International cooperation in the oil & gas sector & the development of energy diplomacy

Delivered by Dr Alvaro Silva-Calderón, OPEC Secretary General to the seminar organized by the International Institute of Energy Policy & Diplomacy of MGIMO-University, Ministry of Foreign Affairs of the Russian Federation

 3rd Russian Oil Gas Week, Moscow, Russia, 5th November 2003

Ladies and gentlemen,

Let me begin by thanking the organisers for inviting me to comment on a topic that is very close to our hearts in OPEC — cooperation.

It is interesting to see that the organisers have linked cooperation with the development of energy diplomacy, because, in OPEC, we cannot imagine any kind of effective diplomacy without cooperation!

OPEC itself was founded on the premise of cooperation in September 1960. Let us look at the OPEC Statute, which was drafted shortly after our foundation. This begins: “The principal aim of the Organization shall be the coordination and unification of the petroleum policies of Member Countries and the determination of the best means for safeguarding their interests, individually and collectively.”

It continues: “The Organization shall devise ways and means of ensuring the stabilisation of 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.”

To understand the full significance of this declaration, you must appreciate the historical context.

Here were five oil-producing, developing countries — four from the Middle East and the fifth, Venezuela, from half-way across the world — joining forces to safeguard their legitimate national interests at a time when the international petroleum industry, outside the former Soviet Union, was under the iron grip of the established industrial powers. Much of the developing world was still dominated by powerful colonial interests, even though this centuries-old enforced institution was gradually being dismantled. Indeed, some countries had already gained independence by 1960 and others would soon follow.

In such a climate, the formation of OPEC was a brave act, a pioneering act, an act that demonstrated that even developing countries had rights, that their indigenous natural resources were more than just a convenience for the rich consumer nations, to be pumped out of the ground as and when these foreign powers deemed fit.

Looked at in this way, cooperation within OPEC had a backbone of steel. And this backbone has remained as OPEC has grown over the years, becoming an established, respected member of the global energy community.

Other oil-producing developing countries joined OPEC in the next decade and a half, extending the Organization’s reach to North Africa, West Africa and South-East Asia and reinforcing its central core of cooperation. They were all committed to OPEC’s longstanding objectives of ensuring order and stability in the international oil market, with secure supply, steady demand, reasonable prices and fair returns to investors.

The next major advance occurred in the late-1980s. This was a consequence of three linked developments. First, there was the gradual erosion of the oil price structure in the early 1980s and its eventual collapse in 1986, which caused severe domestic upheavals and huge revenue losses for oil producers. Secondly, there was a significant reduction in OPEC’s market influence, due to its sizeable loss of market share since the late 1970s. And thirdly, there was the realisation by non-OPEC producers after 1986 that market-stabilisation measures were urgently needed and that OPEC required support in providing these.

In other words, non-OPEC producers — from both the developing and developed worlds — had finally acknowledged what OPEC had been saying for years, that cooperation is vital for the ongoing welfare of the international oil market.

It was only a matter of time before this process broadened out further, and this occurred with major advances in producer-consumer dialogue in the 1990s, in tandem with the rising profile of the International Energy Forum, whose specific purpose was to provide the setting for such dialogue. This process received its formal seal of approval with the recent decision to establish a permanent Secretariat for this forum in an OPEC Member Country, Saudi Arabia.

When presented in this manner, there seems little doubt that the concept of cooperation within the world oil industry is now well-established — although, of course, such is the complexity of this industry and the underlying forces and pressures that propel it, that there is still plenty of scope for improvement. But, since the end of the 1980s, there has come the clear realisation that the industry is better-off if there is an underlying consensus on, at least, the major issues that concern all parties — such as pricing, stability, security of demand and supply, investment, environmental issues and sustainable development. A lot of progress has been made in this regard, thankfully. But this is not enough.

