Petroleum will still be the major energy resource in the 21st century

By Dr Purnomo Yusgiantoro, President and Secretary General of OPEC, Minister of Energy and Mineral Resources of Indonesia. Delivered by Mr Mohammad Alipour-Jeddi, Head of OPEC's Petroleum Market Analysis Department. World Petroleum Congress, First Youth Forum Beijing, China - 17–20 October 2004

Excellencies, distinguished delegates, ladies and gentlemen,

As I understand it, most of you are at the beginning of your professional lives in the petroleum industry. We believe you are entering an industry that is dynamic and in good shape. This has been due to the dedication, the commitment and the expertise of generations of personnel who have devoted their careers to its development and enhancement, since its foundation in the middle of the 19th century.

It has moved forward with the times, reflecting the attitudes, the philosophies and the concerns of each passing era. It has also embodied a resolute pioneering spirit and has pushed forward the boundaries of innovation and enterprise. It has never stood still. It is now very different to the business that existed even a quarter of a century ago.

The industry, into which your generation will rise and inhabit and excel, is concerned with more than just energy supply. It seeks to benefit mankind as a whole. It embraces an awareness and sensitivity of the economic and social needs of the global community at large. Sustainable development, economic, environmental and social harmony, and other basic human issues provide reference points that may well define your careers in the years ahead.

We should, therefore, like to congratulate both the World Petroleum Congress and the Chinese National Committee for WPC on recognising the true nature of the challenges facing the industry and on launching the idea of the First Youth Forum, as well as undergoing the formidable task of organising it here in Beijing. Our gratitude is also expressed to the other Chinese enterprises that are co-hosts of this event.

The capital city of China is a suitable venue for this forum, since this country is experiencing remarkable economic expansion and currently is the major growth area in the world energy community. In such a dynamic and progressive setting, it is clearly symbolic of youth and the future.

Thus — for both China and the world at large — it is vital that we continue to attract to the industry the most skilled, the most qualified and the most committed people. Moreover, we must ensure that the industry is appealing enough and challenging enough to hold onto them during the course of their long careers. Sound investment in human capital is indispensable for any viable business that aspires to long-term growth and prosperity.

What do we find attractive about a career in petroleum?

First, there is the sheer importance of energy for the evolution of mankind. Mankind will always need energy. Therefore, a career dedicated to the energy industry has a special undertone to it, since, in the final analysis, we are providing a service which is basic to human needs.

Secondly, petroleum has a special appeal, because it has long been the market leader — the main source — in the world energy mix and is expected to remain so well into the 21st century. The future is still with petroleum.

Thirdly, there are exciting challenges in the years ahead in an industry which is highly competitive and operates at the sharp end of technology. Producers must, for example, meet the forecast rising oil demand in a manner which is both timely and compatible with such objectives as sustainable development and social, economic and environmental harmony.

Fourthly, there are many opportunities for personnel to excel and for their efforts to be rewarded in the form of career progression, remuneration and other benefits. The industry has a long history of rewarding ability and commitment.

And finally, there are the qualities of working in the industry itself. Many tasks are, in themselves, dynamic and stimulating. There are chances to travel or relocate in different parts of the world. There are opportunities to mix with a diverse range of nationalities, cultures and backgrounds. And there is a strong feeling of comradeship among people committed to seeing their tasks performed to perfection.

Let us now look more closely at the industry.

Past development

Oil has been the world’s major commercial energy source for many decades and the consensus view is that it will maintain this leading role well into the 21st century. Here are some of the underlying trends.

OECD countries have, by and large, enjoyed very high, steady growth since the end of the second world war, and this has occurred in line with an enormous expansion of the world economy. Industrial production grew by around 50 times during the 20th century and four-fifths of this growth happened after 1950.

This resulted in an enormous increase in energy consumption, most of which was concentrated in the OECD countries.

Oil dominated the world energy mix after the second world war, with the OECD accounting for 60–70 per cent of world oil consumption. Total and per capita energy consumption was much lower in the developing countries throughout this period, although this trend is now beginning to change. In both regions, there has been a steady increase in the use of gas.

