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 this year, and the price of OPECs Reference 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 are suffering 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.

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 for much 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 uncertainties stemming 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

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 are signatories 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 Energy Organization (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 has been 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 been essential 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

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 the history 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

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 large and 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,

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.