Forecast of the world oil and gas market development

By Dr Maizar Rahman, Indonesian Governor for OPEC, Acting for the OPEC Secretary General on behalf of Dr Purnomo Yusgiantoro, OPEC President and Secretary General and Minister of Energy and Mineral Resources for Indonesia. The 4th Russian Oil and Gas Week, Moscow, Russia 26–28 October 2004

Excellencies, ladies and gentlemen,

I should like to begin by thanking the organisers for inviting me to address this opening plenary session of the 4th Russian Oil and Gas Week, here in Moscow. As this vast country’s petroleum sector continues to play a growing role on the world stage, so do the importance and relevance of this event establish themselves on the international energy calendar.

At the present time, the eyes of the world are focused on the near-term outlook, due to the volatile state of the international oil market. This is understandable. However, as I am sure all of us here today appreciate, this constitutes only part of the challenge facing us. We are also committed to the future of the industry. And so, during this address, I shall be looking at both the present and future outlooks, which are, of course, linked. My remarks will focus on oil, because this is OPEC’s principal area of interest.

The current market volatility and high prices have been a major cause for concern among OPEC’s Member Countries. Prices for OPEC’s Reference Basket of seven crudes have recently reached record levels, since this yardstick was introduced in January 1987. They rose above US $45 a barrel for the first time earlier this month; this compares with an average level of $25.8/b from the inception of the OPEC price band in 2000 through 2003. In other words, the average was close to the centre of the $22–28/b price band during that period, and this won wide acceptance among producers and consumers, as being both fair and reasonable.

We see a combination of factors contributing to the rising price trend this year — even though, throughout, the market has remained well-supplied with crude and fundamentals have been sound: higher-than-expected oil demand growth, especially in China and the USA; refining and distribution industry bottlenecks in some major consuming regions, coupled with more stringent product specifications and compounded by the recent hurricanes in the Americas; and the present geopolitical tensions and concern about adequacy of spare capacity to meet possible supply disruptions. Combined, these factors have led to fears about a possible future supply shortage of crude oil, which, in turn, have resulted in increased speculation in the futures markets, with substantial upward pressure on prices.

To help restore order and stability, OPEC raised its production ceiling twice, at Meetings of our Ministerial Conference on 3 June and 15 September. The total rise for OPEC-10 (that is, OPEC excluding Iraq) was 3.5 million barrels a day, to take the ceiling to 27.0 mb/d, with the final increase of 1.0 mb/d coming into effect on 1 November. These decisions were taken, even though our assessments had indicated that there was sufficient crude already in the market and that Member Countries were already pumping out levels of crude well above previous ceilings. It was believed that, as well as the actual physical fact of agreeing to these big increases in supply, such actions, in themselves, would also send a powerful psychological signal that OPEC was ready to act in order to help stabilise prices.

With regard to the ability to meet rising demand in the short-to-medium term, OPEC has spare production capacity of around 1.5–2.0 mb/d, which would allow for an immediate additional increase in production. Furthermore, in response to the expected demand growth in the near future, Member Countries have plans in place to further increase capacity by at least 1 mb/d towards the end of this year and through 2005. In addition, plans for additional capacity expansion are available and could be enacted soon; however, this capacity would, typically, become available around 18 months after commencement of this process.

Nevertheless, in saying all this, it must be pointed out that our latest studies show that, for the third quarter, the market was over-supplied by nearly 2 mb/d and that this trend was being continued into the fourth quarter, although to a lesser extent, due to demand seasonality and other factors. A further Extraordinary Meeting of the Conference is scheduled for 10 December in Cairo, to review market developments and, if necessary, adjust the production ceiling agreement accordingly.

OPEC keeps a close watch, at all times, on energy market developments, as part of its ongoing research activities, at its Vienna-based Secretariat. This covers all reasonable time-horizons — the short term, the medium term and the long term. The purpose is to provide the Organization’s Oil Ministers with the necessary high-quality support material for their decision-making on market issues, whether this be for their short-term production agreements or for their deliberations on important longer-term issues. The objective throughout is to achieve and maintain market order and stability, with reasonable prices, steady revenues, secure supply and fair returns for investors.