Currently, oil accounts for around 40 per cent of the world energy mix. This is because it is a unique commodity, with a combination of attributes which far exceeds that of any other energy source — sufficiency, accessibility, versatility, ease of transport and, in many areas, low costs. These have been complemented by a multitude of practical benefits that can be gained from decades of intensive exploitation and use in the industrial, commercial and domestic fields. Advances in technology make oil a cleaner, safer and more efficient fuel, so that it can meet increasingly tighter environmental regulations, as well as conforming to the broader demands of sustainable development.

The world’s proven crude oil reserves total around 1,100 billion barrels, which, in simple mathematical terms, will be enough to meet demand for around 45 years, at current production rates.

However, in practice, the situation is not as simple as this. To begin with, production will not suddenly stop at a finite point; instead, there is likely to be a gradual transitional phase lasting many decades, as occurred when the world moved from the coal era to the oil era. Also, while, on the one hand, annual output is forecast to rise steadily in the early 21st century, on the other hand, recovery rates will also improve, through enhanced technology, improved infrastructure and better accessibility. Moreover, there is “unconventional oil”, such as tar sands, oil shale and heavy oil, and exploitation of this is expected to rise steadily in the future. And finally, we have been talking in terms of “proven” reserves. There is still plenty of oil that has yet to be discovered, in regions whose geological structures suggest a high probability of commercially viable reserves.

What we can say with certainty is that there should be plenty of oil around for decades to come. In short, the world’s oil resource base is not a constraint. This is reassuring, because the consensus view is that oil will remain the dominant energy source for the foreseeable future.

Future prospects

The reference case from OPEC’s World Energy Model, “OWEM”, sees global oil demand rising by 38 million barrels a day to 115 mb/d by 2025 — annual average growth of 1.6 mb/d, or 1.7 per cent, over the years 2010–25. Oil’s share of the world energy mix will dip slightly during this period, from 40 to 37 per cent.

OECD countries will continue to account for the largest share of world oil demand. However, almost three-quarters of the increase in demand of 38 mb/d over the period 2002–25 will come from developing countries, whose consumption will almost double. This will be consistent with the forecast that the average annual economic growth rate of 5.0 per cent for the developing countries will be double the OECD’s 2.5 per cent, for the period up to 2025. Asian countries will remain the key source of oil demand increase in the developing world, with China and India central to this growth.

At the global level, the transportation sector accounts for about 60 per cent of the rise in demand in 2000–25. This will amount to nearly all the growth in transition economies, almost four-fifths of it in the OECD and close to half in developing countries. The industrial and household/commercial/agriculture sectors will also be important sources of growth in the developing world.

Turning to the oil supply outlook, in the short-to-medium term, overall non-OPEC supply is expected to continue to increase, rising to a plateau of 55–57 mb/d in the post-2010 period. This represents an increase of 7–9 mb/d from 2002, although the eventual scale of this future expansion is subject to considerable uncertainty. The key sources for the increase in non-OPEC supply will be Latin America, Africa, Russia and the Caspian.

With the forecast gradual depletion of non-OPEC reserves in the first quarter of the 21st century, OPEC will increasingly be called upon to supply the incremental barrel. OPEC has both the capability and the will to do this.

Around four-fifths of the world’s proven crude oil reserves are located in OPEC’s Member Countries, although these 11 states account for only about two-fifths of current world output. Moreover, these reserves are more accessible and cheaper to exploit than those in non-OPEC areas. In 2025, OPEC is projected to meet more than half the world’s oil demand, at 51 per cent, with 58 mb/d.

OPEC is fully aware of the role it will need to play in the evolving international oil market. It is, indeed, an extension of the role it has been playing, with great effect, for many years and which has its roots in the OPEC Statute, which dates from 1961. This important document defines the Organization’s core values of stable markets, reasonable prices, steady revenues, secure supply and fair returns for investors.

