OPEC and Non

7/31/2019 OPEC and Non

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OPEC and non-OPEC

OPEC and non-OPEC is a principal element of the overall theme of the conference Balancing

the interests of consumers and producers and is a matter to which we attach much importance.

Balancing these interests in a successful and sustainable manner is, indeed, a challenge for all of us and

is fundamental to the future healthy development of the international oil market.

We shall start our address by reviewing the current situation in the market, because I know that this is

of most immediate concern to us. I shall then examine the respective positions of OPEC and non-OPEC

producers, the relationship between them and the role they play in meeting oil demand both now and

in the future. This will involve providing projections about world oil demand and supply over the next

two decades. My concluding remarks will touch on investment and stress the importance of dialogue

and cooperation in the process of ensuring that OPEC and non-OPEC producers can successfully meet

the challenges that lie ahead of them, to the benefit of producers and consumers alike.

So let us now look at the current situation in the market.

I must begin by stating loud and clear that OPEC is not comfortable with prices at the present high

levels. We have witnessed record levels in the second quarter of th is year, and the price of OPECsReference Basket has risen above US $65 a barrel, which means it has doubled in just two years.

Nevertheless, in real terms, prices are still well below the levels seen in the early 1980s, when the OPEC

Basket would have reached $85/b, at todays prices. We should also not forget that, over the last two

years, there has been a strong increase in non-energy commodity prices, sometimes at rates greater

than that of oil. This is an often overlooked fact, but it needs to be expressed to provide a more

complete picture of the present global situation.

In simple marketing terms, prices that are too high will drive people away from oil, as we saw a quarter

of a century ago, while prices that are too low will provide inadequate revenue for investment in future

capacity, as we witnessed in the late-1990s and which is why many under-financed refining sectors aresuffering at the present time. Extreme prices in either direction will contain the seeds of volatility, as the

market will sooner or later and with or without some assistance return to levels more in line with

supply and demand fundamentals. And, as I am sure you are all well aware, volatility is the enemy of

sound investment strategies.

Accordingly, OPEC seeks prices that are stable, sustainable, affordable across the market and provide

fair and reasonable returns to producers and investors. It is, indeed, in the best interests of our

Members that such a pricing environment exists, because the revenues we receive from our oil sales

play a major part in the economic and social development of our countries, and such development

thrives on stability and predictability. This is why OPEC has been making such a concerted effort to

restore stability and reasonable prices to the market over the past two years.

The present volatility has a number of causes.

First and foremost, oil demand growth has been exceptional. Fuelled by high economic growth, global

oil demand surged in 2004 by 2.9 million barrels a day. Such a high level of demand growth has not been

seen since the early 1970s. North America and the developing countries, in particular China, were at the

centre of this remarkable spurt. It moderated somewhat during 2005, with demand growing by just

under 1 mb/d.


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There has also been a slow-down in the rate of expansion of non-OPEC supply. This has been, in part, a

delayed reaction to the lower oil prices witnessed at the end of the 1990s, with the commensurate

stalling of expenditure on exploration and development gradually being felt. Moreover, it has followed

many years of non-OPEC supply growth exceeding that of OPEC, and often at faster-than predicted

rates. I shall take an in-depth look at non-OPEC supply shortly, since it is the principal focus of this

session.

Next, there has been tightness in the downstream sector. In three key regions of the world Asia,

Europe and the United States refineries have been operating at 90 per cent of capacity and above formuch of the time. In this situation, any disruption can create product shortages whether from a

maintenance shutdown or an emergency such as Hurricanes Katrina and Rita. There is also a lack of

capacity to process heavier sour crudes, causing the prices of light sweet crudes to climb even higher

and the differentials between crude grades to increase. All these factors have contributed to

downstream tightness, a situation that, based on the information available today, OPEC does not expect

to ease in the near term.

