1 Cosmopolitan Club Cosmopolitan Club Organization of the Petroleum Exporting Countries Vienna, Austria Oil & Development: Oil & Development: The role of OPEC: A historical perspective The role of OPEC: A historical perspective and outlook to the future and outlook to the future 24 March 2005 Vienna Dr Adnan Shihab-Eldin Director, Research Division Acting Secretary General
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Cosmopolitan ClubCosmopolitan Club
Organization of the Petroleum Exporting CountriesVienna, Austria
Oil & Development:Oil & Development:The role of OPEC: A historical perspectiveThe role of OPEC: A historical perspective
and outlook to the futureand outlook to the future
24 March 2005Vienna
Dr Adnan Shihab-EldinDirector, Research DivisionActing Secretary General
2
OPEC and EU-15 Real GDP and Real GDP/CapitaOPEC and EU-15 Real GDP and Real GDP/Capita
Index: Comparison OPEC and EU-15 Real GDP and Real GDP per Capita
Sources: Direct Communication to the Secretariat. International Monetary Fund, International Financial Statistics,IMF World Economic Outlook database. UN, Handbook of World Development Statistics. World Bank, WorldDevelopment Indicators.The Economist Intelligence Unit, Country Reports. National Sources. Secretariat's estimates.
6
OPEC StatuteOPEC Statute
“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”
7
OPEC’s developmentOPEC’s development
1960Five Founder Members
OPEC formed to safeguard legitimate national interests, when petroleum industry dominated by established industrial powers
Intervening yearsNew Members
OPEC faced formidable challenges, impacting across spread of pricing spectrum and compounded by factors far removed from simple market economics
TodayVast experience of petroleum issues
Acute awareness of realities and sensitivities of performing on world stageProduction agreements make major contribution to market stability
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OPEC Reference Basket Price(US$ / b)
OPEC Reference Basket Price(US$ / b)
51
16
22
28
34
40
46
52
Jan Feb Mar Apr May May Jun Jul Aug Sep Oct Nov Dec
?
9
Main reasons behind the rise in prices in 1Q 2005:Main reasons behind the rise in prices in 1Q 2005:
Continued strength in oil demand led by the respectable performance of the world economyLate & lasting cold spell in the Northern HemisphereIncreasing market anxiety over forward capacity tightnesscoupled with geopolitical tensionsExpectation of strong demand outstripping growth in non-OPEC supply over the medium-term, leading to increasing production requirements from OPECAll these act as a driving force behind rising activity of non-commercials (pension & index funds in particular), exacerbating the current ‘bullish bias’ with further pressure on prices & volatility
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OPEC R. Basket price in nominal & in real terms(Base: 2004=100, US$ / b)
OPEC R. Basket price in nominal & in real terms(Base: 2004=100, US$ / b)
“Four-fifths of the increase in demand of 28 mb/d over the period 2005–2025 comes from developing countries Transportation continues to be the dominant source of growth (~60 %)Many uncertainties: GDP, technology, policy – substantial downside risks
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Annual growth in oil demand, 2004-2025,Reference, mb/d pa
Annual growth in oil demand, 2004-2025,Reference, mb/d pa
0.0
0.2
0.4
0.6
0.8
1.0
1.2
OECD DCs Transition economies
Asia
OPEC & other exp.
N. America
W. EuropeOECD Pac.
Africa & M.E.Latin America.
FSUother
Asia: 66% of DCs increase, especially China & India huge potential (e.g. low vehicle ownership)But possible constraints: infrastructure, policies
Short- to medium term, non-OPEC production continues to rise, plateaus at 55-57 mb/dKey sources of increase: Latin America, Africa, Russia and CaspianRussian exceptional growth not sustainable (infrastructure constraints): eventually plateaus at 11 mb/dOECD production expected to declineRate of increase in non-OPEC supply subject to considerable uncertainty after 2010.OPEC increasingly supplies incremental barrelAlso: significant medium term uncertainties.
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OPEC responseAccelerated expansion of OPEC production capacity
OPEC responseAccelerated expansion of OPEC production capacity
20
25
30
35
40
45
2004 2005 2006 2007 2008 2009 2010
mb/
d
Announced OPEC capacity plans
Range of required OPEC productionLow
Base
High
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Investment in production capacityInvestment in production capacity
The bulk of incremental supply to meet demandgrowths will come from OPEC, in particular the ME:
To meet increase in overall demandTo replace exhausted reservesTo cope with unexpected shortages (adequate spare capacity)
⇒Oil must & can be cleaner, safer and more efficient
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What about medium- to long-term outlook ?What about medium- to long-term outlook ?
Drivers of uncertainties over future supply & demand growth & future scale of investment that will be required
The world economy
Energy policies impacting supply/demand
Technology developments
Oil price path
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Cumulative OPEC investment requirements:Huge uncertainties in future oil demand translate into huge
uncertainties and risks for future OPEC investment
Cumulative OPEC investment requirements:Huge uncertainties in future oil demand translate into huge
uncertainties and risks for future OPEC investment
0
50
100
150
200
250
300
350
400
450
2010 2015 2020 2025
$(20
03) b
illion
$70-95bn
$122-173bn
$185-269bn
$258-382bn
If OPEC balances the market, the uncertain volume requirements translate into huge ranges of anticipated capital outlay needs
Already by 2010 an estimated uncertainty of $25 billion exists between the reference case and the low economic growth case
This a central concern: where lies the onus of maintaining sufficient spare capacity?