Let us now look further into the future, to 2025. According to our projections, based on OPEC’s World Energy Model, “OWEM”, the early decades of the 21st century are expected to see fossil fuels account predominantly for increases in world energy demand, with oil continuing to maintain its major role. There is also a clear expectation that the oil resource base is sufficiently abundant to satisfy this demand growth.

Our reference case sees average annual world economic growth of 3.6 per cent over the period 2003–25, with the most rapid rates being in the developing countries, particularly China, which has a projected figure of 6.4 per cent. The average annual rate of 5.0 per cent for the developing countries is double the OECD’s 2.5 per cent, for the period up to 2025.

Global oil demand is projected to rise by 38 million barrels a day to 115 mb/d by 2025 — annual average growth of 1.6 mb/d, or 1.7 per cent, over the years 2002–25. OECD countries will continue to account for the largest share of oil demand. However, almost three-quarters of the increase in demand up to 2025 will come from developing countries, whose consumption will almost double. Asian countries will remain the key source of demand increase in the developing world, with China and India central to this growth.

At the global level, the transportation sector accounts for about 60 per cent of the rise in demand in 2000–25. This will amount to nearly all the growth in transition economies, almost four-fifths of it in the OECD and close to half in developing countries. The industrial and household/commercial/agriculture sectors will also be important sources of growth in the developing world.

Turning to the oil supply outlook, in the short-to-medium term, overall non-OPEC supply is expected to continue to increase, reaching a plateau of 55–57 mb/d in the post-2010 period. This represents an increase of 7–9 mb/d from 2002, although the eventual scale of this future expansion is subject to considerable uncertainty. The key sources for the increase in non-OPEC supply will be Latin America, Africa, Russia and the Caspian.

This will all result in OPEC being increasingly called upon to supply the incremental barrel. OPEC has both the capability and the will to do this. Around four-fifths of the world’s proven crude oil reserves are located in OPEC’s Member Countries, although these 11 states account for only about two-fifths of current world output. Moreover, these reserves are more accessible and cheaper to exploit than those in non-OPEC areas. In 2025, OPEC is projected to meet more than half the world’s oil demand, at 51 per cent, with 58 mb/d.

Thus, one of the most basic challenges facing OPEC — as well as other oil producers — is to ensure that sufficient production capacity will be available at all times to help meet the forecast rise in oil demand in the coming years and decades. This brings us onto the subject of investment. However, before discussing this, I should like to say a few words about other energy sources, especially gas.

Order and stability in the oil sector are essential not just for oil, but also for gas. This is because of the linkage between oil and gas prices in major consumer markets, with oil price movements in volatile markets likely to be followed, to some extent, by same-direction gas price movements. Therefore, the case for ensuring that a sound international oil price structure is in place at all times finds further valuable support.

OPEC has a strong base in the gas industry, even though the focus of our Organization is on the oil market. Our Member Countries hold almost half the world’s proven natural gas reserves, with the Islamic Republic of Iran and Qatar being second and third, respectively, to Russia, in global rankings. Algeria and Indonesia also place a heavy emphasis on the gas sector, in their hydrocarbon activities.

Gas producers share many of the basic challenges of oil producers. Demand for gas is forecast to rise faster than that of oil, although from a lower base. It is the source of commercial energy that is most favoured by environmentalists, as well as being a reliable and highly efficient source of power generation. Production costs are coming down too.

But the transportation of gas remains expensive, in spite of the big advances that are being made with liquefied natural gas, which are expected to turn it from being a regional to a global fuel. Also, legislation to liberalise energy markets, particularly in the European Union, has been handled without due regard to longstanding agreements with gas suppliers.

The share of gas in the world energy mix is around 23 per cent at the moment and this is expected to climb to 30 per cent by 2025. Even so, this will still be well below the share of oil, which will have dipped slightly from around 40 per cent now to 37 per cent share in 2025. The share of solids — mainly coal — will remain at around 25–26 per cent during this period, while that of hydro, nuclear and renewables, treated as one group in this analysis, will fall by more than two percentage points to eight per cent.

