Vitality Provide And Demand Security

Let me begin by thanking the organisers for this timely invitation to address you on the problem of vitality security. This necessary issue has not too long ago re-established itself high on the political agenda in some influential consumer circles, as witnessed just a fortnight ago within the US State of the Union tackle delivered by President George W. Bush.

What lies behind this increased client concern about security of provide? The road of reasoning appears to be as follows.

There has been the perception of shifting fundamentals in the global power demand/provide stability, introduced on by the unexpectedly excessive levels of demand growth within the growing world, particularly in China and India, which became particularly apparent in 2004, after three years of comparatively excessive market stability. Within a short while, this drew attention to a broader-based issue, within the eyes of those customers whether or not the world has enough vitality sources to fulfill the levels of energy demand growth that have been forecast for the approaching decades, affecting not simply right now’s developed and emerging economies, but in addition other economies that are anticipated to reach take-off point within the early 21st century.

These client concerns have arisen at a time of heightened tensions affecting a number of regions of the world. On top of this, there have been some major natural disasters with which the market has had to cope at brief notice. Inevitably, political opportunism has been at play too, with influential interest groups placing out alarmist theories in regards to the world operating out of oil quickly or about pure disasters occurring with greater frequency sooner or later, and generally tying all of this in with unsubstantiated fears about unreliable sources of provide.

In talking to you at the moment, subsequently, I should like to put your minds at ease about such matters and, more usually, in regards to the outlook for the oil market and the role that OPEC and different producers play in it.

The commitment to security of oil provide lies at the center of OPEC’s existence. Our Organization’s very first resolution, adopted at our formative assembly in Baghdad in September 1960, refers back to the assurance of “an environment friendly, economic and regular supply” of petroleum to customers. (Slide 2) This principle is enshrined in the OPEC Statute, which was adopted in 1961 and has remained a guiding light for our Group ever since.

But this is not just altruism. The revenues oil-producing growing international locations obtain from petroleum sales are essential for financing their financial and social growth, to an extent that may not be totally appreciated by industrialised nations. This is along with the half that must be reinvested in the upstream to satisfy rising demand. It’s, subsequently, in the very best interests of these producing countries to make sure that each attainable measure is taken to support market stability and provide security always.

Furthermore, for OPEC and all producing international locations, there may be one other equally vital parameter the assurance of steady, predictable demand. This is usually overlooked by customers; but, for producers, it’s as vital and as basic as safety of supply. Safety of demand goes hand-in-hand with safety of supply. OPEC’s Second Solemn Declaration, which was signed by our Member Countries’ Heads of State and Government in Caracas in the yr 2000, emphasises “the robust hyperlink between the security of provide and the security and transparency of world oil demand.” The Lengthy-Term Technique adopted by OPEC last September refers to “the security of normal supplies to shoppers, in addition to the safety of world oil demand.”

The OPEC Statute of 1961 additionally outlines other central aims of our Group, together with “the stabilisation of prices in worldwide oil markets” and “the necessity of securing: a gentle revenue to the producing countries; and a fair return on their capital to those investing within the petroleum industry.”

To see how OPEC’s longstanding commitment to security of provide works out in practice, we’d like solely look at our Group’s actions within the volatile worldwide oil market of the past two years. In doing so, we will see that, all through this period, the market has remained well-supplied with oil and that other factors have been driving-up oil prices, reminiscent of downstream bottlenecks, geopolitical tensions and elevated speculation in futures markets.

(Slide three) First, OPEC’s Member International locations have increased manufacturing by round four.5 million barrels a day since 2002. This has, in flip, led to a gradual rise in OECD business oil stocks, which are actually exceeding their 5-12 months average.

(Slide four) Secondly, where attainable, our Member Nations have accelerated their plans to carry on-stream new production capacity to fulfill continued demand growth and to re-establish a comfortable stage of spare capacity. This spare capacity which is now at 2.0 mb/d might be greater than ample to cover oil demand growth all through 2006, when the decision on OPEC oil is predicted to be slightly decrease than in 2005. (Slide 5) More increases in capacity have been planned and are being carried out for the rest of the decade. Along with the anticipated growth in non-OPEC provide and OPEC pure fuel liquids, this means that cumulative world oil manufacturing capacity will rise by around 12 mb/d or extra over the next five years properly above the expected cumulative rise in demand of 7-eight mb/d over the identical period.

And thirdly, at a time when severe downstream bottlenecks in some major consuming nations have been placing strain on not just product prices, but also crude costs, especially mild, candy blends, OPEC’s Member Nations, although traditionally related extra with the upstream, have themselves taken the initiative to invest in downstream tasks; this has been on their own and in partnership with others. At the moment, 0.6 mb/d of refinery capacity is under construction, with a further 1.9 mb/d planned and a further 1.Four mb/d under consideration, to make a complete of three.8 mb/d by 2010. However, all of this does not escape the fact that downstream funding is primarily the responsibility of the home and international oil corporations in consuming international locations.

