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1 Aspen Dialogue on World Economy Aspen Dialogue on World Economy Energy: the coming back of the Gulf Florence July 8, 2005 Dr. Adnan Shihab-Eldin Acting Secretary General Organization of the Petroleum Exporting Countries Vienna, Austria

Aspen Dialogue on World Economy Energy: the coming … · Aspen Dialogue on World EconomyAspen Dialogue on World Economy Energy: the coming back of ... Key features of the present

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1

Aspen Dialogue on World EconomyAspen Dialogue on World Economy

Energy: the coming back of the Gulf

FlorenceJuly 8, 2005

Dr. Adnan Shihab-EldinActing Secretary General

Organization of the Petroleum Exporting CountriesVienna, Austria

2

Main issuesMain issues

Key features of the present oil marketDemand surge OPEC & non-OPEC supply Persistent price volatility: enhanced by geopolitical tensions, increasing speculative activity in Futures market Upstream & downstream capacity Oil outlook beyond 2010Uncertainties & investment requirementsOPEC / Middle East oil & gas : Importance of investments

Cooperation: upstream & downstream

3

Strong economic growth in DCs (e.g, China, India): growing faster than the world with increasing share in global GDPGlobalization processRobust oil demand growth (particularly in Asia)Capacity adjustment across the supply chain, in particular downstream; conversion refining capacity

0.0

0.5

1.0

1.5

2.0

2.5

3.0

72-05 87-05 94-05 03-05

aagr %avg growth (mb/d)

Oil demand growth Rates of Economic Growth (real terms, at 1995 purchasing power parity)

0

1

2

3

4

5

6

7

8

9

10

OECD DCs China World

2004 2005

2006 2007

Twenty Year Average Growth Rate

Key features of the present marketKey features of the present market

4

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2000 2001 2002 2003 2004 2005* 2006**

USA China Others

Range of uncertainty

Largest contributors to growth in world oil demandyear-on-year change (mb/d)

Largest contributors to growth in world oil demandyear-on-year change (mb/d)

Last 3 years avg.: 2.2

Last 10 years avg.: 1.4

Last 20 years avg.: 1.2

China has become the2nd largest consumer

5

China has become the second largest oil consumer

China has become the second largest oil consumer

0

3

6

9

12

15

18

21

24

27

India

China

Brazil

UK USA

Oil demand, barrels per capita per year

0

1

2

3

4

5

6

7

197119741977198019831986198919921995199820012004

Germany Japan China

Oil demand, mb/d

6

-0.5

0.0

0.5

1.0

1.5

2.0

2000 2001 2002 2003 2004 2005*-0.5

0.0

0.5

1.0

1.5

2.0

C h i n a OECD Pacific OECD W.EuropeOECD N.America Total DCs Fsu- ex RussiaNon-OPEC

Russia

Source of non-OPEC supplyyear-on-year change (mb/d)

Source of non-OPEC supplyyear-on-year change (mb/d)

* Projected

1.0

0.8

0.4

7

0

250

500

750

1000

1250

Jan-03 Apr03 Jul03 Oct03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-050%

3%

6%

9%

12%

15%y-o-y absy-o-y %

Slowing pace of Russian oil supply growth(mb/d)

Slowing pace of Russian oil supply growth(mb/d)

• Yukos impact is now visible!• Export tariffs create disincentive • Fiscal regime uncertainties

8

OPEC crude oil production, 2002-2005(based on secondary sources, mb/d)

OPEC crude oil production, 2002-2005(based on secondary sources, mb/d)

25.4

27.0

29.129.8

3.7

4.4

1.6

21

23

25

27

29

31

2002 2003 2004 2005*0

1

2

3

4

5IraqOPEC-10OPEC-11 cumulative change

* / 1st half year.

9

Global oil demand & supply growth 2000-2009 (mb/d)

OPEC production as of 2006 reflects levels to balance the market.

10

2002 2003 2004 200520

25

30

35

40

45

50

12-step Forecasts WTI

WTI 12 m ahead forecasts and actual

2002 2003 2004 2005

20

25

30

35

40

45

50

Forecasts WTI

WTI 12 m ahead forecasts and actual

Speculation variable (proxied by Non Commercial Long Positions) providesa good explanation about the evolutionof the oil price during 2004 and 2005.

