Opec Long Term Strategy

Organization of the Petroleum Exporting Countries

OPEC

LO N G – T E R M S T R AT E G Y

OPEC L O N G – T E R M S T R A T E G Y

Foreword The Organization of the Petroleum Exporting Countries (OPEC) was established in Baghdad, Iraq, in September 1960. Its Members are Algeria, Indonesia, the Islamic Republic of Iran, Iraq, Kuwait, Nigeria, Qatar, Saudi Arabia, Socialist People’s Libyan Jamahiriya, the United Arab Emirates and Venezuela. The main guiding texts for the Organization are the OPEC Statute, approved in January 1961, the Solemn Declaration, stemming from the first Summit of OPEC Heads of State, held in Algiers in 1975, and the Caracas Declaration from the Second Summit of OPEC Heads of State, held in Venezuela in 2000. On its 45th Anniversary, OPEC adopted a comprehensive long-term strategy, on the occasion of its Ministerial Conference Meeting in Vienna, 20 September 2005. The Conference expressed its appreciation of the efforts that lie behind the development of this strategy. The Conference thanked HRH Prince Abdulaziz bin Salman Bin Abdulaziz Al-Saud, Chairman of the Meetings of the Deputy Ministers of Petroleum/Energy on Long-Term Strategy; HE Dr Bernard Mommer, Vice-Chairman; all Heads and Members of Delegations to these meetings; as well as the Staff of the OPEC Secretariat involved.



This strategy, which was prepared over a period of two and a half years, provides a coherent and consistent vision and framework for the Organization’s future. It recognises the important role of oil in the world economy at large and for the socio-economic development of OPEC Member Countries. The Strategy defines specific objectives and identifies the key challenges the Organization faces now and in the future. Benefiting from a scenario-approach for the energy scene, it is designed to be robust and adaptive throughout the various possible futures. This document provides an overview of the key issues which have been addressed. Vienna March 2006



OPEC L O N G – T E R M S T R A T E G Y

Introduction The OPEC Long-Term Strategy recognises the important role of oil in meeting future global energy demand and for the socio-economic development of OPEC Member Countries, and provides a coherent and consistent vision and framework for the Organization’s future. The objectives for the Strategy relate to the long-term petroleum revenues of Member Countries, the stability of the world oil market with fair prices, and the security of regular supply to consumers, as well as the security of world oil demand. There are key challenges that may constitute constraints for OPEC in the attainment of the objectives of the Strategy. A major hurdle relates to the uncertainties surrounding future demand for OPEC oil, stemming from, inter alia, future world economic growth, consuming countries’ policies, and technology development, as well as from future non-OPEC production levels. These uncertainties are explored in three internally-consistent scenarios that depict contrasting futures of the global energy scene. These scenarios, named respectively Dynamics-as-Usual (DAU), Protracted



Market Tightness (PMT) and Prolonged Soft Market (PSM), map out a coherent and credible set of assumptions for these drivers of change. The key implications that emerge from these scenarios are described in the following section.



OPEC L O N G – T E R M S T R A T E G Y

How might oil demand evolve? The DAU scenario envisages a future where the drivers of change shaping the scenario continue their past patterns and, thus, no particular departure from these trends is assumed. Global economic growth is robust in this scenario, but no different to average growth rates observed over the past 15 years. However, there are substantial uncertainties over future economic growth arising from the complex interplay of domestic and global determinants of that growth, including such diverse factors as demographics, advances in technology, capital availability and trends in commodity prices, domestic policies and global trade developments, regimes, environmental policies and financial regulations. Both lower and higher rates of economic growth are considered in the PSM and PMT scenarios respectively. For example, even without assuming the arrival of a recession, there are genuine and persistent worries about the long-term health of the world economy, especially regarding growing international imbalances, resulting, in particular, from some countries’ current account and budget deficits. On the



