OPEC Secretary General address to the Workshop on Integrating Environmental & Social Impact Assessments into Oil & Gas Projects

Delivered by Dr. Alvaro Silva-Calderón, OPEC Secretary General International Association of Oil & Gas Producers - Semmering, Austria, 17 November 2003

Ladies and gentlemen,

Thank you for inviting me to this beautiful part of Austria to deliver this keynote address. The organisers have done an excellent job in arranging this workshop, but I am sure the keen sportsmen among you will wish that it had been arranged a month or two later, because the Semmering area is famous for its ski resorts and the new season has not begun yet! It is also a wonderful area for walking at other times of the year.

The subject of this workshop is a very important one, and one that has risen to prominence in the petroleum industry’s agenda over the past couple of decades, as people realise that the true cost of any project can be far greater than might appear on a company’s balance sheet — and very often is.

It is particularly meritorious that a workshop is being held with the specific purpose of improving the way the industry handles issues of environmental and social impacts, by developing guidelines that are applicable to development projects in any geographical area. I understand that you have already received some revealing insights into this matter, with the case studies that were presented to you in today’s two sessions.

I was particularly impressed by the following sentence, which I have found in the workshop’s background pack, because I believe it sums up the situation facing the industry rather well:

“As responsible exploiters of hydrocarbon reserves, the exploration and production industry must meet the challenges of satisfying an increasing world demand for clean and cheap energy, whilst complying with international (and) national environmental regulatory requirements and satisfying the increasingly demanding environmental and social expectations of international and local communities.”

Our Staff at the OPEC Secretariat — just an hour’s drive from here, in the middle of Vienna — will continue to monitor the progress of your Taskforce as it develops its work, and will keep our 11 Members informed of your activities, since they are of much relevance to the oil and gas projects that take place in their countries.

We are all working in partnership with each other when it comes to exploiting the world’s finite petroleum resources, and so it is necessary to ensure that every effort is made to facilitate this process, including the handling of issues of environmental and social concern.

OPEC has almost 850 billion barrels of proven crude oil reserves, which is nearly 80 per cent of the global figure; but its actual share of world production at the present time is less than half of this, in terms of percentage points, at around 37 per cent. There is an even bigger discrepancy for natural gas, with world proven reserves of almost 50 per cent set against current marketed production of just 16 per cent. OPEC’s proven natural gas reserves total almost 87 trillion standard cubic metres, or, to equate them with crude oil, nearly 550 billion barrels of oil equivalent.

In other words, OPEC’s share of world production is well below its reserve strength for both hydrocarbons, and this has been the case for decades. The simple laws of arithmetic tell us that, all other things being equal, this imbalance will be corrected in the future and there will be a growing reliance on petroleum from our Member Countries. This will be particularly the case for crude oil, since, not only does OPEC have such a high proportion of the world’s reserves, but these reserves are much more accessible than those in other, high-cost regions of the world. OPEC clearly has the reserve strength to cope with the rising levels of demand for both oil and gas that are expected in the early 21st century.

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 gas — 78 per cent — from 42 to 75 million barrels of oil equivalent a day in the same 20-year period. Oil’s share of the world energy mix is expected to dip slightly to 38 per cent by 2020, while that of gas will rise from 23 to 28 per cent, overtaking solids, which will fall to 25 per cent.

With non-OPEC oil production likely to reach a plateau, OPEC’s Member Countries will be expected to satisfy most of the projected new demand. Our projections see OPEC producing 36 mb/d of crude in 2010, which constitutes 40 per cent of global supply, rising to 52 mb/d in 2020, a share of almost 49 per cent. Thus OPEC is expected to become an even bigger player in a petroleum industry that is itself expanding.

In investment terms, we are looking at very large sums of money. For OPEC oil alone, the investment is estimated at nearly $100 billion by 2010 and as much as $200 bn by 2020. For the more costly non-OPEC oil, the figures are much higher. And then there is gas, with the enormous costs involved in developing its infrastructure, particularly for transporting it vast distances to consumer markets.

To ensure orderly growth of the petroleum industry, it is essential that there is a stable base. OPEC seeks to provide this for oil through its pricing and production agreements. Our objectives are to ensure that the international oil market is kept well-supplied with crude oil at all times, with reasonable prices and fair returns to investors. But this must be supported in turn by assurances of steady, predictable demand from consumers.

In many consumer markets, gas prices are tied to oil prices. Therefore, a sound pricing policy for oil is also beneficial to gas. This provides an added incentive to oil producers with a big involvement in the gas sector to support our market-stabilisation measures.

OPEC’s production agreements are aimed at keeping prices within a band of US $22–28 a barrel for our Reference Basket of seven crudes. We have identified this range as balancing the interests of producers and consumers; the flexibility of the system allows for the market’s regular fluctuations to be absorbed in an orderly manner. If prices begin to settle outside the limits of the band, OPEC adjusts its production level accordingly, to correct the situation.

OPEC’s price band policy has won widespread acceptance in the market since its introduction three years ago and has helped bring about stability and reasonable prices. To be truly effective, of course, our market-stabilisation measures require the support of non-OPEC producers, and we welcome very much the advances that have been made in this regard in recent years.

There is now a far greater willingness for dialogue and cooperation, and this spreads right across the industry, embracing producers and consumers and the multitude of companies, large and small, that bind them together.

Many such companies are represented at this workshop. You are all involved, in some way or another, in finding the most efficient, effective and economic means of exploiting the world’s petroleum resources and in doing this in a way that blends in well with existing environmental and social systems, together with making reasonable returns.