Also influencing price movements has been increased activity in the futures market, with a new inflow

of capital movements by hedge and pension funds. Indeed, open interest contracts in the NYMEX passed

the one million mark for the first time in April. Add to this mix, natural disasters and uncertaintiesstemming from geopolitical developments and it is understandable why there is so much volatility at the

present time.

OPEC has been responding as necessary to the need for additional oil, underlining, once again, its

longstanding commitment to market stability, which dates back to the establishment of our

Organization more than 45 years ago. Indeed, OPECs Member Countries have increased production by

around 4.5 mb/d since 2002, even though there have been no actual supply shortages; indeed, recently,

stocks have increased to levels above their five-year average. And, where possible, our Member

Countries have accelerated their plans to bring on-stream new production capacity to meet continued

demand growth and re-establish a comfortable level of spare capacity. Indeed, in September last year,

OPEC agreed to make available to the market spare capacity of around two million barrels a day in

Member Countries, should this be called for.

We have adopted these measures, even though, in reality, we have had little influence over the factors

that have caused the volatility and rising prices. Nevertheless, we believe that the very fact that we are

taking such measures sends a strong signal to the market about OPECs views on a particular set of

events, and this, in itself, can have a stabilising effect on market sentiment. For example, last year,

OPECs assurances of healthy supply helped prevent the supply interruptions caused by Hurricanes

Katrina and Rita from developing into a major crisis. These assurances were accompanied by similar

positive statements from the International Energy Agency (IEA), whose 26 members include eight

countries producing more than 50,000 b/d, among them the worlds third -largest producer, the USA.

Similar joint assurances calmed markets at the outbreak of hostilities in Iraq in 2003.

In providing this short review of the current situation in the oil market, I have, at the same time, been

able to draw attention to the ever-pervasive role of non-OPEC producers in the constantly shifting

landscape.

What is often overlooked here is the fact that, globally, non-OPEC production far outweighs OPEC

production, by a factor of around three to two at the present time. Indeed, for only one period in OPECs


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45-year history has the Organization accounted for more than half the worlds average crude output and

that was in 197077, with OPECs share peaking at 55.4 per cent in 1973. After that, it fell heavily, to

below 29 per cent in 1985 in other words, OPECs share almost halved before climbing back to

around 40 per cent, where it has remained since the early 1990s within a couple of percentage points

either way. In case of crude oil exports, the OPECs share also slid albeit from close to 90% to around

50% at present.

Of course, by definition, we are not comparing apples with apples. Our categorisation exists because

OPEC is an established grouping of oil-producing developing countries, with 11 Members that aresignatories to a set of common energy-related objectives, which have a big influence on their market

behaviour. Such a formal collective oil market commitment does not again, by definition apply to

non-OPEC producers. Here, it must be pointed out that a majority of non-OPEC oil output 57 per cent

comes from developed countries, due, particularly, to the high levels of production in Russia, the

United States of America and Norway. However, significant levels do come from non-OPEC developing

countries such as Mexico, Brazil, Angola and Malaysia.

Furthermore, both OPEC and non-OPEC producers may also be members of other energy groups, on

either a regional or political basis, and these may themselves influence their behaviour in the market.

Examples are the IEA, the African Petroleum Producers Association (APPA), the Latin American EnergyOrganization (OLADE) and the Organization of Arab Petroleum Exporting Countries (OAPEC). Thus OPEC

is not the only energy-oriented intergovernmental organization in which collective decisions or

perspectives can influence market behaviour. This is an important and often-overlooked fact.

Nevertheless, even taking all of this into account, the situation is not as clearcut as it may at first seem.

First and foremost, when stripped to its essentials, the reality is that OPEC producers, like non-OPEC

producers, are simply trying to sell their commodity on competitive world markets and to do so at fair

and reasonable prices. There is nothing magical about this idea or its implementation and it applies

equally to producers of any commodity anywhere.