30 25 20 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 2020

Demand growth is uncertain mbd

120 110

PMT DAU

100

PSM

90 80 70 60 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 2020



OPEC L O N G – T E R M S T R A T E G Y

other hand, a synergistic combination of positive economic and geopolitical circumstances could conceivably unleash sustained longerterm growth at significantly higher levels than assumed in the DAU. Oil demand is also greatly affected by consuming countries’ policies. Taxation of energy products is often seen not only as a means of raising revenue, but also as a means of controlling demand in addressing environment and energy security issues. Policies demonstrate significant discrimination against oil, involving not only higher tax rates, but also subsidies for competing fuels. Great uncertainty exists in relation to future developments of consuming countries’ policies and is considered one of the main constraints in ensuring adequate security of demand. Further uncertainty stems from the impacts on oil demand of technology development. In particular, in the transportation sector, conventional internal combustion engines could continue to achieve significant fuel economy improvements, while hybrid vehicles may witness a significant growth. While in all scenarios, oil will remain the



main fuel over the next 20 years, the introduction of non-oil fuelled vehicles and the use of alternative fuels, such as biofuels, are drivers that could affect oil demand growth patterns in this sector.

World demand in the scenarios: differences from DAU mbd

Protracted Market Tightness Prolonged Soft Market



2010

2015

2020

2.2

3.5

5.4

–1.7

–3.9

–6.9

OPEC L O N G – T E R M S T R A T E G Y

The outlook for oil demand must be seen very much in the context of these uncertainties. In the DAU scenario, oil demand increases annually by, on average, 1.5 mbd, with around 75 per cent of the increase to 2020 coming from developing countries. The transportation sector is the single most important source of increase and represents close to half of the expected rise in oil demand. Nevertheless, demand growth, subject to the uncertainties outlined above, could turn out to be considerably different. For example, a long-term tight market situation could be envisaged, characterised by a high sustained oil demand, principally from higher economic growth. Such potential developments have been explored in the PMT scenario. In this scenario, by 2020 demand is more than 5 mbd higher than in the DAU. On the other hand, over the next 10-15 years, lower demand growth must also be considered as a credible alternative to these DAU figures. In fact, downside risks are seen even greater than upside potential: lower economic growth could emerge, characterised by increased



regionalism and protectionism, which may well combine with policy measures designed to reduce demand. Implications of these possible alternative trends have been examined in the PSM scenario, with demand 7 mbd below DAU values by 2020.

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OPEC L O N G – T E R M S T R A T E G Y

Non-OPEC supply prospects also uncertain Another major area of uncertainty that impacts the demand for OPEC oil and further complicates making appropriate and timely investments in OPEC countries concerns the development in non-OPEC supply. A number of factors, such as oil prices, upstream legal and fiscal regimes and investments in non-OPEC countries, technology advancements and exploration successes, will shape future scenarios regarding nonOPEC supply. Future technological progress may also lead to the development of significant amounts of unconventional oil and alternative fuels. However, under all scenarios, it is still expected that non-OPEC production growth will slow over the medium term.

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Uncertain future demand and non-OPEC supply translate into a broad range of demand for OPEC oil in the scenarios mbd

60

55

PMT

50

DAU

45

PSM

40 35 30 25 20 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 2020

12

120

OPEC L O N G – T E R M S T R A T E G Y

Broad range of future demand for OPEC oil In meeting the future growth of world oil demand, oil resources are large and sufficient, and oil supply will not peak within the considered timeframe. Moreover, the size of the global upstream investment challenge will not be markedly different from the past, despite the growing volumes, as capital will be increasingly used more efficiently in lower cost OPEC Countries. Over the longer-term, OPEC will be relied upon to supply most of the incremental barrel demanded. However, the uncertainties over future oil demand and non-OPEC supply translate into a broad range of demand levels for OPEC oil. This complicates the planning for appropriate and timely investments in OPEC Countries and, consequently, increases the risks associated with under-, as well as overinvestment. In these scenarios, the amount of oil that OPEC is projected to supply over the next 10-15 years could range by as much as 10 mbd or more. A central challenge is associated with the lack of security of demand and the need for adequate flexibility to adapt to a wide range of

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potential growth in demand for OPEC oil that stems from these great uncertainties over the coming years, particularly given the long lead times involved.

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OPEC L O N G – T E R M S T R A T E G Y

The downstream is also important It is important to note that the challenge related to making the appropriate investment in the oil industry extends along the entire supply-chain. In particular, close attention should be paid to the downstream sector. The profile of incremental global demand is overwhelmingly for light and clean products, while incremental supply comprises significant volumes of sour medium and heavy crude grades. The combination of this with the move to ever-stricter product quality and environmental regulations represents a challenge for the downstream industry, especially in the context of uncertain demand growth. Future refining capability needs to be considered in terms of both the adequacy of secondary processes – for example, to upgrade heavy streams and to meet tight targets for sulphur – and crude distillation capacity. Thus, tightness in the downstream sector could potentially be a main source of volatility, especially if the necessary investment in the refining sector is not undertaken in a timely manner.