I should like to provide you with some observations in this important area that I have gained from my years of experience in the petroleum industry of an oil-producing developing country, Venezuela. I hope you will find these useful.

The first point I wish to make concerns the importance of information. This is a two-way process. Before setting-up operations, the guest company and the host country should ensure that there is a full exchange of information about every relevant aspect of the project, with established channels of communication, so as to ensure that the venture proceeds smoothly and harmoniously, from beginning to end.

Of course, there is no general rule here and every project must be treated on its merits. It must also be understood from the word “go” that the situation can be a very fluid one with many uncertainties, and that some of the original assumptions and conditions may require revision with the passage of time.

The type of information in which a host country is likely to be interested includes the following: a verifiable case history of the guest company; full assurances about its financial and commercial viability; the reasons for its interest in the project, including its perceptions of the likely reward; indications about its compatibility with life in the local community; a demonstration of its attitude towards environmental issues; and advice about its ambitions, with regard to, for example, possible future involvement with the host country in some other, related area.

A guest company is likely to want to find out as much as it can about the living and working conditions in the host country. This includes: the supporting infrastructure for industry, trade and commerce and its international connections; the economic, social, political and legal systems; the labour market; the housing sector; the historical background, culture and traditions; social and political issues of current concern; the environmental landscape; and the facilities available to the company, as a corporate entity, and its employees, individually, to maintain effective communications with their home countries, in the broadest sense of the term.

Both sides should consider the enterprise as being a professional partnership, with a fair, balanced and transparent division of the returns, which has been agreed on, in advance, through negotiations. Issues relating directly to the host country’s permanent sovereignty over its natural resources should be settled at the beginning, too. These include the degree to which the guest company integrates itself into the entire matrix of the host country’s petroleum industry and its rights of ownership to any plant or equipment that may be installed as part of the project.

Every company and its employees must abide by the law — that goes without saying. But legal systems and legislation can vary enormously from one country to the next, and there may be some situations where the necessary specialist legislation for a petroleum project quite simply does not exist. Perhaps the country in question is just starting-up operations in the industry. It is then the responsibility of the guest company to act in an honourable manner and to observe the spirit of the law, in the sense of applying a reasonable interpretation of what could be described as the closest similar law, even if this law’s precise application was in some other field.

Alternatively, there may be situations where legislation cannot keep up with the pace of technology, or where one domestic law contradicts another. Here again, good faith is required from the company in its interpretation of the law, and, where possible, this should be done in full consultation with the country’s legal authorities, with the emphasis being put on encouraging the fullest possible use of the most advanced technology in undertaking a project.

In Venezuela, we have sought to clarify this situation, by introducing a clause in our new hydrocarbons law which states that all petroleum operations must be carried out in accordance with our general laws on the preservation of the environment, even if there has been no specific application of such a law to the petroleum sector. We are very strict about this, because of our country’s deep concern about the state of the environment.

The situation has changed from the past in two distinct ways.

First, there is now a greater awareness of environmental issues in the minds of the public at large, allied to expectations that every effort is made to keep industry, trade and commerce as clean and as safe as possible, from the beginning of a project to its conclusion — so that all adverse environmental impacts have been removed once a company has wound up its activities and left the area.

And secondly, continued advances in technology have enabled us to minimise impacts on the environment throughout a project’s life. Technology now provides us with the capability to access data about a potential development site with remarkable levels of detail in even the most remote locations — using satellite images at one extreme and virtual reality displays of sea-bed terrains at the other, in the case of the petroleum industry. Technology enables us to install state-of-the-art plant and equipment which can satisfy even the toughest environmental laws and regulations. And technology allows us to tightly control every stage of the production process, from needle-sharp monitoring of day-to-day operations to the facility to quickly and effectively adjust to changing conditions as and when the need arises.

Let me refer again to my home country, Venezuela, to illustrate the difference between the past and the present. Intensive exploitation of the hydrocarbon resources in the Lake Maracaibo area began in the early 20th century at a time when the state of technology was primitive compared with today. We now sadly have a situation where repeated subsidence over the years means that the lake now stands about ten metres above the surrounding countryside and that an elaborate system of walled defences are in place to prevent flooding on a massive scale. Moreover, once it was a valuable fresh-water reservoir, but now it is salinated. This compares with the new hydrocarbon development in the Orinoco delta, where every effort is being made to extract natural gas in a manner that is in harmony with the needs of the surrounding environment, including the nearby location of a national park. It has already been decided that deposits from the venture are not just left in the water, but instead are collected and carefully disposed of in specially prepared sites on land. Companies bidding for concessions are required to cater for the environmental impacts in their proposals.

The exploitation of the world’s finite oil and gas resources is a hazardous and risky business at every level — the economic, the political, the legal, the social and the environmental. As oil and gas producers, we have the responsibility to ensure that this task proceeds in a manner that is conducive to the well-being of mankind.

As we saw at the World Summit in Johannesburg last year, the provision of energy services is an essential input to the process of sustainable development and the eradication of the drastic poverty that affects much of the world today. At the other extreme, modern consumer societies could not exist in their present form without continued access to advanced forms of energy that have supported their growth and development over the past 200 years.

As I have outlined in this address, OPEC and its 11 Member Countries are committed to creating a petroleum sector that can fully meet the world’s growing energy needs in the years and decades to come. Due to our strong hydrocarbon resource base, we are in a position of much influence. But the full involvement of the oil and gas industry at large is required if we are to be truly effective in achieving these universal goals.