There is no hard, impenetrable line between OPEC and non-OPEC; if anything, for many years there hasbeen a steady softening of any divides that may have existed to any degree in the past. There have been

major advances in cooperation and dialogue involving all the major players, and OPEC has been very

much to the fore in encouraging these; the benefits are clear for all to see and can be felt right across

the industry. And many non-OPEC producers openly support OPECs market-stabilisation measures,

particularly at critical moments for the market, while others are quietly appreciative, recognising their

identity of interests with those of our Organization and the responsible, carefully considered nature of

such measures.

There is another important observation to make here and this is of more relevance to non-OPEC

producers. It concerns the evolution of global oil supply. Access to convenient forms of energy has beenessential for economic development and its subsequent sustainability. This has been as true for the 18th

century industrial revolution in Great Britain as it is to the emerging economies of today. Since the early

20th century, national economic prosperity has been heavily dependant on easy access to oil supplies,

starting in the USA and then spreading across the industrialised world.

Since the birth of the modern oil industry in the USA in the middle of the 19th century, the sources of

supply have had a rich and varied history, as producers have sought to keep pace with the continued

rises in demand in the world at large. Some prolific production areas have come and gone, while others


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remain major sources of supply and are likely to do so well into the future, especially in many OPEC

countries.

Even in the space of two decades, there have been major changes in the global supply balance. In North

America, there has been a steadily falling trend, with output from the USA the worlds leading

consumer nation dropping by nearly 40 per cent between 1984 and 2004. During that period, the USA

began to import more than half its crude oil. The opposite trend has occurred in Latin America, where

one of OPECs five Founder Members, Venezuela, accounts for nearly a third of the rising regional

output.

There are contrasting trends in Europe too, with Eastern part, dominated by the former Soviet Union,

showing steady growth in supply over the past five years, after the declines that came in the wake of the

dissolution of that large economic bloc; however, output is still below that of 20 years ago. Also, the

focus has switched to two distinct production areas, Russia and the Caspian states, and their

characteristics differ considerably. In contrast, production in Western Europe, dominated by Norway

and the United Kingdom, is on an inexorable downward trend, after peaking in the late 1990s; but it is

still well above that of 1984.

Production grew significantly in the three remaining regions between 1984 and 2004. As with Latin

America, the oil producers in these regions are almost exclusively developing countries, the exceptions

being the minor cases of Australia and New Zealand in Asia and Pacific. Also, each has an OPEC

presence, which dominates in the Middle East, has the majority share in Africa and is small and declining

in Asia and Pacific. Significantly, China, with its heavily rising demand for oil, became a major net

importer of crude in the 1990s.

The real significance of all of this is that oil production is declining steadily across the industrialised

world in both relative and absolute terms, and so advanced consumer nations are having to look

elsewhere for their energy at a time when energy demand is rising rapidly in the emerging economies,

particularly China and India. In the specific context of oil, therefore, the competition for sources of

supply is already apparent across the world and the signs are that this will increase in the future, as thehistory of the oil industry enters a new chapter.

What is more, there are qualitative factors involved, since it is expected that there will be a continuation

of the move towards demand for lighter products, as well as the trend towards providing significantly

cleaner products. This will be in line with the fact that the oil industry has a long history of successfully

improving the environmental credentials of oil, addressing concerns of local pollution and improving air

quality.

When looking at the future, OPEC shares the view of most analysts that energy supply will continue to

rely primarily on fossil fuels until at least the middle of the century, underpinning socioeconomic

development throughout the world.

Oil is expected to retain the leading position in meeting the worlds growing energy needs, accounting

for close to 40 per cent of energy demand over the next two decades, according to the reference case

from the OPEC World Energy Model, OWEM.

OWEMs reference case scenario forecasts a 30 mb/d rise in demand by 2025, to reach 113 mb/d. This

is an annual average rise of 1.5 mb/d. The transportation sector will be the main source of future oil

demand growth, while developing countries, especially from Asia, are set to account for four-fifths of


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the rise, with consumption almost doubling to 53 mb/d. However, in spite of this, by 2025, OECD

countries will remain the dominant oil consumer and the USA will continue to use five times more

energy per person than China.