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OPEC L O N G – T E R M S T R A T E G Y

Elements of the Strategy OPEC’s Long-Term Strategy covers various issues, such as oil market stability, upstream and downstream investment, technology, the role of OPEC National Oil Companies, multilateral negotiations, in particular those related to trade and the environment, and the important relationships with both producers and consumers, as well as with international organisations and institutions. “... extreme price levels, either too high or too low,

In addition, the need to be flexible and adaptive led to the inclusion in the Strategy of elements that are pertinent to specific situations as explored in the three scenarios.

are damaging for both producers and consumers ...”

The strategy re-emphasises OPEC’s commitment to support oil market stability. It builds upon the fundamental recognition that extreme price levels, either too high or too low, are damaging for both producers and consumers, and points to the necessity of being proactive under all market conditions. Oil price volatility renders all the more difficult the interpretation of price signals, whether they are an indication of structural change or

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“… there is a need to support fair and stable prices, sustainability of supply, and security of demand.”

“The use of ‘leading indicators’ to assist in foreseeing economic downturns and upturns

a reflection of temporary phenomena, and thereby affecting the ability to support longer-term market stability. Given the dynamic and complex behaviour of oil markets, there is a need to support fair and stable prices, sustainability of supply, and security of demand. In a tight market environment, too high oil price levels may affect the prospects for economic growth, especially in developing countries, and therefore threaten future oil demand growth. On the other hand, low oil price levels would place strains upon the aspirations of OPEC Member Country populations for their economic development and social progress. The use of ´leading indicators` to assist in foreseeing economic downturns and upturns that affect oil demand and supply should be a fundamental tool, to help avoid excessive market tightness or softness. Other developments, such as policies and technological advances, should also be closely monitored.

that affect oil demand and supply should be a fundamental tool …”

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In supporting market stability and security of supply to consumers, OPEC will continue to expand its production capacity, both to meet

OPEC L O N G – T E R M S T R A T E G Y

“The timing and size of capacity expansion in Member Countries … should be such that a reasonable level of spare capacity is available.”

“... the primary responsibility for downstream investment remains with major consuming countries and international oil companies.”

the increased demand for its oil and to maintain an adequate level of spare capacity. The timing and size of capacity expansion in Member Countries in the medium- to long-term, however, should be such that a reasonable level of spare capacity is available. Yet large and inherent uncertainties concerning the scale of projected future OPEC oil production signify a heavy burden of risk in making the appropriate investments. Oil market stability also requires adequate investment in refining capacity, as well as pipeline systems and storage facilities. OPEC National Oil Companies have an interest in considering undertaking part of the investments required through expanding and upgrading domestic refineries for product export or investing in consuming countries. However, the primary responsibility for downstream investment remains with major consuming countries and international oil companies. Measures are needed to improve the investment climate for refinery expansion and operation. Close co-ordination in this area between consuming and producing countries would be beneficial to address and avoid downstream bottlenecks.

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“OPEC also calls for the promotion of the development of technologies that address climate change concerns. One promising example is that of carbon dioxide capture and storage technology ...”

OPEC Member Countries should strive to strengthen co-operation in upstream and downstream scientific research and technological development among themselves and with international institutions. OPEC stresses the importance of technology-based responses to the need to protect the environment, in relation to both air quality and climate change concerns. The oil industry has a long history of successfully improving the environmental credentials of petroleum, both in use and production, and research and development in this area should be supported. OPEC also calls for the promotion of the development of technologies that address climate change concerns. One promising example is that of carbon dioxide capture and storage technology, in particular for enhanced oil recovery, where suitable and feasible. In this regard, international collaborative efforts are needed to develop large-scale demonstration projects. OPEC National Oil Companies should enhance their competitive performance and develop close co-operation among themselves in various

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OPEC L O N G – T E R M S T R A T E G Y

“In OPEC Member Countries, the application of advanced upstream technologies can potentially reduce costs further, increase recovery rates, and open up frontier areas ...”

