OPEC : OPEC: Vision, Mission and Development

OPEC: Vision, Mission and Development

World Oil Outlook to 2025 by Dr Maizar Rahman, Indonesian Governor for OPEC, Acting for the OPEC Secretary General. Indonesian National Committee, World Energy Council - Jakarta, Indonesia, 29 July 2004

Distinguished guests, ladies and gentlemen,

Let me begin by thanking the Indonesian National Committee of the World Energy Council for inviting me to deliver this keynote address on the subject of: “OPEC: vision, mission and development / World oil outlook to 2025”.

From a personal point of view, this is a special honour — and pleasure — for me, because, as the saying goes, “There is no place like home”. Having the opportunity to address an audience in one’s own, beloved, home country, has a particular appeal that cannot be found elsewhere. Among other things, it enables one to equate important issues on the global agenda with the specifics of one’s own domestic circumstances in a more direct and targeted manner than usual.

Added to this is the fact that Indonesia is a proud Member of the OPEC family, joining the Organization in 1962, just two years after its establishment in Baghdad. (Slide 2) Indeed, Indonesia is the only Member of OPEC from this part of the world! All in all, Indonesia and OPEC have been through a lot together over the past four decades, sharing a common vision about many aspects of the world oil industry, and, in the process, we have both grown in expertise, confidence, authority and effectiveness during this period. OPEC’s mission can best be understood by familiarising ourselves with the Organization’s principal objectives, as set out in the OPEC Statute: (Slide 3)

“The Organization shall devise ways and means of ensuring the stabilisation of (oil) prices in international markets, with a view to eliminating harmful and unnecessary fluctuations. Due regard shall be given at all times to the interests of the producing nations and to the necessity of securing: a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on their capital to those investing in the petroleum industry.”

The fact that the Statute dates from 1961 means that, throughout its existence, OPEC has had as its core values: stable markets, reasonable prices, steady revenues, secure supply and fair returns for investors. But OPEC’s mission does not stop there. (Slide 4)

In 1968, OPEC issued a Declaratory Statement of Petroleum Policy in Member Countries. This referred to the inalienable right, as expressed by the United Nations, of all countries to exercise permanent sovereignty over their natural resources in the interests of their national development. The Declaratory Statement pointed out that this right applied to OPEC Member Countries directly undertaking the exploitation of their own, indigenous exhaustible resources. In 1975, a Conference of OPEC Sovereigns and Heads of State in Algiers adopted a “Solemn Declaration”, which, among other things, embodied a proposal for a New International Economic Order. This aimed at promoting a more equitable global economic system, with particular emphasis on alleviating poverty and other injustices affecting developing countries, by encouraging greater interdependence among nations from the North and the South. This first OPEC Summit led to the establishment of OPEC’s own specialist multilateral development finance institution in 1976, to help other developing countries pursue social and economic advancement. To date, the OPEC Fund for International Development has made total financial commitments of US $7.0 billion. In addition, over the years, our Members have, separately, provided considerable assistance to other developing countries.

At its Second Summit in Caracas, Venezuela, in September 2000, OPEC’s Heads of State and Government reviewed the state of the energy industry, “taking into consideration the rapid pace of change in economic, political, technological and environmental developments, and the challenges and opportunities created by globalisation and liberalisation.” The resulting second Solemn Declaration saw Member Countries reaffirm their commitment to OPEC’s longstanding principles and objectives, “to aim at the preservation and the enhancement of the role oil would play in meeting future world energy demand.” It also accommodated other important issues which had risen to prominence on the international agenda since the First Summit.

Therefore, OPEC’s mission has many sides to it and extends well beyond the confines of the international oil market.

OPEC’s development over the years has been remarkable. (Slide 5) It was founded in September 1960, when five oil-producing, developing countries joined forces to safeguard their legitimate national interests, since they relied almost exclusively on petroleum sales on world markets for the generation of export revenue. This occurred at a time when the international petroleum industry, outside the former Soviet Union, was under the firm grip of the established industrial powers.

Other oil-producing developing countries joined OPEC in the next decade and a half, extending the Organization’s reach from Latin America in the west, across North Africa, West Africa and the Middle East in the centre, to South-East Asia in the east. OPEC is truly an international Organization! Over the past four decades, OPEC has overcome formidable challenges in the constantly evolving international oil market, impacting across the spread of the pricing spectrum and compounded by factors far removed from simple market economics.