Clearly, such actions as these come from a corporation that is committed to safety of provide. This entails careful evaluation of the market outlook, detailed planning and considerable upfront funding, maybe diverting funds from different worthy domestic causes, as a way to make absolutely positive that there is sufficient oil available on the market. I will return to funding later.

The year 2006 has begun with a significant rise in prices, though the market remains properly-supplied with crude and industrial oil inventory levels in the OECD are wholesome. This, once once more, is primarily the result of refining bottlenecks and different non-basic components. However, the continued worth volatility is, as ever, a matter of much concern to us, particularly the impression it could also be having on the global economy and, particularly, growing international locations. The OPEC Secretariat in Vienna continues to monitor the scenario rigorously.

(Slide 6) Nonetheless, wanting additional into 2006 and on the forecast supply/demand steadiness, we believe typically that the market provide will remain ahead of demand and that spare capability will even increase.

Usually speaking, OPEC wishes costs that replicate market fundamentals and which can be acceptable for producers and customers alike. Only in this way can our Organization present the stability and the sustainability that’s so vital to the regular development in provide that is required to help the rising ranges of demand which were forecast for the opening many years of this century. I shall return to the topic of market forecasts in a minute.

Value stability is, indeed, a practical prospect, but it is one thing that must be worked on by all the players available in the market, and not simply by sure committed groups, if it is to be sustainable over lengthy periods. Stability is the duty of all events. Excessive ranges of volatility will be very damaging to the market; they will destabilise other sectors of the worldwide financial system; they can be prey to rampant speculation, which, in itself, can then add to the volatility; and they’ll severely hinder investment methods in future production capacity.

(Slide 7) And eventually, on the topic of prices, let me put them of their correct historical context by stating that, though oil costs are excessive in nominal phrases, they’re nevertheless below those of the early 1980s in actual terms. The relative resilience of the worldwide financial system to the recent value will increase is partly because considerably less oil is now used to produce each greenback of national earnings, when compared to the past. For example, OECD oil intensities have fallen by virtually 60% since 1970. Even developing international locations are using less oil per unit of GDP. In addition, what has gone hand in hand with this decline in intensities, in fact, has been the falling share of energy in the consumers’ finances, as their wealth has elevated. We also needs to remember that the latest rise in oil prices was accompanied by a powerful enhance in non-power commodity costs (Slide 8). For example, since the beginning of 2002, steel, copper, iron, lead, nickel and zinc costs have all roughly doubled, while rubber and uranium prices have tripled. These worth rises are typically considered as being pushed by the sturdy synchronised financial growth over this period.

Let us now look at the long-time period prospects for the oil market, since OPEC’s dedication to market stability and safety is as legitimate for the long term as it’s for the quick time period. (Slide 9) Demand for vitality will continue to develop, because of demographics, (with an expected 1.6 billion extra people on the planet inside the following 25 years), will increase in incomes, continued urbanisation and globalisation. Firstly, we must always word that, not only has oil been within the leading place in supplying the world’s rising power needs for the past four many years, but also that there is a transparent expectation that this can continue a minimum of for the following two a long time. Gasoline will continue also to develop at fast charges, changing into by 2025 the second most vital gas, forward of coal. Hydro/nuclear/new renewables will flatten out, regardless of the excessive excessive development rates for some new renewables; nevertheless, the slightly low initial base makes the expansion in absolute terms somewhat restricted.

(Slide 10) Based on the reference case scenario from OPEC’s World Energy Mannequin, “OWEM”, world oil demand is anticipated to continue rising within the early a long time of the twenty first century, with annual growth averaging 1.5 per cent as much as 2025, when demand will reach 113 mb/d. A startling eighty per cent of the rise in world oil demand will come from creating countries. However, regardless of this development, oil use per capita will remain far under the levels seen in the OECD. The transportation sector is particularly essential for this progress, with the massive potential for will increase in vehicle ownership in developing countries. Asian nations, residence to half the world’s population, are forecast to experience annual financial progress of over 5 per cent over the next two decades, and, coupled with this massive potential for progress, will remain the important thing source of oil demand increases within the growing world.

Over the approaching years, non-OPEC output is anticipated to continue to develop and attain a plateau of fifty five-57 mb/d after 2010. (Slide eleven) This can mean that the call on OPEC oil will increase considerably, with the Group’s output, together with pure gasoline liquids, rising to 57 mb/d in 2025, in contrast with 33 mb/d in 2005.

