Reflecting on Oil Investment

Keynote address by OPEC Secretary General, HE Abdalla S. El-Badri, to the Middle East and North Africa Energy Conference, at Chatham House, London, U.K, 31 January 2011

Thank you, Mr. Chairman.

Ladies and gentlemen: good morning.

It's my pleasure to be here once again to talk about the Middle East and North Africa, one of the most dynamic regions of the world.

MENA countries are rich in natural resources. They have growing, young and educated populations and are expected to take their share of world GDP growth now and into the future.  The region is also home to eight of OPEC's twelve Member Countries, which provide significant quantities of the world's oil and gas supplies.

However, these countries - like many other countries which are endowed with natural resources - face difficulties over whether to invest in their oil and gas, and produce now or postpone investment to a later date.  Not only do they have to address ongoing economic and social development aspirations but they also have to consider how to meet global demand for oil and gas.

Before I proceed, I would like to touch on the current situation in the oil market.

I can understand that consumers are concerned about recent oil price developments.  I'd like to emphasise that OPEC has no interest in very high oil prices.  We are watching the oil market very closely and we see that WTI is close to 85 Dollars per barrel and Brent is around 95 Dollars per barrel.  First of all, it is not usual for Brent to be priced higher than WTI.  In 2010, the average price for WTI was higher than it was for Brent.  So this is clearly due to technical factors and has nothing to do with market fundamentals.

While we are focussing on the oil price, I would like to reiterate that the oil market currently has more than enough oil to meet current demand.  Global inventories are high.  Forward cover is close to 60 days, which means that it is six to seven days above the five-year average.  Our Member Countries are producing 29.3 million barrels per day and also collectively hold spare capacity of a very healthy 6 million barrels per day.  Consequently, we do not see any shortage of oil in the market.

Now I will return to the subject which I am here to discuss with you today.

Resource Endowments

MENA countries have abundant natural resource endowments.  With 820 billion barrels in proven crude oil reserves and 83 trillion cubic metres in proven gas reserves, this is about 61 per cent and 44 per cent of global totals, respectively.

For most of these countries, oil and gas also form the backbone of their economies and trade.  In 2009, for example, oil alone accounted for more than 21 per cent of their combined GDP and represented 60 per cent of total exports.

Striking the Right Balance

Having great natural resource endowments brings with it great benefits - and even greater responsibilities and challenges.  OPEC's Member Countries understand this and are dedicated to market stability.  That is why OPEC is committed to continuous investment and ensuring more supply to the world's oil markets.

As you are all aware, OPEC's Secretariat advises its members on the outlook for the oil market - in the short-, medium- and long-term.  Investments are a Member Country driven approach.  However, there are a couple of scenarios that any oil-producing nation may face.

In general, the oil and gas industry, due to its long-lead times and capital-intensive nature, has to strike a careful balance so as to avoid both under-investing and over-investing.  Balance is needed between meeting the requirements of the oil market and addressing a country's own development needs.

One scenario could be for a producing country to not depend solely on oil and gas as its main source of revenue and, consequently, leave the majority of these resources in the ground.  Of course, the risk is that if there is any unexpected supply crunch, the country may not be able and ready to meet a possible shortfall.  Oil producers have experienced this situation before.

The other scenario could be for a country to focus strongly on upstream investments - with the goal of expanding capacity and generating more money, despite its needs.

But if upstream investments are pursued without a careful consideration of global market conditions, the result could be a higher risk of idle spare capacity - and unnecessary costs to maintain this.  This is one of several risks of over-investing.  It could also result in damage to existing oil fields if consideration is not given to reservoir conditions, which could lead to faster-than-anticipated decline rates.

In the longer-term, over-investment in capacity could end up generating massive revenues, which would then have to be channelled elsewhere.  A country could very well deposit these revenues in banks or other investment schemes, but these are subject to continual risks of fluctuation, low interest rates and volatility.

If a country is unable to absorb an inflow of revenues, those financial resources could very well end up being spent on unnecessary large-scale, big-ticket projects - so-called "white elephants".

In my opinion - and let me stress that this is my personal opinion - one must invest according to the needs of one's country and the capability of one's resources.  By leaving unneeded resources in the ground, one is catering for future generations.