“The international community should fulfil its obligations to strive to minimise the adverse effects of policies and measures on

areas such as technology and knowledge- and experience-sharing. In OPEC Member Countries, the application of advanced upstream technologies can potentially reduce costs further, increase recovery rates, and open up frontier areas, thereby maintaining competitive, cost-effective and successful exploration and development activities. In climate change-related multilateral fora, it is important for OPEC Member Countries to continue to have an active role, recalling the principle of common, but differentiated responsibilities. The international community should fulfil its obligations to strive to minimise the adverse effects of policies and measures on developing country Parties and, in particular, fossil-fuel exporting developing countries. This could involve, inter alia, assistance in relation to economic diversification, transfer of technology and capacity building.

developing country Parties and, in particular, fossil-

An active OPEC role in trade-related discussions is important, espe-

fuel exporting, developing

cially as they relate to issues of concern to developing countries. OPEC Member Countries should continue enhancing their economic and

countries.”

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“Dialogue ... should be widened and deepened to

social development by using the comparative advantage offered by their natural resources.

cover more issues of mutual concern, such as security of demand and supply ...”

“… preconception and misunderstanding … calls for the effective communication of the positive role OPEC plays for the world at large.”

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Dialogue among producers and between producers and consumers should be widened and deepened to cover more issues of mutual concern, such as security of demand and supply, market stability, upstream and downstream investment, and technology. Dialogue should be initiated or intensified with all countries, both producing and consuming, regional groups, United Nations institutions, the International Energy Forum (IEF), the International Energy Agency (IEA), etc. Participation of other producers in OPEC ministerial meetings as observers should continue, with the possible expansion of the membership of the Organization, including Associate Membership. Despite OPEC’s role in supporting oil market stability, there is still much preconception and misunderstanding. This calls for the effective communication of the positive and beneficial role OPEC plays for the world at large.

OPEC L O N G – T E R M S T R A T E G Y

Finally, enhancing cohesion among Member Countries is of crucial importance. The Organization should expand intra-OPEC interactions, networking and dialogue at the level of Ministers of Petroleum/Energy and National Oil Companies. Co-operation should also be pursued in the technological and scientific areas of higher education in Member Countries. Enhancing Member Countries’ resilience by promoting the diversification of their economies and the development of human capital can contribute significantly to the Organization’s strategic objectives.

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OPEC L O N G – T E R M S T R A T E G Y

Concluding remarks With this document, OPEC reaffirms its longstanding commitment to oil market stability, as embodied in the OPEC Statute. OPEC’s role in this respect is becoming better understood and appreciated, as its continuous efforts at supporting such stability are increasingly acknowledged as beneficial to the world at large. In supporting security of supply to consumers, OPEC will continue to expand its production capacity, both to meet the increased demand for its oil and to offer an adequate level of spare capacity. This, together with the acceptance that there are clearly sufficient oil resources, should provide a solid foundation for future market stability. Moreover, due regard must be given at all times to the need for fair returns on capital invested throughout the petroleum industry, fundamental to a balance of interest between all parties. At the same time, the important role of oil in the economic development and social progress of OPEC Member Countries must be recognised. However, the challenge of making these investments is fraught with significant uncertainties, in particular regarding the rate at which oil demand may grow. The risks associated with implementing large capital

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investments with long lead times in the context of these uncertainties lead to genuine concern over the possible waste of much-needed financial resources. The issue of security of demand must, therefore, be regarded as an inherent factor in supporting longer-term market stability. Nevertheless, it is also increasingly recognised that a broader set of conditions are needed for long-term oil market stability. In particular, the downstream sector must be a prime focus of efforts in working towards this objective. This draws attention to the need, particularly in consuming countries, to adopt an active, forward-looking approach to this sector, supporting timely investment. OPEC’s Long-Term Strategy has identified many areas where OPEC Member Countries, both as individual sovereign nations, as well as members of an Organization, can support their own pressing needs for socio-economic development, while playing a vital role in the international community. Open, positive, constructive, pragmatic dialogue, with all parties, must constitute the main means of turning the future challenges into opportunities in the new energy era.

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OPEC L O N G – T E R M S T R A T E G Y

Organization of the Petroleum Exporting Countries Obere Donaustrasse 93, A-1020 Vienna, Austria Telephone: +43 1 211 12-0 Telefax: +43 1 216 43 20 www.opec.org