Summary of OPEC’s background paper on the oil outlook to 2025

by Mr Mohammed Barkindo

Excellencies, ladies and gentlemen,

We welcome the opportunity to address the distinguished participants at the 10th International Energy Forum and to present a summary of the OPEC Secretariat’s background paper on the oil outlook to 2025.
In doing so, we shall seek to reaffirm OPEC’s longstanding commitment to oil market stability, as embodied both in the OPEC Statute and the recently released OPEC Long Term Strategy. Energy security is a highly topical issue, and we concur with the organisers of the Forum that it must be directly linked to the idea of it being a shared responsibility.

It is important that we clarify what the term “global energy security” actually means.
First and foremost, security of supply and security of demand are two sides of the same coin. Moreover, the concept of energy security should apply to the entire supply chain and cover all foreseeable time-horizons. For all consumers and producers in this increasingly interdependent world, security resides in the stability of the entire market, to the benefit of rich and poor nations alike.

Since the 9th IEF, energy and non-energy commodity prices have risen to unexpectedly high levels, leading to renewed concerns over energy security. In May 2004, the OPEC Reference Basket price stood at $ 36 a barrel, but rose in nominal terms to over $ 65/bbl. We should remember, however, that, in real terms, prices have been far lower than the levels seen in the early 1980s, when the OPEC basket reached over $ 85/bbl in today's prices.
These movements have been influenced by a convergence of factors: the exceptionally strong economic and, in turn, oil demand growth, especially in developing countries, with a global increase of 5.4 mm bpd over the three years to 2005; tightness in the downstream sector, where utilisation rates have exceeded 90 % in most regions; and speculative behaviour -- indeed, contract volumes for crude oil on the NYMEX have almost doubled since 2003.

Add to this mix major natural disasters plus uncertainties that stem from other disruptive events, and it is understandable why concern about energy security has intensified. However, no supply shortages have appeared; to the contrary stocks have been increasing to levels above their five year average, with OECD commercial stocks at almost 2600 mm barrels at the end of 2005.
OPEC has responded to the need for additional oil, confirming its continued commitment to supporting global energy security. Indeed, OPEC's Member Countries have increased production by around 4.5 mm bpd since 2002. Despite the impact of Hurricanes Katrina and Rita late last summer, OPEC's assurances of healthy supply -- accompanied by similar positive statements from the International Energy Agency -- helped prevent that supply interruption from developing into a major crisis. Moreover, further increases in OPEC capacity are being implemented, something that I shall return to in a moment.

Allow me then to turn to the longer-term outlook.
First, demand for energy will clearly continue growing. Fossil fuels will continue to meet more than 90 % of the world's total commercial energy needs. Oil is expected to continue to be in the leading position in meeting the world’s growing energy needs, accounting for close to 40 % of energy demand over the next two decades. Gas demand is expected to continue growing at a fast rate, steadily increasing share from 24 % now to over 28 % by 2025.
Turning specifically to oil demand, our reference scenario sees oil demand rise by 30 mm bpd over the next 20 years, reaching 113 mm bpd by 2025. This is under the assumption that no particular departure in trends for energy policies and technologies takes place.

Although developing countries are set to account for most of this rise, with consumption almost doubling, from 29 mm bpd to 53 mm bpd, OECD countries will continue to account for the biggest proportion of world oil demand. Asian countries are expected to account for a rise of 17 mm bpd, which represents two-thirds of the increase in all developing countries.
Nevertheless, energy poverty will remain an important issue over this period: by 2025, developing countries will consume, on average, five times less oil per person, compared with OECD countries.

The transportation sector will be the main source of future oil demand growth. Of course, the potential for increases in vehicle ownership is greatest in developing countries. Nevertheless, the level of ownership per capita in developing countries will remain well below that of OECD countries. This is an even more evident portrayal of the expected persistence of energy poverty.
From the supply perspective, the resource base is sufficient to satisfy expected world oil demand growth for decades to come. 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.

Indeed, as can be seen from the figure, USGS estimatesof Ultimately Recovery Reserves have practically doubled since the early 1980s, from just 1,700 bn barrels to over 3,300 bn barrels. On top of this, there is a vast resource base of non-conventional oil to explore and develop.
The number of non-OPEC countries producing oil has risen substantially in recent years. In the medium term, total non-OPEC output has the potential to grow substantially; in the period 2005-10, our projections show 6 mm bpd growth.

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 is eventually expected to reach a plateau after 2015, at 58–59 mm bpd.
In the longer term, it is therefore expected that OPEC will be relied upon to supply most of the incremental barrel of demand. By 2025, OPEC production levels, including natural gas liquids, rise to 54 mm bpd. However, even then, non-OPEC countries will account for the larger part of world oil production.

These projections underline the need for substantial investment along the entire hydrocarbon supply chain. Up to 2025, total upstream investment requirements in our reference case over the next 20 years amount to $ 1.9 tn (in 2005 dollars). The global scale of upstream investment that this reference case outlook implies, however, is not expected to be greater in magnitude than that witnessed in the past, because of the gradual shift from higher-cost non-OPEC to lower-cost OPEC supply.
Nevertheless, oil prices must be sufficient to mobilise the resources to supply the market with the necessary oil.

