15th International Oil Summit

Speech delivered by HE Abdalla S. El-Badri, OPEC Secretary General, at the Ministerial Session (specific focus on supply) of the 15th International Oil Summit, Paris, France, 11 April 2014.

Excellencies, ladies and gentlemen,
Good afternoon.

I would like to begin by thanking the organizers of this event for inviting me to the 15th International Oil Summit. It is a pleasure to be here.

In looking at the overview of this session, it is clear that there is a specific focus on global oil supply, both now and in the future. There is mention of an abundance of supply, and the potential for production increases in both OPEC and non-OPEC countries.

It is interesting to see such topics now listed on conference agendas, given that only a few years ago there was much talk of there not being enough resources, and that supply would struggle to keep up with demand.

But today we hear very few voices talking about ‘peak oil’. There are clearly plenty of available resources – both conventional and non-conventional – to meet expanding future oil demand.

At OPEC, we have been consistent in voicing our opinion that the world has enough resources to meet expected demand. And technological advancements continue to help the industry increase the estimates of the amount of oil and gas that can be found, and that can be recovered, extending its reach into harsher and more remote locations in ‘frontier areas’. What was once described as ‘impossible’ oil has today become ‘possible’.

Of course, peak oil will come one day. It is a non-renewable resource – but not for the foreseeable future.

So what has happened to change the focus from talk of peak oil and tight supply?

It is evident that non-OPEC supply developments have been a central element in this change, particularly US tight oil. These tight oil developments are welcome. They add depth and diversity to global supply, aid market stability and provide further proof that the world is not running out of oil.

In a 2013 report, the US Energy Information Administration’s assessment of technically recoverable global tight oil resources was 345 billion barrels. This was much higher than its 2011 assessment of 32 billion barrels. And these estimates are likely to change again in the future.

However, it is important to stress that the figure is relatively minor when compared to the already known conventional resource base. In 2012, the US Geological Survey estimated that the world’s ultimately recoverable resources of crude oil and natural gas liquids were more than 3.8 trillion barrels.

So in terms of resource availability; there remain more than enough resources to meet demand for the foreseeable future.

In respect to actual production capacity, however, we have undoubtedly seen a transformation in the US with tight oil adding new capacity over the past few years.

But I think we can all recognize that there remain questions over how sustainable these tight oil developments will be in the long-term. For example, many wells are already experiencing sharp decline rates – in some cases 60% after one year.  In OPEC’s World Oil Outlook (WOO) 2013, we see US tight oil, including NGLs, reaching 4.9 million barrels a day by 2018, before declining in the years following.

A number of other non-OPEC regions are also expected to see strong supply growth, both in the medium- and long-term – regions such as Brazil and some countries in Central Asia, particularly Kazakhstan.

And of course OPEC continues to invest – to maintain existing capacity and add new production as well. However, like any investments, they will be influenced by various factors – such as policies, the price of oil and overall economic conditions.

Given all this, it is easy to see why current talk might be of ‘supply abundance’. But we do need to be careful about what this really means.

Looking at the current situation, we see the market as relatively balanced. And we expect this to be the case for the rest of 2014.

In terms of OPEC crude production, it is currently close to 30 million barrels a day. This is what is required by the market. The Organization is making sure its consumer’s needs are met.

In the medium-term, the call remains fairly steady – at around 29-to-30 million barrels a day. It means that OPEC spare capacity is expected to rise, although expectations are that this will be towards comfortable levels.

But let me add here that this is presuming that everything will stay the same and that there will be no disturbances to supply. History tells us that things rarely stay the same, and the market will have to evolve to ever-changing circumstances in the years ahead.

Allow me here to recall what happened at the end of 2013.

In the third and fourth quarters of last year, a number of forecasters were warning of an oil glut. However, this never happened. Cold weather in the US, robust global oil demand, especially in the OECD, along with some supply constraints and a drawdown in stocks in the fourth quarter, meant supply and demand remained relatively balanced.

Moreover, we also need to keep our eyes on the long-term and where supplies will come from. When we talk about our future, we are not just talking about the next few years. What is clear is that significant OPEC capacity expansion will be required.

We expect to see the call on OPEC liquids increase by over 10 million barrels a day – from around 37 million barrels a day in 2018 to over 47 million barrels a day by 2035. This is greater than the expected increase in non-OPEC liquids supply over the same period, at just under 9 million barrels a day.

In recent months, there has also been talk of falling prices. This is obviously difficult to assess. But prices have held fairly steady for the past 18 months or so. It is a level that has been acceptable to both producers and consumers.

Let me stress here that OPEC does not have target price. Our priority is a stable price – at a level that does not affect global economic growth and, at the same time, that allows producers to receive a reasonable income and invest in supply to meet future demand.

Talking about the price, we also need to understand the cost of the marginal barrel. Specifically, at what price levels costlier projects become unworkable. It is clear that for some projects – for example, deepwater and Arctic fields, as well as most tight oil and oil sand plays – such a price may not be far below current price levels.

So we really need to appreciate the delicate balance between prices, the cost of the marginal barrel and future supplies. And this balance is essential in making sure the necessary future investments are made.

It is important to underscore just what investments we are talking about. In OPEC’s World Oil Outlook (WOO) 2013 it is estimated that global upstream investment requirements between 2012 and 2035 are $5.2 trillion. Combined with expected requirements in the midstream and refining industries, this number approaches $8 trillion.

In terms of the upstream, most of the investment will be made in non-OPEC countries. In the medium-term, non-OPEC will invest more than $170 billion each year. OPEC, on the other hand, would need to invest an average of $35-40 billion annually in the coming decade and then over $50 billion annually in the long-term.

These are huge investments. And of course, the best environment for making these is a stable market.

To conclude, let me pose a few simple questions:

Do we have enough resources? Yes we do.

Is the market over-supplied? No, I don’t believe it is. It is fairly balanced.

Will both OPEC and non-OPEC be required to increase capacity significantly post-2018? Yes, they will.

Does this require significant investment? Yes, it does.

And to deliver the necessary investment I think we can all appreciate that what is of major importance to the market and investors are order and stability.

This will help us all better understand supply-side developments – in the short-, medium- and long-terms. Given the long-term nature of investments in our industry, they are all connected.

And although I have only touched upon the supply-side today, we cannot forget about the demand-side, particularly with regard to consuming country policies that might impact demand for oil. This is crucial for investors.

Of course, challenges and uncertainties remain, and new ones may be just around the corner. There are always unknowns. But we need to make sure we continually advance our understanding of the market and try to put in place the best framework with which to arrive at a future that works for us all.

Because if there is one thing that can be said with confidence, it is that the future will require supply and investment from all corners of the world.

Thank you for your attention.