fair and balanced treatment.