We have emerged from this as an Organization with a vast experience of petroleum issues and an acute awareness of the realities and the sensitivities of performing on the world stage. Our production agreements make a major contribution to market stability, to the benefit of producers and consumers alike. This brings us onto the subject of cooperation.

Cooperation lies at the roots of OPEC’s existence. Indeed, OPEC was founded on the premise of cooperation, with its first Conference of 1960 resolving that: (Slide 6) “The principal aim of the Organization shall be the unification of petroleum policies for the Member Countries and the determination of the best means for safeguarding the interests of Member Countries, individually and collectively.”

The crude oil price collapse of 1986 and its damaging economic repercussions encouraged many non-OPEC producers to respond to OPEC’s calls for enhanced cooperation, as they finally recognised what we had been saying for years — that the oil market was inherently unstable and that some form of supervision was required to help achieve and maintain order and stability. (Slide 7) Since the late 1980s, the support of leading non-OPEC producers has, on many occasions, increased the effectiveness of our market-stabilisation measures.

The benefits of cooperation extend into many other areas of the oil industry’s activities. For example, in July 2003, we held a productive joint one-day workshop on the short- and long-term prospects for the development of world oil markets, with high-powered delegations from the Russian Federation. Moreover, there were major advances in producer-consumer dialogue in the 1990s, in tandem with the rising profile of the International Energy Forum. (Slide 8) OPEC has played a prominent role in the development of this specialist producer-consumer forum; among other things, its new permanent Secretariat has been located in an OPEC Member Country, Saudi Arabia.

Recent years have witnessed the development of a closer working relationship between OPEC and the International Energy Agency, to exchange ideas and information. Two Joint Workshops on Oil Investment Prospects have been a product of this, while, last year, informal discussions between our two organisations helped stabilise the oil market at the time of the Iraq war. Clearly, the concept of cooperation within the world oil industry is now well-established (Slide 9) — although such is the complexity of this industry and the underlying forces and pressures that propel it, that there remains plenty of scope for improvement. Nevertheless, a clear realisation has emerged that the industry is better-off if there is an underlying consensus on the means of handling, at least, the major issues that concern all parties — such as pricing, stability, security of demand and supply, investment, environmental issues and sustainable development.

This is all very welcome and is helping the industry prepare to meet the challenges that face it both now and in the future.

Let us now look at today’s oil market. (Slide 10)

The present high oil prices are a matter of much concern to OPEC, and we are doing everything we can to restore order and stability to the market, in the interests of producers and consumers alike. However, the high prices are occurring in spite of the market remaining well-supplied with crude and despite the continued efforts of our Member Countries to meet market requirements. OPEC is producing at close to capacity and has made significant increases in output. Our most recent assessment shows that OPEC-10 is currently producing some 2 mb/d above the agreed output ceiling. This should not, however, be seen as a violation of our production agreement; instead, it should be recognised as constituting a positive response by our Members to the current market situation. It should be clear from our actions that the Organization does not wish to see prices rise any further. Even the US Federal Reserve Chairman, Alan Greenspan, acknowledged last week that oil prices were high because demand was expanding faster than supply, and not because OPEC was squeezing the market. He was quoted as saying that, even though there was an obvious incentive for them to do so, OPEC countries were not trying to increase prices because of the dollar’s recent decline. So what has been putting such strong upward pressure on prices this year? It has, in fact, been a combination of factors, including: higher-than-expected oil demand growth, especially in China and the USA; geopolitical tensions; and refining and distribution industry bottlenecks in some major consuming regions, coupled with more stringent product specifications. Combined, these factors have led to unwarranted 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. Indeed, demand growth projections for 2004 are being continually revised up; since this time last year, they have more than doubled to around 2 mb/d, which represents a 16-year high.

