The future of oil & sustainable development: A Nigerian perspective
Africa, China and India in particular have a great deal to say about how the transition to a sustainable world will unfold which makes it clear that this will not be as easy. The "Truth" may be a lot more inconvenient than we've been led to believe. (GW)
Meeting oil industry challenges: An OPEC perspective
By Mohammed Hamel
April 24, 2007
Let me start by thanking the organisers for the invitation to present on behalf of OPEC’s Secretary General, HE Abdalla Salem El-Badri, to such a distinguished gathering and on such important topics. Given the history and nature of our industry, the use of the words ‘challenges’ and ‘cooperation’ for today’s session could not be more apt.
The oil industry has successfully dealt with many challenges in the past; through technology development, extended reach, innovative ways of doing business and by continuously creating and developing new opportunities. Today, in a more global and interconnected world the challenges continue, some new, others the result of past actions and behaviours, but all necessitating innovative thinking, collaboration, timely adaptation and swift action.
Regarding oil, the reference case scenario displays world demand rising at an average annual rate of 1.4 per cent during this period, climbing from 84.6 mb/d in 2006 to 118 mb/d in 2030. Developing countries account for most of this rise, with consumption doubling from 29 mb/d to 58 mb/d. More than two-thirds of this growth will be in Asian developing countries. For oil, the main source of future increases will be in the transportation sector. Thus, the industry is very sensitive to any technology, policy and economic developments in this sector.
To complete the future demand outlook, what I need to underline are the uncertainties in all this. Doubts over how future oil demand plays out translate into large uncertainties over the amount that OPEC Member Countries (MCs) will eventually need to supply, signifying a heavy burden of risk. For example, to 2020, scenarios developed by the OPEC Secretariat highlight that the amount of oil required from OPEC could range by close to 9 mb/d. And this is where we come to the security of demand challenge; for the oil industry as a whole and for OPEC MCs specifically.
In the EU, Member States have agreed to adopt a binding 2020 target to increase renewable fuel use by 20 per cent. And the US is promoting the use of ethanol with subsidies and has set out ambitious targets for increasing the use of alternative fuels. The most recent proposal in the US – the Alternative Fuels Standard Programme – sees alternative transport fuel hitting almost 2.3 mb/d by 2017. This is approximately 1.5 mb/d more than what has been laid out in OPEC’s reference case over the same period.
It begs the question: will producing countries need to revisit their investment plans, in the face of policies that lean towards a movement away from oil? Investments in capacity that will just lie idle do not make sense. While OPEC has offered in the past, and will continue to offer in the future, adequate levels of spare capacity for the benefit of the world at large, it cannot be expected to invest in what to all intents and purposes is a back-up security policy in case alternative fuel policy initiatives fail to materialise.
With regards to policies, it is also worth mentioning the continuing upward trend in the taxation of oil products. This has evolved over the past three decades despite the up and down nature of crude price behaviour. This throws up a challenge to the industry as a whole as most of the end-consumer price ends up in the budget of the consuming country government. It means that only a relatively small fraction is left to recover costs and provide returns to producers and those investing in the industry.
The uncertainties I have just described also impact the downstream. Our analysis reveals tightness in the refining sector in the form of inadequate refining capacity which has been putting much pressure on oil prices generally. The extent to which refining tightness will ease will depend on the evolution of what is currently a neck-and-neck race between refinery capacity growth and demand growth.
Alongside the investment issues I have highlighted, it must also be appreciated that we are presently in a period when costs are significantly inflated, in part, as a result of the low oil price environment ten years or so ago. This led to the implementation of downsizing and cost-cutting strategies in particular in the services sector. According to CERA, upstream costs have increased by 53 percent over the last two years. It leads me to the question: is this cost behaviour structural or cyclical? Whatever the answer, it is a huge challenge facing the industry and an issue that needs to be continually monitored.