Source: Antonio Merino, Chief Economist, Repsol YPF‘The oil price premium: can non- commercial long positions help to explain the premium?”, June 2005.

The OPEC Spare Capacity could explain part of the price forecast, but not totaly the increase in price.

The extended models, NCLP and OPEC Spare Capacity:Forecast ability

The extended models, NCLP and OPEC Spare Capacity:Forecast ability

11

OPEC production vs. spare capacityOPEC production vs. spare capacity

23

2425

26

27

2829

30

31

1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q050

2

4

6

8

10

12

14

Required OPEC prod. OPEC Production Spare Capacity(%)

(%)(mb/d)

2004 04/03 1Q05 2Q05 3Q05 4Q05 2005 05/04

Demand (a) 82.2 2.6 83.8 82.3 83.7 85.9 83.9 1.8

Supply 82.8 3.5 83.9 84.7 84.7 85.3 84.7 1.9 Non-OPEC (b) 49.8 1.1 50.3 50.6 50.4 51.0 50.6 0.8 OPEC NGL (c) 3.9 0.2 4.1 4.2 4.2 4.3 4.2 0.2 OPEC Crude oil 29.1 2.1 29.5 30.0 30.0 30.0 29.9 0.8

a-(b+c) 28.4 1.2 29.3 27.6 29.1 30.6 29.2 0.7

Balance (d) 0.6 0.1 2.4 1.0 -0.6 0.7

Seasonal stock change: ('00-'04) -0.7 0.9 0.3 -0.6Stock change (e) 0.3 0.3 OECD commercial 0.1 0.0 OECD SPR 0.1 0.1 Oil in Water 0.1 0.2Remaining to Balance (d-e) 0.4 -0.2

12

30.3

33.1 33.9

38.7

35

24

27

30

33

36

39

42

Jan-03 Jan-04 Jan-05 end 2005 2006 201024

27

30

33

36

39

42Capacity additionCapacityCapacityProduction

40.0

32

Note: OPEC production as of 2005 reflects estimated required OPEC volumes.

(mb/d) Jan 04 Jan 05 End 05 2006

Production capacity 30.8 31.6 33.1 33.9Addition to capacity 0.4 0.9 1.5 0.7Production* 28.2 29.3 30.0Spare capacity (vol) 2.6 2.4 3.1Spare capacity (%) 8.4 7.4 9.4

*/ End 05 production is based on estimated required OPEC volumes.Note: Net capacity increase for Iraq is expected to be 0.5 - 1.0 mb/d by 2010.

Accelerated production capacity expansion plans

OPEC production capacity & additions(mb/d)

OPEC production capacity & additions(mb/d)

13

OPEC crude oil production capacity expansion(mb/d)

OPEC crude oil production capacity expansion(mb/d)

-0.5

0.0

0.5

1.0

1.5

2.02004/03 2005/04 2006/05

Algeria Indonesia Iran, I.R.Kuwait Libya NigeriaQatar Saudi Arabia UAEVenezuela Iraq

2004/03 2005/04 2006/05Algeria 0.10 0.13 0.00Indonesia -0.12 0.00 0.00Iran, I.R. 0.14 0.07 0.00Iraq 0.00 0.00 0.20Kuwait 0.15 0.26 0.04Libya 0.09 0.21 -0.05Nigeria 0.06 0.12 0.07Qatar 0.02 0.07 -0.06Saudi Arabia 0.12 0.48 0.28UAE 0.02 0.06 0.14Venezuela 0.11 0.13 0.11

Net increment (mb/d)

14

Overloading of Refining Industry Overloading of Refining Industry

*/Asia = Japan, South Korea, China, India and Singapore. For some Asian countries May is estimated.