At the Extraordinary Meeting of the OPEC Conference in Beirut on 3 June, in the light of the prevailing high, volatile prices, we decided to increase OPEC-10’s production ceiling in two stages — by two million barrels a day to 25.5 mb/d, with effect from 1 July, and by a further 500,000 b/d to 26.0 mb/d, with effect from 1 August. We did this to ensure adequate supply, to send a clear signal of OPEC’s commitment to market stability and to restoring prices to levels acceptable to both producers and consumers, and to support continued, robust, global economic growth. At the same time, we once again called on all other parties, including non-OPEC producers and consumers, to support our actions and to take appropriate measures to address the challenges facing the industry. Although the price of OPEC’s Reference Basket fell by more than US $3 a barrel in the weeks after the Beirut Conference, they began to rise again at the beginning of this month, indicating that the principal elements that concerned us in Beirut are still with us today, in what has continued to be a nervous, sensitive market.

We in OPEC recognise that this is a challenging time in the oil market, with the unusual, powerful combination of forces that are currently dominating market activity and adversely affecting its equilibrium. However, we remain firm in our resolve to continue doing everything we can to restore prices to reasonable levels, that are acceptable to producers and consumers alike — and to keep them there. We successfully operated our price band mechanism for three years and we have every intention of ensuring its return to full effectiveness as soon as we can — but this is, of course, difficult in the present exceptional circumstances. Turning our attention to 2005, initial forecasts from recognised sources for next year assume a moderate slowdown in global economic growth. (Slide 11) We project an annual growth rate of 4.3 per cent for 2005, compared with the 4.8 per cent currently forecast for this year. Growth of 5.1 per cent for developing countries will compare with 3.0 per cent for the OECD. Separately, China is projected to experience 7.7 per cent growth in 2005, and Russia 5.7 per cent. (Slide 12)

What impact will this have on oil demand in 2005 — especially at a time when there may be attempts to fill strategic petroleum reserves in China, India and, possibly, the USA? (Slide 13) Oil demand growth forecasts for 2005 fall within a wide range of 1.4–2.4 mb/d, with an average of around 1.8 mb/d. OPEC itself projects 1.7 mb/d. Asia is expected to account for a significant proportion of this growth. (Slide 14)

Looking at supply, forecasts for 2005 non-OPEC supply (which, in this short-term analysis, includes OPEC NGLs) also cover a wide range, between 0.7 mb/d and 1.6 mb/d, with a mean of about 1.0 mb/d. (Slide 15) OPEC’s projections see an increase of 1.3 mb/d. According to various sources, the difference between world oil demand and non-OPEC supply is expected to increase for the third consecutive year. The preliminary market balance forecasts — demand minus non-OPEC supply — are also spread across a wide range, from 27.4 mb/d to 29.4 mb/d, with an average of around 28.4 mb/d. OPEC expects this number to fall at the low end of the range. (Slide 16)

Will OPEC be able to meet the projected additional call on its oil in 2005? Historically, our Organization has maintained adequate excess production capacity to provide a timely response to supply disruptions and/or surges in demand, such as those experienced in the last few years. We are confident that this trend will be repeated in 2005. After all, in addition to opening their taps in response to market demand so far this year, OPEC’s Member Countries have also been investing vast resources to increase production capacity in the near term. We think it is reasonable to assume that OPEC’s spare capacity will lie within a range of 2.8–3.5 mb/d next year, and this will provide a sufficient buffer to ease the pressure on prices from concern about potential supply disruptions or other unexpected developments. (Slide 17)

Let us now look further into the future, to 2025. Here we rely heavily upon OPEC’s World Energy Model, “OWEM”, and the reference case from its latest scenarios report, which was prepared at the beginning of this year, before the recent big rise in oil prices. The early part of this period sees the Reference Basket at $25/b, while the longer-term figure, in real terms, settles at $20/b, at 2003 prices. (Slide 18) 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. (Slide 19)

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. (Slide 20) 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.

Our reference case sees global oil demand rising by 12 million barrels a day to 89 mb/d from 2002 to 2010 (Slide 21) — an average annual growth rate of 1.5 mb/d, or 1.8 per cent per annum. Further increases in the following decade will see demand grow by another 17 mb/d to 106 mb/d by 2020, and then by 9 mb/d to 115 mb/d by 2025 — an average of 1.7 per cent p.a. growth over the years 2010–25.