As is widely recognised by knowledgeable and reputable organisations, the global resource base is

sufficient to deal with the forecast increases in world oil demand. Estimates of global ultimately

recoverable reserves for conventional oil have been increasing, due to such factors as technology,

successful exploration and enhanced recovery from existing fields. In addition, there is a vast resource

base of non-conventional oil to explore and develop.

In the medium term, non-OPEC supply has the potential to rise substantially, with growth projected at 6

mb/d in the present period of 200510. Indeed, the recent high oil prices have made more funds

available for investment in non-OPEC oil. Russia and the Caspian region will lead non-OPEC growth,

while, outside these areas, supply increases will be driven primarily by increases in the Gulf of Guinea

and offshore Latin America, as well as non-conventional oil in North America. Non-OPEC supply,

however, is eventually expected to reach a plateau after 2015, at 5859 mb/d.

In the longer term, therefore, it is expected that OPEC, which has nearly four-fifths of the worlds proven

crude oil reserves will be relied upon to supply most of the incremental barrel of demand. Hence

most of the new demand will be met by non-OPEC in the short-to-medium term and by OPEC in the

longer term. Our projections show that OPEC production levels, including natural gas liquids, will rise to

54 mb/d by 2025.

Nevertheless, even then in two decades time non-OPEC countries will still account for the larger

part of world oil production, and they will continue to play a central role in meeting world oil demand.

The story does not quite end here. While it is clear that the world has enough oil resources to meet

rising demand for decades to come, there is also the important consideration of getting it to consumers

in an orderly, timely and sufficient manner in other words, deliverability. This brings me onto the

subject of investment and the fact that the requirements for investment in the oil industry are very largeand subject to long lead-times and pay-back periods.

But it is here that we run into problems of uncertainty and the huge risks this can impose on the

industry if there ultimately proves to have been heavy over-investment or under-investment.

Uncertainties over future oil demand growth stem from a number of factors, including economic, energy

and environmental policies in consuming countries, as well as technological progress and catastrophic

events of an unpredictable nature. Every effort must be made to reduce the levels of uncertainty,

wherever possible. This applies to both the upstream and, increasingly, the downstream, where

shortages, as I mentioned earlier, have been playing a big part in the recent market volatility.

This brings me back to the subject of dialogue and cooperation and the huge advances that have been

made in this area in recent years, enabling OPEC and non-OPEC producers to become better-equipped

to meet the challenges of the future and to find a better balance of interests between consumers and

producers. OPEC places great credence on the issue of shared responsibility advanced through dialogue

and cooperation. It is vital that we all understand the needs of each stakeholder.

For OPEC, this has played out in a number of non-OPEC producers participating as observers at the OPEC

Conference. At the 141st (Extraordinary) Meeting of the OPEC Conference in Caracas earlier this month,


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the Minister of Petroleum of Angola and the Minister of Petroleum & Mineral Resources of the Syrian

Arab Republic, as well as a high-ranking representative from the Ministry of Petroleum of Egypt, were

present.

OPEC also actively participates in joint meetings of experts from OPEC and non-OPEC countries and in

May the Fourth Joint OPEC/IEA Workshop took place in Oslo, focusing on the outlook and uncertainties

in global oil demand. In 2005, OPEC also helped establish structured energy dialogues with respectively,

the European Union, China and Russia.

It is also important that I mention the International Energy Forum (IEF), whose 10th meeting took place

in Doha in April. The IEF brings together both producers and consumers and in Doha the importance of

transparency and exchange of energy data for market predictability and stability, so as to provide a

more stable investment climate while supporting planning and enhancing global energy security, was

underscored. OPEC very much welcomes such actions.

As an industry we have to be inclusive: to think and plan ahead and to look at the needs of producers

and consumers, as well as both developed and developing nations, not just this year and next, but over

the next decade and beyond.

Thank you.

OPEC and Non

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