Shrinking Refining Spare Capacity in key refinery regions

0

1

2

3

4

5

6

7

8

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

mb/d

EU15 & Norway USA Asia*

0

1

2

3

4

5

6

7

8

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

mb/d

EU15 & Norway USA Asia*

Increasing Refinery Utilization Rate in key markets

75

80

85

90

95

100

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

%

EU15 & Norway USA Asia*

75

80

85

90

95

100

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

%

EU15 & Norway USA Asia*

15

Oil outlook beyond 2010Oil outlook beyond 2010

Oil will remain single largest fuel in primary energy mixThe resource base is adequate to meet demand growth for decades to comeMajor part of the increase in world oil demand to come from developing countriesOPEC increasingly supplies incremental barrelUpstream investment challenge not dissimilar to the past: nevertheless, ensuring market stability will be complicated by considerable uncertainties driven by:

Growth of world economyEnergy policies (substantial downside risk to demand)Technological developmentsOil price path

Need to reduce uncertainties to ensure sufficient & timely investmentsGlobal downstream investments are critical to market stabilityReconcile/harmonize energy & environmental policy

16

Thomas Ahlbrandt, USGS, ‘Global Perspective on Petroleum Resources with a Middle East / North Africa Focus’, 2005.

World oil supply: cumulative production & reserve growth

World oil supply: cumulative production & reserve growth

17

A Prospective Depletion Curve for the World's Conventional and Non-Conventional Oil to 2080A Prospective Depletion Curve for the World's

Conventional and Non-Conventional Oil to 2080

Odell, 1998

0

500

1000

1500

2000

2500

3000

conventional unconventional

undiscoveredreserve growthremaining reservescumulative production

Billion bbl

18

26 2729

1310 12

0

10

20

30

40

2005 2015 2025Oil demand Oil import requirements

North Americamb/d

2530

38

31

23

16

0

10

20

30

40

2005 2015 2025Oil demand Oil import requirements

Asiamb/d

16 17 171412

10

0

10

20

30

40

2005 2015 2025Oil demand Oil import requirements

Europe mb/d

7

-25

-32

-44

9

-50

-40

-30

-20

-10

0

10

2005 2015 2025Oil demand Oil import requirements

OPEC mb/d 10

3 5 5

-8-10 -10

-20

-10

0

10

20

2005 2015 2025Oil demand Oil import requirements

FSU mb/d

(mb/d)2005 2015 2025 2005 2015 2025

North America 25 27 29 10 12 13Latin America 5 6 7 0 0 1Europe 16 17 17 10 12 14FSU 4 5 5 -8 -10 -10Asia 23 30 38 16 23 31 China 7 10 13 3 6 10M.East & Africa 3 4 5 -3 -3 -2OPEC 7 9 10 -25 -32 -44

Oil Demand Net Oil Import Req.

Regional oil demand & net import requirements(mb/d)

Regional oil demand & net import requirements(mb/d)

19

0

50

100

150

200

250

300

350

400

450

2010 2015 2020 2025

$(20

03) b

illion

$70-95bn

$122-173bn

$185-269bn

$258-382bn

Cumulative OPEC investment requirements:Huge uncertainties in future oil demand translate into huge

uncertainties and risks for future OPEC investment

Cumulative OPEC investment requirements:Huge uncertainties in future oil demand translate into huge

uncertainties and risks for future OPEC investment

If OPEC balances the market, the uncertain volume requirements translate into huge ranges of anticipated capital outlay needs

Already by 2010 an estimated uncertainty of $25 billion exists between the reference case and the low economic growth caseA unit of investment in OPEC country on average produce it 4X the additional capacity.

Impact of lower economic growth

20

Proven Crude Oil Reserves

15.0

21.3

Crude Oil Production

12.4

58.5

Proven GasReserves

9.8

51.0

Gas Marketed Production

7.8

83.0

0

10

20

30

40

50

60

70

80

90

100

Proven Crude Oil Reserves

Crude Oil Production

Proven GasReserves

Gas Marketed ProductionOPEC Middle East OPEC Rest Non-OPEC

ch63.7

29.1

39.2

9.2

OPEC oil & gas reserves vs. market share2004

OPEC oil & gas reserves vs. market share2004

What if the pictureis reversed!

