"Reflections on key oil challenges and opportunities"

Speech delivered by OPEC Secretary General, HE Abdalla Salem El-Badri, at the 11th International Energy Forum (IEF), Rome, 21 April 2008

[Slide 1 - title]
Thank you, Mr Chairman, for your introduction.

Let me begin by thanking the Italian Government for hosting this event, and also the co-hosts, India and Mexico.

Excellencies, ladies and gentlemen,

OPEC recognises the International Energy Forum as a leading platform for producer-consumer dialogue.

[Slide 2]
Genuine, multilateral, well-targeted and constructive dialogue and cooperation are essential in meeting the challenges facing an increasingly interdependent energy world. These benefit all parties.

Progress made at previous Forums has led to a better understanding of the views and interests of countries, industry and other stakeholders on important energy issues. This is undoubtedly a positive development.

We need to continue along this path, since further progress is required in some important areas, to seek a convergence of views and an enhancement of mutual understanding.

In the short time available, I shall focus on some key issues during my address.

[Slide 3]
First, however, let me briefly summarise some key findings from the oil outlook presented in OPEC’s background paper for the period up to 2030.

In the reference case, world energy demand grows at an annual average rate of 1.7 per cent, to satisfy the needs of a rising, more urbanised world population, as well as to meet continued economic growth.

Fossil fuels will continue to provide more than 85 per cent of the world’s total commercial energy needs; there are no viable substitutes in such quantities on even the most distant horizons.

And oil and gas will be the leading sources, together accounting for more than 60 per cent of the total energy mix.

Average annual growth of 1.4 per cent will see world oil demand reach 118 million barrels a day by 2030.

Most of the new demand will come from developing countries, with consumption doubling to 58 mb/d, and Asia will account for more than half this increase. Nevertheless, energy poverty will remain an important challenge. By 2030, developing countries will consume, on average, about five times less oil per person than OECD countries. In sector terms, transportation will be the main source of the world rise.

[Slide 4]
Now, I should like to look at the first of the key issues: volatility. This continues to have a serious impact on the oil market, together with the persistent upward pressure on prices.

Non-fundamental factors have been mainly responsible for this. Indeed, as is well-known, in today’s market, crude oil prices have become detached from the dynamics of supply and demand.

[Slide 5]
The heightened levels of speculation have been a principal driving force behind the volatility, with oil becoming a financial asset. The falling value of the US dollar has encouraged additional inflows of money into the crude oil futures markets. We welcome recent moves by many industrialised countries and key intergovernmental bodies to address the financial turmoil and help reduce speculation. This comes nearly a year and a half after OPEC and the European Union held a joint workshop on the impact of financial markets on crude oil prices.

Also contributing to the volatility are the ongoing geopolitical developments, perceived market tightness and bottlenecks in the refinery sector. The last factor is compounded by the fact that the expansion of refinery capacity is under pressure to keep pace with rising demand for lighter products and more stringent specifications.

[Slide 6]
OPEC has played a vital role in keeping the market well-supplied during the recent volatile period, with our Member Countries increasing crude output, as needed, and accelerating capacity-expansion plans. There are, for example, more than 120 upstream development projects, and cumulative investment in new capacity exceeds US $150 billion.

These countries have also been increasing their presence downstream, at home and abroad, with more than $60 billion of investment in refining.

[Slide 7]
Another longstanding issue requiring attention is the persistent uncertainty about future demand trends. This is affecting the ability of our Member Countries to devise and implement effective investment strategies in production capacity, from which the market at large will benefit.

Important drivers of uncertainty include future world economic growth, consuming countries’ policies, technological developments and non-OPEC performance.

Uncertainty can be very costly for oil producers. Scenarios we have prepared, based on plausible higher and lower world economic growth assumptions, show that, even by 2020, there is an estimated range of uncertainty for required investment upstream by OPEC producers of around $270 billion.

Without the confidence that additional demand for oil will emerge, and without the market signals that long-run prices are supportive, the incentive to invest can be affected. Just like anyone else, oil producers do not want to invest in capacity that will not be used.

There is a clear need, therefore, to increase security of demand. One important area where consumers can act is in policy-making — through the introduction of greater predictability, consistency, stability and transparency. The Joint Oil Data Initiative has, of course, been a good starting point in this respect.

[Slide 8]
Adding to the uncertainties about investment is the sharp increase in the unit cost of adding capacity, with one research body noting that upstream costs have nearly doubled since 2005. On top of this, the industry is experiencing a shortage of skilled personnel for both construction and operations, with a large section of the existing workforce approaching retirement.

