OPEC's role and the challenges we face in the petroleum industry

Delivered by Dr Alvaro Silva-Calderón, OPEC Secretary General to the Institute of Petroleum's Autumn Lunch. London, England, 22 October 2003

Ladies and gentlemen,

I should like to thank the Energy Institute for this kind invitation to be Guest of Honour and Speaker at their Autumn Lunch.

This comes at a time of major change, following the merger of the Institute of Petroleum with the Institute of Energy earlier this year, to form the Energy Institute. We in OPEC warmly welcome any actions that support the relentless pursuit of excellence within the industry, especially when these involve institutions whose fine records of achievement stretch back more than three-quarters of a century. We wish the new Energy Institute every success in the future.

I should like to talk today about OPEC’s role and how this equips us to meet the challenges we face in the petroleum industry in the early 21st century. As you may know, the Organization of the Petroleum Exporting Countries, itself, has been around for a long time — since September 1960.

OPEC is an international organization with 11 oil-exporting, developing countries as its Members. These countries exercise permanent sovereignty over their finite natural resources, principally petroleum, as outlined in United Nations resolutions. They are committed to ensuring that these natural resources are exploited in a sensible and responsible manner.

The OPEC Statute, which was first adopted in 1965, defines our principal objectives. It begins with the coordination and unification of our Member Countries’ petroleum policies, the safeguarding of their interests and the securing of a steady income for them from petroleum sales. This is of central importance to us, because petroleum revenue plays a major part in our efforts to develop our economies in a viable and sustainable manner.

The Statute also contains objectives that can be described as outward-looking. It pledges OPEC to the achievement of: stable oil prices; an efficient, economic and regular supply of petroleum to consuming countries; and fair returns to investors. In other words, OPEC’s policy is to consider and accommodate the interests of other parties in the industry in its decisions and actions — non-OPEC producers, consumers and investors.

In practice, the oil market conditions we seek have three fundamental elements. The first is steady, predictable demand. The second is an absence of disturbances on the supply side, caused by interruptions, shortages and uncertainty. And the third is the maintenance of a fair and stable price range. All of this, however, is easier said than done!

In addition to these market-stabilisation activities, OPEC has committed itself wholeheartedly to other causes, for which an orderly flow of energy can make a significant difference to the well-being of mankind and the global economy — notably environmental harmony, sustainable development and the eradication of poverty.

The application of energy, in one form or another, is an essential dynamic ingredient of everyday economic activity. Accessing energy can be described as perhaps the most important issue facing mankind, with ramifications which can be economic, political, social, legal or strategic, and a reach which can be local, regional, national or international — or a combination of all of these.

Oil is the leading source of commercial energy in the modern world, accounting for around 40 per cent of today’s world energy mix. It is a unique commodity, with a combination of attributes which far exceeds that of any other energy source — sufficiency, accessibility, versatility, ease of transport and, in many areas, low costs. These have been complemented by a multitude of practical benefits that can be gained from decades of intensive exploitation and use in the industrial, commercial and domestic fields.

There is every indication that oil will maintain this leading role well into the 21st century. This is in spite of the fact that, over the past decade or so, oil has come under pressure on environmental grounds, particularly in the context of the UN-sponsored climate change negotiations. There have also been longer-standing efforts among some consuming nations to diversify energy sources away from oil, on so-called “strategic grounds”. However, projections from the reference case of OPEC’s World Energy Model, “OWEM”, suggest only a marginal dip to 38 per cent in oil’s market share in the period to 2020. In absolute terms, world oil demand is forecast to rise from 76 million barrels a day in 2000 to 107 mb/d in 2020 — that is, by around 41 per cent.

The chief beneficiary of all of this will be gas. Gas has a more favourable environmental profile among the fossil fuels, and is a reliable and highly efficient source of power generation. It is now relatively low in cost to produce, although still expensive to transport to consumers. Our reference case shows that the use of gas will almost double in the period 2000–20 and its share in the global energy mix will rise from 23 per cent to 28 per cent; however, this will still be ten percentage points below oil’s share. In absolute terms, world gas demand will rise from 42.2 million barrels of oil equivalent per day in 2000 to 75.0 mboe/d in 2020 — that is, by around 78 per cent.

All in all, about two-thirds of the world’s commercial energy is expected to come from petroleum — oil and gas — in 2020. OPEC is well endowed with both hydrocarbons, having almost 80 per cent of the world’s proven oil reserves and nearly 50 per cent of its natural gas.

Our proven crude oil reserves total nearly 850 billion barrels and there is a reserves-to-production ratio of more than 80 years. These reserves are much more accessible than those in other, high-cost regions of the world. Also, advances in technology continue to make oil a cleaner, safer fuel, so that it can meet increasingly tighter environmental regulations, as well as conforming to the broader demands of sustainable development. Therefore, our Member Countries possess the reserve strength to cope with the forecast rises in demand in the coming decades.