21

Investment in OPEC Member CountriesInvestment in OPEC Member Countries

Numerous possibilitiesExtent of IOC involvement varies, from large to little or

noneCombination/partnership — IOCs + NOCs

AgreementsFair and workable

Open and transparentIncentives for investorAssurances for owner

Commitment to long-termMany uncertainties, which can be costly

Increasing attention on downstream

International oil companies (IOCs) National oil companies (NOCs)

22

OPEC medium term oil expansion 2006-2010OPEC medium term oil expansion 2006-2010

Over 60 oil projects (excluding Iraq)80% UD/advance planning stage

+45 oil projects involve IOC’sMajors account for the bulk

OPEC capacity expected to increase by 3.5 - 4 mb/dOther liquids to increase by 1.5 - 1.8 mb/d

Cumulative capex $75 - $90 bn

Additional projects beyond 2010 already being discussed

Iraq?

23

OPEC oil & gasin major IOC’s production profile

OPEC oil & gasin major IOC’s production profile

0%5%

10%15%20%25%30%35%40%

Total CVX Eni RD/Shell XOM Repsol BP Statoil

2000 2008

% of total oil & gas production in OPEC

0

1

2

3

2000 2001 2002 2003 2004 2005 2006 2007 2008

OPEC Oil, kboe/d OPEC Gas, kboe/d

OPEC oil & gas in IOC* production profile

*/Total, RD/Shell, Chevron/Texaco, ENI, Exxonmobil, Repsol, BP, Statoil.

24

0 10 20 30 40

Iraq

Libya

UAE

Kuwait

Algeria

Qatar

Iran

S. Arabia

US$ billion

Oil upstream Oil midstream Oil downstream

Gas upstream Gas midstream LNG-GTL

Petroch/Fertilizers Power generation

• Driven by strong demand growth (local & Asian market)

• 5-year (2005-09) investments in the MENA region: US$210 billion

• 80% in hydrocarbons sector & 20% in the oil-gas power generation sector

• Capital structure: oil upstream auto-financed, downstream 30% equity, 70% debt

(billion US$)Oil

chain Gas

chain Power

gen. Total

energy Iraq 2 1 1 4Libya 4 3 1 9UAE 3 6 4 12Kuwait 9 4 3 16Algeria 4 15 2 21Qatar 3 23 1 27Iran 5 18 12 35S. Arabia 15 16 7 38

Total 44 85 31 161

Energy investments: 2005-2009

Investment requirements: extends beyond oil!(2005-2009)

Investment requirements: extends beyond oil!(2005-2009)

Source: APICORP

25

0

5

10

15

20

25

30

35

NorthAmerica

LatinAmerica

Africa Europe FSU MEGulf

AsiaPacific

$ bi

llion

20.119.8

2.9

14.8 12.5 13.7

30.3

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2000

2001

2002

2003

2004

(mb/

d)Light Products * Oil Demand Growth

* Gasoline, Jet Kerosene and Distillate

increasing demand for lighter productslimited flexibility

Average Global Crude Slate2004 2015

API 33.36 33.12% SULPHUR 1.17 1.27

significant investment requirements (> $130 billion over the next decade)

Downstream challengesDownstream challenges

26

Dialogue and cooperationDialogue and cooperation

Continued cooperation & genuine dialogue: underlying consensus on handling major issues of mutual concern for the benefit of all.

International Energy Forum; International Energy Agency; EU-OPEC Energy Dialogue; Euro-Mediterranean Dialogue;EU-Gulf Cooperation Council; Asian Oil and Gas Ministers Round Table; Non-OPEC at OPEC Conferences; OPEC & Non-OPEC experts meetings …

Effective engagement on all interrelated issues:• Security of supply and demand• Price stability• Energy policies• Multilateral issues• Technology

27

OPEC R. Basket price in in real terms(Base: May 2005=100, US$ / b)

OPEC R. Basket price in in real terms(Base: May 2005=100, US$ / b)

?

0

10

20

30

40

50

60

70

80

90

100

Jan-

80

Jan-

82

Jan-

84

Jan-

86

Jan-

88

Jan-

90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Jan-

00

Jan-

02

Jan-

04

28

Concluding remarksConcluding remarks

Paradigm shifts do occur, and should- and do- result in changes

Unfortunately, they are cited and used to propel prices-in self fulfilling prophecies, beyond what is reasonably expected or implied by the paradigm shift itself. Examples:

Stock markets

Emerging markets

China (1994-2001)

GCC (2003 →

All players in the oil market should focus on discovering the real oil price development- no doubt occurred- in order to avail undesirable consequences to economic growth and prices.

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