The situation is somewhat different for the gas sector, where, at a global level, the concept of cooperation is less well-established. This is partly because of the regional nature of the gas industry, although this may be changing now, in the light of current developments with liquefied natural gas, which is introducing a global dimension to gas supply. Also, right now, gas is not as critical to the overall welfare of the modern consumer society as oil; however — again — this may change with time, due, in particular, to gas being the fuel of choice for environmentalists. Furthermore, the international gas sector, which can still be described as relatively young, has been in the advantageous position of benefiting from the lessons of history and avoiding some of the mistakes made by the oil sector over the past century and a half. And finally, a higher proportion of gas reserves can be found close to consumer markets and this eases the flow of gas from its source to its final destination.

However, this is only a matter of degree, compared with the oil sector, and the need for cooperation in the gas sector is every bit as real as it is for oil. This is even more the case, when you consider the bright market prospects for gas, the fact that demand for gas is forecast to grow strongly in the coming decades and that it will increase its share of the global energy mix. OPEC’s projections show this share rising from 23 per cent in 2000 to 28 per cent in 2020, although this latter figure will still be ten percentage points below that of oil, whose market share will decline slightly to 38 per cent in that period.

The recent formation of the Gas Exporting Countries Forum recognises the need for discussion of issues of mutual concern 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.

The message from all of this is that the petroleum industry — both oil and gas — is well-disposed towards dialogue, as it seeks to handle present and future challenges. This is a welcome development, because the challenges are formidable, numerous and diverse in nature — especially since they cover two hydrocarbon sectors and, moreover, interact with each other!

OPEC’s present policy is to ensure that the international oil market is well-supplied with crude, with reasonable, stable prices. Our production agreements are aimed at keeping prices within a band of US $22–28 a barrel for OPEC’s Reference Basket of seven crudes, which is the range we have identified as balancing the interests of producers and consumers; the flexibility of this system allows for the market’s regular fluctuations to be absorbed in an orderly manner. If prices begin to settle outside the limits of the band, OPEC adjusts its production agreement accordingly, to correct the situation. However, to be truly effective, our market-stabilisation measures require the support of non-OPEC producers, and much progress has been made in this regard in recent years.

In many consumer markets, gas prices are tied to oil prices. Therefore, a sound pricing policy for oil is also beneficial to gas. This provides an added incentive to oil producers with a big involvement in the gas sector to support our market-stabilisation measures.

Looking at the longer term, demand is expected to continue growing steadily in the early decades of this century. OPEC’s World Energy Model forecasts a 41 per cent rise in world oil demand, from 76 million barrels a day in 2000 to 107 mb/d in 2020. It projects even faster growth for gas — 78 per cent — from 42 to 75 million barrels of oil equivalent a day in the same 20-year period.

Requirements for petroleum to meet increasingly stringent regulations, particularly for environmental reasons, make this more than an issue of mere volumes. And the situation becomes even more complex in the light of the challenges presented by other aspects of 21st century energy dynamics — these include globalisation, the information revolution, rapid technological change, regionalism and sustainable development. There is a wide range of choices, therefore, about the world’s energy options on every time-horizon.

The decision-making process itself has a diverse set of possibilities, from simple day-to-day transactions to international diplomacy involving governments, major companies or a mixture of both. Fresh impetus has been given to energy diplomacy over the past decade, following, in particular, the dissolution of the Soviet Union, and this has contributed towards a significant shift in the world energy order.

The part OPEC has played in this process has covered an array of issues related to the present and future welfare of the international oil market. We have been actively seeking to the preserve the integrity of crude oil as the world’s leading energy source and to assure consumers of OPEC’s firm commitment to secure, stable oil supply. This rides hand-in-hand with the fact that our 11 Member Countries possess around four-fifths of the world’s proven crude oil reserves.

OPEC’s substantial presence in the gas sector — where our Member Countries hold around half the world’s proven natural gas reserves — adds further resonance to OPEC’s central role in future energy supply.

Ladies and gentlemen,

We have moved forward a long way since September 1960, when a group of five oil-producing developing countries took a decision to cooperate with each other and form OPEC. The world of petroleum is a very different place now. But the basics remains the same: stability, security, sufficiency, equity. And binding all these elements together is cooperation.

Thank you.