It would seem logical, therefore, for consumers to expect to get most of their oil from OPEC’s Member Countries.

However, unjustified fears exist about security of supply and over-dependence on specific regions for crude oil. The reasons for this are an unfortunate mix of fact and fiction. The fact is that the world’s oil reserves are concentrated mainly in developing countries, while most customers are located in industrialised nations. The fiction is the belief by some people that developing countries cannot be relied upon to act in a consistent, honourable way in international trade and commerce.

These people refer us back to the events of the 1970s, to support their case. But they over-simplify these events, they rarely have a detailed knowledge of them and they overlook the fact that they actually happened 30 years ago and that the world has moved on since then.

These unjustified fears paradoxically can themselves make the oil market a less secure place, by resulting in decisions and actions that contribute to distortions in the market. The most notable distortion is that OPEC has around four-fifths of the world’s crude oil reserves, but accounts for only about two-fifths of its output.

Running away from realities, as a result of misperceptions and fears, will not solve anyone’s problems. Instead, it will only add to them.

I wish to assure you that fears about OPEC’s integrity are groundless. OPEC has demonstrated repeatedly its firm commitment to the three elements I mentioned earlier: security of supply, security of demand and fair, stable prices. The most recent example of this occurred earlier this year, with the hostilities in Iraq. Many people had predicted that this would lead to a sudden steep rise in oil prices and a period of protracted volatility. But this did not occur. OPEC ensured that the market was kept well-supplied with oil at all times. Indeed, at around the same time, there were serious unexpected cutbacks in output from two other leading oil producers, and the impact of these on world oil prices was again successfully handled by our Organization, with support from some leading non-OPEC producers.

The principal issue is how the world chooses to manage its finite oil resources. OPEC knows, through both intuition and experience, that it does not operate in a vacuum. If it wants to sell its oil, then it must attract buyers. And it does not attract buyers by scaring them off, or being unreliable. As oil-producing, developing countries, OPEC’s Members are heavily dependent on a steady flow of income from petroleum sales to help them develop their economies on a sustainable basis. It is in their best interests to ensure that the oil market performs in a stable and orderly fashion at all times. They have nothing to gain from rocking the boat. OPEC realises that its market-stabilisation measures are most effective when they receive widespread support from within the industry. The boundaries between OPEC and non-OPEC producers and between producers and consumers should not be allowed to neutralise OPEC’s actions. It is a process of interdependence. Producers need consumers and consumers need producers. Companies in-between provide the dynamics, while conferences and seminars create opportunities for constructive dialogue. They all have an important role to play.

Reason, equity and compromise should be the guiding principles when there are diverging interests. For example, people who are concerned about security of supply should acknowledge, at the same time, the need by producers for steady, predictable demand; this is vital, among other things, for the process of making sound investment decisions for the future. Also, while we in OPEC would not question the right of sovereign states to devise their domestic fiscal regimes, we believe that, if a government imposes a 70 or 80 per cent tax on petrol, it should at least admit this when oil prices are high and not just stand aside and let oil producers take the blame. Further, on the question of the deregulation of energy markets, what does this really mean? They are not being totally deregulated, otherwise there would be anarchy and chaos. To what extent, therefore, are they being deregulated and in whose ultimate interest? We all need to live by rules, but they must be the right rules — fair, balanced, consistent, transparent and the product of consultation among, at least, the most affected parties.

Turning to oil prices, these will only be sustainable and useful to the market if they are at levels that balance the contrasting requirements of producers and consumers. OPEC has identified a range of US $22–28 a barrel for its Reference Basket of seven crudes that has won widespread acceptance in the market over the past three years, and it periodically adjusts its production levels to stay within this adopted price band. This has contributed greatly to stability, countering heavy pressure on the market’s equilibrium at both ends of the pricing spectrum. Destabilising factors are not just the result of developments in the market, such as news of unexpected inventory levels or refinery bottlenecks. They can also come about through natural disasters, outbreaks of hostilities or accidents, even when they happen far from oil installations. Whatever the case, they require timely remedial action by OPEC, and we seek to provide this, to the best of our ability.

This also has benefits for the longer term, since stability provides a sound base for investment in future production capacity. This has three elements to it. 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, it must ensure that oil-producing nations always have sufficient spare capacity available to cope with sudden, unexpected shortages in supply.

Our projections indicate that OPEC Member Countries may need to spend nearly $100 bn by 2010 and as much as $200 bn by 2020 to meet the future demand for oil in full. It will require a concerted effort by the industry at large to attract these sums.

Ladies and gentlemen,

I have been privileged to have this opportunity to speak to you about OPEC’s role in the petroleum industry, as we seek to face the challenges that will arise in the early 21st century. These revolve around ensuring that our Member Countries are able, at all times, to meet the world’s steadily growing demand for clean, safe petroleum in a stable, well-ordered market, founded upon transparency, equity and a readiness for constructive dialogue. We will do everything within our power to meet this commitment.

Thank you.