Current Investments

Investments are the lifeblood of the oil and gas industry.  They are the key for meeting future demand and are therefore too important to be approached without much thought and planning.  Simply put, one has to anticipate the economic cycle.  Again, the key to this is a balanced approach.

OPEC has consistently said in recent times that prices are disconnected from the physical oil markets and are increasingly subject to paper markets.  Consequently, the market is dominated by financial players, which is misleading when it comes to understanding the behaviour of the oil market.

Yet, despite all of the difficulties which our Member Countries are facing, and as I have said on numerous occasions, we remain committed to future investment plans to boost our capacity.

In the medium-term, we are investing an estimated 155 billion Dollars in projects across our Member Countries.  The timeframe for these projects to come on stream, is between 2010 and 2014.  These projects will add around 12 million barrels per day of gross production capacity.

OPEC is continually reviewing the status of these, and other projects.  In fact, a new updated report on investment projects in our Member Countries can be expected in March.

In addition to investing in upstream projects, some of our Member Countries are also investing in downstream projects.  These projects - both at home and abroad - are estimated at close to 40 billion Dollars.

Let me turn for a moment to natural gas.  The capital investment requirements for the gas industry seem to have recovered from contractions since the recent financial crisis.  Actual natural gas investments (in expanded capacity, production and transportation) will amount to about 167 billion Dollars to 2015 across the MENA region.  A majority of these investments will be in OPEC Member Countries.

In addition, close to 39 trillion cubic metres of gas reserves remain as yet to be discovered in MENA countries.

But there are two important pre-requisites:  demand security and stable prices.  Without these, investment plans lose their rationale. 

Allow me to address these in turn.

Security of Demand

Sound, long-term investments thrive on certainty and predictability and what we have always called security of demand.  But there are numerous challenges to this.

On the economic front, the recent crisis has added an element of uncertainty to oil demand.  Despite signs of a recovery, doubts  still persist over the medium- and long-term prospects for economic growth.  And looking towards the long-term, it is difficult to gauge the strength of recovery between regions and within sectors.  This means that different paths could emerge for crude required by OPEC.

For instance, OPEC's higher growth scenario sees demand rising by around 44 million barrels per day to 2030.  However, the lower growth scenario sees demand for OPEC crude as low as 28 million barrels per day for the same period.

Investments in the industry also depend on clear, accurate and timely data - about production and supplies, about upstream and downstream activities, and about existing contracts and projects.  For that kind of data, we need increased transparency on the part of all energy stakeholders - and oil consumers everywhere.

And with growing oil demand from emerging markets around the world, data from those parts of the world is increasingly important. That is a challenge that has yet to be addressed.

Enabling Price Environment

The other aspect needed to ensure the continuity of investments is having an enabling and stable price environment.  This means having prices at a reasonable level and without extreme fluctuations. Prices that are extreme in either direction, whether too high or too low, can be detrimental to investment plans.

We in the industry have seen periods of both record high and low prices - most recently in 2008.  That experience reminded all of us - producers and consumers alike - that extreme price volatility benefits no one.

I'd like to remind you all that fossil fuels will remain the dominant source of energy for the foreseeable future.  There is no doubt that other sources of energy will grow.  But that growth will be from a low base.

And I am certain that all of you will agree with me when I say that our industry is facing enormous challenges - such as climate change, manpower shortages, technological changes.  Therefore, it is a good opportunity for IOCs and NOCs to cooperate with each other to overcome these and any new difficulties which we may face.

Concluding Remarks

Balance is particularly important to upstream investment plans, especially given an environment like today's, which remains risky, uncertain and somewhat unpredictable.  Oil-producers are thus constantly assessing these conditions as they make their investment plans, guided by an over-arching concern for balance.

OPEC Member Countries know that to make the necessary investments at the right time, they have to consider many inter-related factors - the return-on-investments, capital costs, price levels, GDP growth and aggregate demand.  They have so far been able to achieve a balance in their investments plans - and, in the process, have ensured the stability of the market.

But the key, as we have said in the past, is to continue to find ways for producers and consumers to work together to ensure a lasting stability - not just for the investment plans of producers, but for the benefit of consumers and the continuing growth of all energy stakeholders.  This is our global task.

Thank you for your kind attention.