Impact of lower economic growth
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Change in fundamentals ?Increasing tightness in world refinery capacity
Change in fundamentals ?Increasing tightness in world refinery capacity
* Present average yield** Forecast average yield (towards 2020) Offshore
Source: IFP/Direction des
Etudes Economiques
Incr
eas e
of r
e co v
ery
y ie l
d
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Clean oil technologyClean oil technology
Increases in oil use are expected to be accompanied by technological advances that will improve their environmental credentials
Making fuller use of many technologies will point towards more sustainable energy patterns, as well as alleviating some of the downside risks to oil demand and the resulting uncertainties in the magnitude and timing of future investment requirements
The identification of opportunities for cooperation on technological issues is therefore considered an important objective
Examples:I. Reductions in gas flaringII. CO2 capture, use and storageIII. Oil gasification
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CO2 Emissions ReductionCO2 Emissions Reduction
Energy efficiency increase
Fuels with lower CO2 emissions
CO2 capture and sequestrationSleipner A
Sleipner T
CO2Aquifère d ’Utsira
Sleipner OuestRéservoir de gaz : formation de Heimdal
Injection de CO2 - Puits A16
Sleipner WestPuits de production
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Dialogue and cooperationDialogue and cooperation
Industry much better-off with underlying consensus on handling major issues of mutual
concernBig advances in recent years, especially in Asia
1st Round Table of Asian Oil and Gas Ministers, New DelhiInternational Energy Forum Secretariat, Riyadh
Annual dialogue with China, Japan, South KoreaJoint OPEC/non-OPEC meeting in Oman in October
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34
Oil Revenues as Percentage of GDP for OPEC MCs(1971-2004)
Oil Revenues as Percentage of GDP for OPEC MCs(1971-2004)
0
10
20
30
40
50
60
1970 1975 1980 1985 1990 1995 2000
Per
cent
age
0
200
400
600
800
1,000
1,200
1000
billi
on U
S$
Oil Revenues as % of Nominal GDP Oil Revenues Nominal GDP
Declaratory Statement of Petroleum Policy in Member CountriesVienna, 1968
Inalienable right, as expressed by the UN, of all countries to exercise permanent sovereignty over their natural resources in the interests of their national development
Conference of Sovereigns and Heads of State of OPEC Member Countries(First Summit) Algiers, 1975
First “Solemn Declaration”. Led to establishment of:
OPEC Fund for International DevelopmentUS $7.0 billion committed*US $4.7 billion disbursed*
*Since 1976
Second Summit of Heads of State and Government of OPEC Member CountriesCaracas, 2000
Average growth in the OECD economies of 2.4% pa over the period 2004–2025For developing countries, considerable technological catch-up potentialChina is a significant uncertainty but expected to remain fastest growing region
Economic growth in the reference case is relatively optimistic regarding the long- term health of the world economy
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World energy demand by fuel type (mtoe)World energy demand by fuel type (mtoe)
?The bulk of incremental supplyto meet demand growths willcome from OPEC, in particularthe ME:
To meet increase in overall demandTo replace exhausted reservesTo cope with unexpected shortages (adequate spare capacity)
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$/Euro Exchange Rate (January, ’99 – March, ’05)
1.34
0.830.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
Jan-99
Jun-99
Nov-99
Apr-00
Sep-00
Mar-01
Aug-01
Jan-02
Jun-02
Nov-02
May-03
Oct-03
Mar-04
Aug-04
Jan-05
0
7
14
21
28
35
42
$/euro% change
> 35%
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Refining Spare Capacity in Key Refinery Regions (mb/d)Refining Spare Capacity
in Key Refinery Regions (mb/d)
0
1
2
3
4
5
6
7
8Ja
n-02
Mar
-02
May
-02
Jul-0
2
Sep-
02
Nov
-02
Jan-
03
Mar
-03
May
-03
Jul-0
3
Sep-
03
Nov
-03
Jan-
04
Mar
-04
May
-04
Jul-0
4
Sep-
04
Nov
-04
EU15 & Norway USA Asia
0
1
2
3
4
5
6
7
8Ja
n-02
Mar
-02
May
-02
Jul-0
2
Sep-
02
Nov
-02
Jan-
03
Mar
-03
May
-03
Jul-0
3
Sep-
03
Nov
-03
Jan-
04
Mar
-04
May
-04
Jul-0
4
Sep-
04
Nov
-04
EU15 & Norway USA Asia
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World oil demand growth : Increasing share of lighter products
World oil demand growth : Increasing share of lighter products
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2000
2001
2002
2003
2004
2005
(mb/d
)
Light Products *
Oil Demand Growth
*: Gasoline, Jet Kerosene and Distillate
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Estimated average G-7 tax earnings vs OPEC oil export values(1999 – 2003), billion US$
Estimated average G-7 tax earnings vs OPEC oil export values(1999 – 2003), billion US$
220
273
0
50
100
150
200
250
300
G-7 OPEC
G-7OPEC
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Index of Austrian retail diesel price vs. crude pricecomposite barrel analysis: Austria vs. EU (2003-2005)Index of Austrian retail diesel price vs. crude pricecomposite barrel analysis: Austria vs. EU (2003-2005)