Both issues need to be addressed, as a matter of urgency, if the industry is to meet rising demand in a timely and effective manner in the future.

[Slide 9]
However, one area where there is a high level of certainty is the oil resource base. There is no doubt that the world has enough resources of oil to satisfy consumers for decades to come.

Estimates from the US Geological Survey of ultimately recoverable reserves have practically doubled since the early 1980s, from just under 1.7 trillion barrels to over 3.3 trillion barrels — while cumulative production, during the same period, has been less than one-third of this increase.

Improved technology, successful exploration and enhanced recovery have enabled the world to increase its resource base to levels well above the expectations of the past, and this will continue in the future.

However, there is still further to go with recovery rates, which average around 35 per cent globally. With the appropriate application of technology, recovery rates of double the present average are seen as achievable.

More than three-quarters of the world’s proven recoverable crude oil reserves lie in OPEC’s Member Countries, and these states are committed to ensuring that consumers receive their oil in a secure, orderly and sustainable manner. This is, of course, subject to the appropriate demand conditions being in place, and here I refer back to my comments about minimising uncertainty.

[Slide 10]
In addition to conventional oil, there is also a vast resource base of non-conventional oil to explore and develop. This includes heavy oil, tar sands, oil shale, gas-to-liquids, coal-to-liquids and biofuels. Their importance will grow over time, and the challenges lie more on the technological, environmental and economic hurdles regarding their production and processing.

This brings me onto the subject of biofuels.

The hard facts are that biofuels are increasingly in competition with land-use, water resources and, consequently, food. Also, there is very little benefit, in terms of greenhouse gas emission reductions.

All in all, the environmental aspects and sustainability of biofuels are being seriously questioned by many people and institutions at the present time, even in the oil-consuming regions.

[Slide 11]
Let me now focus on the environment and the need for oil production to meet the tightest regulations, addressing both local pollution and climate change concerns. The industry has made substantial progress in meeting these challenges in recent years, and further advances are expected in the future.

OPEC has been very committed to this, acting in many important areas. Indeed, last November, four of our Member Countries pledged a total of US $750 million towards research into energy and the environment.

Clearly, technology-based solutions are essential for a carbon-constrained world.

OPEC is a keen advocate of carbon capture and storage (CCS). However, a big leap forward is needed now, in terms of the development and deployment of this technology on a broader scale. This offers great potential for consuming countries, with their superior financial and technological resources.

While it is difficult to predict the pace and the extent of advances in technology, cooperation in this area should be treated as a high priority within the industry at large and supported by governments.

In addition, OPEC welcomes any measures that enhance the global energy mix. But people should be realistic about switching capital resources to developing renewables. Such resources could get better returns in developing cleaner fossil fuel technologies.

And finally, we must remember that energy is central to poverty eradication, sustainable development and the achievement of the Millennium Development Goals.

Even though oil consumption may double in the developing world by 2030, not all the countries in this group are benefiting from such growth. At the present time, an estimated 1.6 billion people across the world have no access to electricity, and 2.5 billion people still rely on traditional biomass for cooking.

We all have a responsibility to help poorer nations set out on the road to sustainable economic and social development, with access to reliable, affordable, economically viable, socially acceptable and environmentally sound energy services.

Excellencies, ladies and gentlemen,

[Slide 12]
During this address, I have discussed seven key issues affecting the industry today.

• Market speculation is a major cause of volatility and the rising prices of oil and other commodities.
• Market uncertainty is undermining the effectiveness of oil investment strategies.
• Urgent attention is needed for rising costs and skill shortages.
• The world has enough oil resources to meet increasing demand for decades to come.
• The sustainability of biofuels is being reassessed.
• A more intensive technology-based approach is required for addressing environmental concerns, such as CCS and cleaner oil technologies.
• Much effort should be directed to reduce energy poverty and improve access to modern energy services for all.

These issues will be best handled in a cohesive environment, with the full support of the international community, which is well-represented at the highest level in this Forum.

Energy interdependence calls for broader dialogue and well-targeted cooperation among all parties, as well as greater transparency and predictability.

Indeed, at the recent Third OPEC Summit, the Heads of State and Government of our Member Countries strengthened their resolve to in-depth dialogue and cooperation.

They have long recognised that this is essential, if the oil sector is to meet all its goals successfully in the future.

[Slide 13]
Thank you for your attention.

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