OECD countries will continue to account for the largest share of oil demand. However, almost three-quarters of the increase in demand of 38 mb/d over the period 2002–25 will come from developing countries, whose consumption will almost double. (Slide 22) 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. (Slide 23) 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, on the basis of detailed bottom-up data on upstream development plans, overall non-OPEC supply is expected to continue to increase, rising to a plateau of 55–57 mb/d in the post-2010 period. (Slide 24) 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.

In the longer term, the balance of the global oil reserve base and the gradual depletion of non-OPEC reserves means that OPEC will increasingly be called upon to supply the incremental barrel, with its market share eventually set to rise. (Slide 25) By 2020, with a production level, including natural gas liquids, of 49 mb/d, OPEC’s share will be 46 per cent of the market. Five years later, in 2025, OPEC is projected to meet more than half the world’s oil demand, at 51 per cent, with 58 mb/d.

Clearly there is a need for increased investment in oil production capacity. This has three elements to it. (Slide 26) First, it must meet the forecast absolute increase in demand, which I outlined earlier. Secondly, it must see that exhausted reserves are replaced, as and when necessary. And thirdly — and this is a recently articulated concept, but, nevertheless, a very important concept — it must ensure that oil-producing nations always have sufficient spare capacity available to cope with sudden, unexpected shortages in supply.

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. (Slide 27)

Even a one per cent shift in global economic growth expectations can make a big difference to required production capacity levels — and hence investment requirements — in a relatively short time. Our calculations, based on OWEM scenarios, show that a one per cent reduction in global economic growth projections reduces the investment requirement for 2010 from a reference case $95 billion to $70 bn and, for just five years later, from $173 bn to $122 bn. (Slide 28) These are very big and, indeed, very significant differences. After all, under-investment will lead to a shortage of crude and over-investment will lead to excessive, costly idle capacity. Neither is good, and both can have a serious, detrimental impact on market stability and prices.

And when a miscalculation occurs, it is by no means an overnight task correcting the situation, due to the long lead-times involved in investment in the petroleum sector. We can easily find ourselves talking in terms of years, when it comes to making the appropriate adjustments to production capacity levels which are found to be out of line with the market’s requirements. Countering uncertainties, therefore, becomes a very important task and, to be truly effective, requires a collective approach from within the industry, since the challenges are too large, too complex and too important to be left to partial interests. This requires transparency, consultation, meticulous planning and careful scheduling by all parties.

One certainty, however, is the clear economic advantage that lies in investing in the exploitation of OPEC’s crude oil reserves. Not only are these reserves more abundant, accounting for around four-fifths of the world’s proven total, but they are also more accessible and cheaper to exploit than those in non-OPEC areas. (Slide 29) Also, as we noted earlier, our projections show that OPEC will increasingly be called upon to supply the incremental barrel. Moreover, it is worth noting that the absolute size of investment required by the oil industry in this outlook is not necessarily different in magnitude to that observed in the past. This should all be viewed as good news for the industry and for world energy supply generally.

However, the conditions have to be right to ensure that this oil is brought to the market in an efficient, effective and timely manner. One of the clear messages to emerge from the second joint OPEC/IEA workshop in April was that the starting-point for a sound investment strategy is market order and stability today. (Slide 30) A reasonable, predictable price level is needed to secure adequate sources of investment. That is why OPEC’s market-stabilisation measures and, in particular, its price band concept are so important.

It is also why it is necessary for other producers to recognise that they share with us the collective responsibility for enhancing the overall welfare of the international oil market and that they must take active steps, whenever they can, to support our measures. (Slide 31) All producers stand to benefit from cooperation, on all time-horizons. Indeed, there must be reasonable burden-sharing among all parties in the industry, including the large oil companies, financial institutions and other intermediary bodies, if the industry is going to develop in an orderly manner in the future and meet the sizeable challenges facing it.

Distinguished guests, ladies and gentlemen, Let us end on a bright note! As I have made clear during this speech, there is the clear expectation that the world’s oil resource base is sufficiently abundant to satisfy the steady rise in demand that has been forecast for the years and decades ahead. (Slide 32) And OPEC, upon which the world will rely increasingly for its oil, has the mission and the commitment to ensure that this demand is met in an orderly manner, with stable markets, reasonable prices, steady revenues, secure supply and fair returns for investors.

Thank you.

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