Are these investments being made today? The answer is: yes.
OPEC crude capacity expansion plans already in place are expected to result in almost 38 mm bpd of crude capacity by the end of 2010, an increase of nearly 5 mm bpd. This is in spite of the high costs currently prevailing, which in turn have arisen, at least in part, due to shortages, in particular in services and human resources, following the period of low prices witnessed just a few years ago.
Similarly, production capacity of NGLs and other liquids continues to rise. This capacity growth is underpinned by more than 100 projects totalling $ 100 bn. Moreover, these projects are in addition to energy infrastructure investments. This investment is expected to further increase OPEC spare capacity to 5-8 mm bpd over the next five years.

This demonstrates the seriousness OPEC attaches to the need for security of energy supply. Nevertheless, the need for enhanced energy security has to be seen from both the supply and demand perspectives. Uncertainty over future demand translates into large uncertainties over the amount of oil that OPEC member countries will eventually need to supply, signifying a heavy burden of risk. Investment requirements are very large and subject to long lead-times and pay-back periods. Over the next 15 years, for example, our scenarios show that the amount of oil required from OPEC could range by close to 10 mm bpd.
With more transparency in the evolution and implementation of policies, better assessments can be made to undertake the appropriate capacity expansion and not waste precious financial resources. This is particularly valid because downside risks to demand are more substantial than upside potential.

Uncertainties over future oil demand translate into a wide range of possible levels of necessary investment in OPEC member countries. Even over the medium term to 2010, there is an estimated range of uncertainty of $ 50 bn for required investment, increasing to $ 140 bn by 2015, and as much as $ 240 bn by 2020.
The issue of security of demand is, therefore, a genuine one. Without the confidence that demand for OPEC oil will emerge, the incentive to undertake investment can be reduced. The possible emergence of large levels of unused capacity would put downward pressure on oil prices. This would result in huge revenue losses,and OPEC’s member countries, as developing countries with strong competing needs for financial resources, would be adversely affected in terms of available resources for education, healthcare, infrastructure, and so on.

The investment challenge, however, extends along the entire supply chain. The downstream sector is a very important part of that chain, with current tightness in the form of inadequate refining capacity putting much pressure on oil prices generally.
Several factors will shape developments in this sector in the coming decade: the rising volume of crude oil that needs to be refined, the expectation of a continued move towards demand for lighter products, and the trend of product specifications towards significantly cleaner products. On top of the need for further distillation and conversion capacity, it is estimated that additional desulphurisation capacity of more than 20 mm bpd will be required over the next 10 years. The downstream sector will require significant investment to address these challenges.

It is estimated that about $ 160 bn in capacity investment will be required by 2015, with another $ 150 bn needed for maintenance and replacement of lost capacity. These estimates do not include the infrastructure required beyond the refinery gate, such as pipelines and terminals. However, analysis of available data indicates that investment in the refining sector is coming at a much slower pace than this.
A more orchestrated effort is clearly required to ensure that sufficient capacities are in place in the future. There is, therefore, a pressing need for ways to be explored that could accelerate expansion plans. Most importantly, it needs to be recognised that the primary responsibility for investment in this sector lies with consuming countries.

Beyond the investment challenge, a critical question is whether the increasing use of fossil fuels is consistent with the “third pillar” of sustainable development, namely the protection of the environment.
Firstly we should note 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. These improvements are expected to continue in the future.

Attention therefore turns to concerns over possible climate change. Most energy scenarios project a substantial increase in CO2 emissions throughout this century. Since well over half the emissions are attributable to power stations and industrial activities, these sectors, therefore, constitute prime targets for emission reduction efforts.
Technological options that allow the continued use of oil and gas in a carbon-constrained world must be considered. One promising example is carbon capture and storage, which could represent an affordable means of responding to climate change concerns. Industrialised countries, having the financial and technological capabilities, should take the lead in this area, by promoting large-scale demonstration projects and the application of this technology, including through the use of the Clean Development Mechanism, in accordance with the principle of common but differentiated responsibilities and respective capabilities.

Finally, Excellencies, ladies and gentlemen,
Energy security is a fundamental issue. And security of supply and security of demand are mutually dependent. But energy security applies across the supply chain. Moreover, we should never lose sight of the fact that energy security applies to all nations of the world, and that the central issue of energy poverty eradication requires urgent attention. Poverty eradication is the first UN Millennium Development Goal. A comprehensive and balanced approach to the three pillars of sustainable development is required, for economic growth, social progress and protection of the environment.
OPEC firmly believes that the International Energy Forum is a key platform for open, constructive producer-consumer dialogue in the new energy era.

See the full presentation at:
http://www.opec.org/opecna/Speeches/2006/attachments/IEFBarkindo.pdf

Mr Mohammed Barkindo is acting for the Secretary General, to the 10th International Energy Forum, Doha, Qatar, 22-24 April 2006. PetroleumWorld not necessarily share these views.
This speech was presented by Mr Barkindo to the 10th International Energy Forum, Doha, Qatar, 22-24 April 2006.