Let me emphasise here that, though we are envisaging larger levels of demand sooner or later, the global resource availability will not be a constraint to assembly this in full. Proven reserves continue to develop on account of recent discoveries, in addition to reserve development resulting from advances in know-how and improved recovery techniques. This isn’t to say the massive potential from unconventional oil assets, akin to tar sands. In reality, estimates of finally recoverable reserves have been rising over time. OPEC possesses nearly 4-fifths of the world’s confirmed crude oil reserves, and these are ample to satisfy the rising oil requirement for decades to come.

The scale of funding required to meet the expected demand growth over the following few decades runs into billions of dollars, though globally it won’t be significantly different to past funding. This is due to the gradual shift away from larger price non-OPEC provide to lower cost OPEC oil. Of course, oil prices will have to be at a level conducive to supporting the funding required. But there are numerous uncertainties which make sound investment planning a hazardous business. Future financial growth charges, consumer authorities energy and environmental policies, technological advances and the oil price path lie at the guts of those uncertainties (Slide 12). Given the role that OPEC plays in supporting market stability by supplying the residual barrel, this uncertainty naturally interprets into a wide range of doable levels of future oil provide that will probably be required from OPEC. With a high development and low progress case, a spread of effectively over 10 mb/d opens up for the doable amount of oil that OPEC may need to supply by 2020. Over-investment implies heavy costs to be borne by producers, while below-investment will lead to severe worth movements (Slide thirteen). Thus each effort should be made to reduce uncertainties and share the dangers among the assorted events in the oil business OPEC and non-OPEC, producers and consumers, and the international oil corporations and other intermediaries.

Importantly, as the President of the OPEC Conference, Dr Edmund Maduabebe Daukoru, stated a fortnight in the past: “All of us must work together in direction of world vitality safety.” He advised towards consuming nations taking a unilateral strategy to handling world vitality issues.

(Slide 14) The need for enhanced power security needs to be seen from both supply and demand perspectives, which are mutually supportive. Uncertainty over future demand interprets into large uncertainties over the amount of oil that OPEC member nations will eventually need to provide, signifying a heavy burden of threat. Investment requirements are very giant, and are subject to significantly long lead-instances. It’s in this context that there is a call for a “road-map” for oil demand, reflecting the necessity for security of demand as a professional concern for producers, just as shoppers categorical concern over safety of provide. With more transparency in the evolution and implementation of insurance policies, better assessments shall be attainable as to how future demand is prone to evolve. This, in turn, would lend help to making applicable capability growth decisions that would meet both the increased demand for OPEC oil but in addition offer an satisfactory degree of spare capacity, whereas at the same time not losing precious monetary assets.

I might like to turn attention to the downstream sector. (Slide 15). This is a very important part of the provision chain, with the present tightness in the form of inadequate refining capacity putting strain on oil costs. A number of elements will form developments in this sector in the approaching decade. The first issues the rising volume of crude oil that must be refined. One other factor is how the oil product demand structure will change, with the expectation that there will probably be a continued transfer in direction of lighter merchandise. At the identical time, product specifications are transferring in the direction of considerably cleaner merchandise that will require substantial reductions in sulphur content, driven by environmental considerations. Therefore, the downstream sector would require important funding to fulfill growing product demand and to deal with emerging mismatches between crude slate, product demand and product specifications.

Considering current relatively excessive refinery utilisation rates, distillation capability enlargement could be anticipated to at the very least keep tempo with rising demand. Nonetheless, a evaluation of identified refining expansion initiatives does not support this. From the current perspective, investments to the refining sector are coming at a significantly slower tempo then is warranted by expected growth in demand: a more orchestrated effort is clearly required to ensure enough capacities are in place sooner or later.

To fulfill the longer term challenges about $160 billion in capacity investment might be required by 2015 and one other $one hundred fifty billion wanted for capability maintenance and alternative of lost capability. The emerging investment tendencies suggest that the downstream sector might very nicely remain a source of market instability over the approaching years. It’s therefore a urgent area for dialogue among all events, and ways must be explored that could accelerate growth plans.

(Slide sixteen) OPEC has devoted so much effort towards encouraging dialogue and cooperation within the industry over the past two a long time. As chances are you’ll know, the latest result of this was the establishment, final 12 months, of power dialogues between OPEC and, respectively, the European Union, China and Russia. In two months’ time, producers and customers will meet at Ministerial stage on the tenth International Energy Forum in Doha, in order to discuss at length the most recent developments affecting the industry. We are firmly convinced that such dialogue is the way in which forward for the trade, if it will evolve in an orderly method within the opening many years of this century and successfully meet the challenges that lie before it, together with the continued assurance of security of supply and demand.

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