Let me stress at this juncture that despite the many uncertainties surrounding the future demand for its oil, in spite of the extremely high costs and the shortage of skilled labour, OPEC MCs are investing heavily in maintaining existing capacity and building new capacity, to ensure that markets are adequately supplied at all times and there is a comfortable level of spare capacity. Going forward, OPEC crude capacity expansion plans already in place are expected to result in almost 40 mb/d of crude capacity by the end of 2010, underpinned by more than 140 projects totalling more than $120 billion. In addition, many MCs are investing in the downstream, both inside and outside of their borders, thus contributing to alleviating the current downstream tightness. OPEC is doing its share and is committed to ensuring order and stability in the international oil market, with secure supply, reasonable prices and fair returns to investors.
I would like now to turn to another extremely important challenge for the future of the oil industry: the protection of the environment, both locally and globally. Up front, let me stress that the oil industry has a long history of successfully improving its environmental credentials, for both the production and the use of the world’s leading energy source. For example, as this slide shows, tailpipe emissions of non-CO2 substances have been enormously reduced over the past three decades.
In the global environment arena our MCs have invested billions of dollars over the past decades in flared gas recovery projects. This represents a significant contribution to the reduction – by more than half since the early 1970s – of the amount of gas that has been flared per barrel of oil produced. Globally, it is extremely important to underscore that an increase of fossil fuels use, as painted by all scenarios, can be made compatible with the objective of limiting or reducing the level of greenhouse gas (GHG) emissions.
We need to look at technological options that allow the continued use of fossil fuels in a carbon-constrained world. One promising option is carbon capture and storage (CCS), applied to large stationary sources of CO2 emissions, such as power stations and industrial sites, which together account for over half the energy-related CO2 emissions. CCS can also be used in conjunction with CO2-enhanced oil recovery. Last year, OPEC held a workshop with the EU in Riyadh on CCS, a demonstration of its commitment to this technology. It is also joining the IEA GHG R&D Programme.
The challenges described all point to the need to develop and explore, existing and new avenues of cooperation, in the context of an increasingly interdependent world. Efforts at expanding dialogues are something our Organization has, and continues to devote much energy to. The most recent result of this was the establishment of energy dialogues between OPEC and a number of other industry stakeholders: the EU, China, Russia, a number of other non-OPEC producers and the IEA.
This year will also witness OPEC broadening its talks. In late March, there was a meeting with the Association of Southeast Asian Nations (ASEAN) in Bangkok, and early talks will be held with Japanese officials from the Ministry of Economy, Trade and Industry in Tokyo. I would also like to highlight the role of the International Energy Forum (IEF) in promoting the producer-consumer dialogue. Its Secretariat in Riyadh is also the home of the Joint Oil Data Initiative (JODI) and OPEC is extremely proud to have played a significant part in the development of JODI. The initiative has quickly evolved into an internationally-respected initiative focused on advancing the transparency, quality, timeliness and flows of energy market data.
Allow me to conclude by bringing you back to the issue I mentioned at the beginning of my speech: sustainable development. The goal in every decision we make needs to take into account its three pillars: economic growth, social development and environmental protection. With all OPEC Member Countries, developing ones, the issue of sustainable development is one close to the Organization’s heart. In fact, His Excellency Abdullah bin Hamad Al Attiyah, the Second Deputy Prime Minister and the Minister of Energy and Industry for Qatar, holds the Chair at the present 15th session of the influential United Nations Commission on Sustainable Development. What needs to be recognised is that sustainable development means different things to different people. In this world, it is abundantly clear that many social and economic disparities exist.
Today, 1.1 billion people are currently living on less than $1 a day, almost two billion have no electricity and many people rely on traditional biomass for cooking and heating in unsustainable ways. For them, energy is not just about the pumps being full, the public transport infrastructure ticking over, or the DVD player being to hand. It is about having the basic energy services to help eradicate poverty, support health care and education, provide the rudimentary conditions for economic development and enhance living standards. I am proud here to mention our sister organisation, the OPEC Fund for International Development, which is contributing its share to poverty alleviation, through developmental actions in 119 countries.