Challenges to OPEC in the Medium & Long Term

Delivered by Dr. Alvaro Silva-Calderón, OPEC Secretary General at the 25th Oxford Energy Seminar - Oxford, England, 11 September 2003

Ladies and gentlemen,

I should like to begin by congratulating Professor Robert Mabro and his team, on the occasion of the 25th anniversary of the Oxford Energy Seminar. The Seminar is widely regarded as one of the premier events on the international energy calendar. This is why energy experts from across the world make their annual pilgrimage to this fine historic centre of learning, to take part in it. The Seminar provides government ministers, captains of industry and renowned academics with an unparalleled opportunity to pass on the wisdom of their years to a younger generation, who can contribute to the discussions with their fertile minds, their energy and their optimism for the future and who, in turn, might one day themselves become government ministers, captains of industry and academics. OPEC attaches great value to the seminar, for its relentless pursuit of excellence among participants of the highest calibre.

As you all know, the subject of my address today is the challenges facing OPEC in the medium and long terms and, here, I doubt that there will be any disagreement when I say that these challenges are not only complex but vary widely in magnitude and scope. I shall now endeavour to enumerate some of these challenges, but without attaching any level of priority to any of them.

Let us begin with the first one, namely the challenge of supplying consumers, from both the rich, developed and the poorer, developing nations of the world, with the important portion of the oil they need and when they need it. In practice, this is easier said than done. First of all, how much oil will be needed? The reference case from OPEC’s World Energy Model, OWEM, indicates that world oil demand will rise from 76 million barrels a day in 2000 to 89 mb/d in 2010 and 107 mb/d in 2020 — this is on the assumption that world energy demand will grow by an annual average of around two per cent during this 20-year period.

OPEC has four-fifths of the world’s proven crude oil reserves — nearly 850 billion barrels. Therefore, it is reasonable to assume that the Organization will supply most of the crude to the market in the years ahead, a market in which oil is expected to remain the leading energy source.

This, in fact, contrasts with the situation today, when OPEC accounts for less than two-fifths of current world production, and this is where our second challenge is to be found. Simple logic tells us that this imbalance will eventually be corrected and that OPEC will then supply the majority of the world’s crude. However, we have been saying this for many years and it seems somehow to be a case of “tomorrow never comes”! Continued advances in technology, together with price defence policies, have encouraged the rapid development of non-OPEC oil and have helped perpetuate this longstanding imbalance. In the short-term, non-OPEC producers are taking the lion’s share of the market – to the extent that even the IEA has observed that OPEC has a problem with the loss in its market share – but there is a limit to this process, and this is provided by the absolute quantity of non-OPEC reserves. In the not-too-distant future, non-OPEC output will reach a plateau. But this imbalance is the reason why the Organization strives so hard to achieve concrete co-operation with its non-OPEC counterparts – efforts which, in OPEC’s view, have begun to bear fruit.

Our reference case sees OPEC’s market share in 2010 as being about the same as in 2000, at 40 per cent. Nevertheless, during this decade, it is projected to actually fall, for a while, below this figure, with just 37 per cent being forecast for 2005. This is, indeed, what is happening at the present time, with weaker-than-expected global energy demand. Nevertheless, the outlook is expected to improve for OPEC during the second decade of the 21st Century, with the projected market share at 44 per cent in 2015 and 49 per cent in 2020. In absolute terms, according to our reference case, OPEC production, including natural gas liquids, is expected to rise from 30 million barrels a day in 2000 to 36 mb/d in 2010 and to 52 mb/d in 2020.

However, the situation extends beyond the issue of who actually produces the oil, to the issue of oil’s share in the world energy mix, and this is where our third challenge appears. Over the past decade or so, oil’s traditional dominance has been put under pressure on environmental grounds, particularly in the context of the UN-sponsored climate change negotiations. There have also been longer-standing efforts among some consuming nations to diversify energy sources away from oil, on so-called “strategic grounds”. The chief beneficiary of all of this has been gas. Our reference case shows that the use of gas will almost double in the period 2000 to 2020 and its share in the global energy mix will rise from 23 per cent to 28 per cent. However, this will still be ten percentage points below oil’s share of 38 per cent in 2020; in fact, oil’s share will have dipped by only a marginal amount since 2000 — less than two percentage points — according to our projections. OPEC, needless to say, has huge reserves of both oil and gas.