This begs the question: What about the future contribution of renewables? While there is an understandable call to develop renewables, the fact remains that the technology is still in its infancy. Therefore, while the renewable energy industry is being developed, all other available resources, which are friendly to the environment, must also be accessed, enhanced and utilised to meet the energy needs of mankind and support sustainable development. Petroleum has a big role to play in this.

This underlines the need for full and timely investment in oil production capacity. Investment is needed: to meet the forecast absolute increase in demand; to see that exhausted reserves are replaced, as and when necessary; and to ensure that oil-producing nations always have sufficient spare capacity available to cope with sudden, unexpected shortages in supply. Also, the oil must be cleaner, safer and more efficient than ever before, to meet the very high expectations of the modern consumer.

This investment will be large — although not necessarily different in magnitude to that observed in the past. However, the magnitude of the required capital injection is far from clear, even in the short and medium terms. This is partly due to the wide range of feasible demand growth scenarios, but it is also reinforced by contrasting views on the potential evolution of non-OPEC production. Uncertainties over future economic growth, government policies and the rate of development and diffusion of newer technologies are among the main factors that lie behind this.

To appreciate the significance of this, one must consider investment lead times that are measured in years rather than months, as well as the importance of “getting it right” i.e. over-investment may result in excessive, costly, idle capacity and under-investment may lead to a shortage of crude and higher prices. In both cases, the losses and the broader collateral damage, such as to the world economy, can be huge.

Producers, in particular, are very concerned about the risk of over-investment, which can prove extremely costly to them. Every effort must be made, therefore, to guard against this, by improving the effectiveness of forecasting and reducing the uncertainties that hinder this process.

Moreover, it is important to note here that, while most people are all-too-familiar with the concept of security of supply, there is also a flip-side to this coin — security of demand. Producers need assurances of stable, predictable markets just as much as consumers require certainty and consistency with supplies.

Also worthy of our attention is the fact that much of the recent price volatility has resulted from problems and bottlenecks in the downstream sector. This is very much the preserve of consuming nations, even though, in recent years, oil producers have been gaining a bigger presence downstream, too.

In short, the onus is on the oil community at large to ensure that the market is well-run. A collective approach is required. All responsible parties stand to gain from a stable, orderly market. After all, the starting-point for a sound investment strategy is market order and stability today, with reasonable prices. All parties must contribute to this — OPEC and non-OPEC producers, consumers, oil companies, financial institutions, governments and so on. The challenges are too large, too complex and too important to be left to individual, concerned groups. Big advances in dialogue and cooperation have facilitated this process over the past couple of decades, from large-scale international ministerial gatherings, such as the meetings of the now-institutionalised International Energy Forum, to bilateral or regional contacts that extend across national boundaries. Indeed, the establishment of the Forum’s Secretariat in an OPEC Member Country, Saudi Arabia, bears witness to OPEC’s commitment to dialogue and cooperation. Recent years have also witnessed the development of a closer working relationship between OPEC and the International Energy Agency, to exchange ideas and information.

Cooperation is not confined to the oil industry, of course. The recent formation of the Gas Exporting Countries Forum recognises the need for discussion of issues of mutual interest to gas producers and its role is likely to grow in the future. Its membership includes seven OPEC Member Countries and Russia. The fact that these eight countries are also leading oil producers brings with it further important benefits, in terms of cooperation across the two closely related petroleum sectors.

OPEC welcomes all of this. The oil and gas industries are much better-off if there is an underlying consensus on the means of handling, at least, the major issues that concern all parties — such as price stability, security of demand and supply, and investment.

This should all be done in a framework of an increasingly globalised industry, where technology is enabling us to make remarkable advances in every field of activity and where the orderly, equitable provision of cleaner, safer energy services is seen as an integral part of sustainable development, the eradication of poverty and the general enhancement of mankind.

Thank you.