Let me briefly refer to renewables here, since there are widespread calls for these to be developed and brought to the market as soon as possible — we heard such calls, for example, at the World Summit on Sustainable Development in Johannesburg last year. Nevertheless, as the Summit itself recognised, the technology required for the large-scale commercial usage of renewables is still years, or even decades, away; therefore, all other available, suitable resources must be enhanced and utilised. Petroleum is already well-placed to provide such energy in sufficient quantities to meet the needs of rich and poor nations alike.

Advances in petroleum technology continue to make oil and gas cleaner fuels, and these advances are accompanied by improved infrastructure and transport, particularly for gas. The successful development of carbon dioxide sequestration technology will, for example, ensure that the use of petroleum is entirely compatible with sustainable growth and that it will continue to serve the needs of mankind for decades to come.

The fourth and fifth challenges are closely related to the first challenge, which is the need to meet an absolute rise in world oil demand.

The fourth notes that exhausted reserves must be replaced, as and when necessary, in addition to increasing production capacity to meet the actual growth in demand, and the fifth acknowledges the desirability of oil-producing nations always having sufficient spare capacity available to cope with sudden, unexpected shortages in supply, in the interests of maintaining market stability for the benefit of all concerned.

The sixth challenge binds together the first five, in that it tackles the issue of financing the producers’ ability to meet expected future oil demand — investment. Our projections indicate that OPEC Member Countries may need to spend nearly US$100 billion by 2010 and as much as US$200 billion by 2020 to meet the future demand for oil in full. It will require a concerted effort by the industry at large to attract these sums. This task is made more difficult by the existence of many areas of uncertainty affecting the clarity and consistency of future world oil demand, and, clearly, the magnitude of these uncertainties increases as we venture further into the future. These uncertainties include changing regulations, fiscal regimes, strategic and political factors, evolving life-styles, natural disasters and, of course, human error. Countering these uncertainties requires transparency, consultation, meticulous planning and careful scheduling across the industry.

It also requires market stability, both now and in the future, and this is our seventh challenge. Indeed, market stability has been one of the biggest challenges facing OPEC for many years. To help us meet this challenge, we introduced our price band mechanism three years ago, with the aim of keeping the average price of the OPEC Reference Basket between US$22 a barrel and US$28/bbl, which we have identified as a range that balances the interests of consumers and producers alike. We use our production agreements to do this. The mechanism constitutes a highly effective part of our market stabilisation measures. It supports market stability, it has done away with extreme price volatility, much to the benefit of both producers and consumers, and it serves to encourage investment in the industry. The success of our mechanism can be judged from the fact that, since its inception, the Basket has averaged around US$26/bbl, which is well within the limits of the band, and this has occurred during a period when there have been serious crises at both ends of the pricing spectrum.

It must be stressed here that these challenges are not OPEC’s alone – a fact which brings us to the eighth challenge. OPEC has welcomed the support our production agreements have received from many leading non-OPEC producers in recent years, and this has clearly made them more effective. Generally speaking, cooperation is essential for the welfare of the industry as a whole, both now and in the future, and this should involve all parties — producers and consumers, as well as the multinational oil companies and financial institutions. Much progress has been made in the past decade, from simple bilateral contact to large international gatherings. Cooperation is also necessary for realising a broader energy vision, which embraces such important universal human concepts as sustainable development and environmental harmony. The need to raise the level of cooperation, therefore, constitutes a very real challenge for OPEC and, of course, all other parties involved in oil activities.

In conclusion, OPEC, with its huge reserves, is expected to be the natural supplier of petroleum to world markets for the foreseeable future, while petroleum will continue to be the dominant source of energy. This means that, if we are to meet our obligation to satisfy the regular needs of the market and provide adequate cover for unusual or extreme situations, such as natural disasters and conflicts, so that order and stability can be maintained at all times, in the interests of both producers and consumers, whilst maintaining our commitment to the pressing demands of sustainable development, which will see us produce cleaner, safer fuels to help preserve the environment and assist in the process of eradicating poverty, we will all have to work together overcome the challenges which I have just enumerated.

Thank you.