Landmark declarations by OPEC in 1968, 1975 and 2000 extended the Organization’s orbit to cover a broader range of issues, including: the inalienable right of all countries to exercise permanent sovereignty over their indigenous natural resources; the promotion of a more equitable global economic system, with particular emphasis on alleviating poverty and other injustices affecting developing countries; sustainable development; and environmental harmony. As you will recall, these incorporate the qualities I outlined earlier, that are considered to be part of the broad-based mandate of the modern petroleum industry.

An important outcome of OPEC’s broader vision was the establishment of its own specialist multilateral development finance institution in 1976, to help other developing countries, especially the least-developed ones, pursue social and economic advancement. To date, the OPEC Fund for International Development has made financial commitments of more than $7.0 bn.

OPEC keeps a close watch, at all times, on energy market developments, as part of its ongoing research activities, at its Vienna-based Secretariat. This covers all reasonable time-horizons — the short term, the medium term and the long term. The purpose is to provide the Organization’s Oil Ministers with the necessary high-quality support material for their decision-making on market issues, whether this be for their short-term production agreements or for their deliberations on important longer-term issues.

One of the most basic issues facing OPEC — and, let us not forget, other oil producers too — is to ensure that sufficient production capacity will be available at all times to help meet the forecast heavy rise in oil demand in the coming years and decades.

Investment is needed: to meet the forecast absolute increase in demand; to see that exhausted reserves are replaced, as and when necessary; and to ensure that oil-producing nations always have sufficient spare capacity available to cope with sudden, unexpected shortages in supply. Also, the oil must be cleaner, safer and more efficient than ever before, to meet the very high expectations of the modern consumer.

Moreover, it is important to note here that, while most people are all-too-familiar with the concept of security of supply, there is also a flip-side to this coin — security of demand. Producers need assurances of stable, predictable markets just as much as consumers require certainty and consistency with supplies.

The required investment will be large, although it will not necessarily be different in magnitude to that observed in the past. Also, the cost of investment in OPEC oil is much lower than in non-OPEC oil.

However, the magnitude of the required capital injection is far from clear, even in the short and medium terms. This is partly due to the wide range of feasible demand growth scenarios, but it is also reinforced by contrasting views on the potential evolution of non-OPEC production. Uncertainties over future economic growth, government policies and the rate of development and diffusion of newer technologies are among the main factors that lie behind this. To illustrate this, if we reduce our global economic growth projections by just one per cent, this will lower the investment requirement for 2010 from a reference case $95 bn to $70 bn — which is a big difference.

To appreciate the significance of all this, one must consider investment lead times that are measured in years rather than months, as well as the importance of “getting it right” i.e. over-investment may result in excessive, costly, idle capacity and under-investment may lead to a shortage of crude and higher prices. In both cases, the losses, especially for producing countries, and the possible, broader associated damage, such as to the world economy, can be huge. Because of the long lead times, it may take years to correct a situation of heavy over- or under-investment.

Clearly, any sound investment strategy must be built upon a solid base. Hence, above and beyond what I have already stated, it is important to have, as a starting-point, market order and stability today, with reasonable prices. This is, sadly, not the case at the present time.

Present challenges

The current market volatility and high prices have been a major cause for concern among OPEC’s Member Countries. Prices for OPEC’s Reference Basket of seven crudes have recently reached record levels. They rose above US $45 a barrel for the first time ever ten days ago; this compares with a fair and reasonable average level of $25.8/b from the inception of the OPEC price band in 2000 through 2003.

We see a combination of factors contributing to the rising price trend this year — even though, throughout, the market has remained well-supplied with crude and fundamentals have been sound: strong economic growth, higher-than-expected oil demand, especially in China and the USA; refining and distribution industry bottlenecks in some major consuming regions, coupled with more stringent product specifications and compounded by the recent hurricanes in the Americas; and the present geopolitical tensions and concern about adequacy of spare capacity to meet possible supply disruptions. Combined, these factors have led to fears about a possible future supply shortage of crude oil, which, in turn, have resulted in increased speculation in the futures markets, with substantial upward pressure on prices.

At the last two Meetings of OPEC’s Ministerial Conference — in Beirut on 3 June and Vienna on 15 September — our Member Countries agreed to raise the Organization’s production ceiling for OPEC-10 (that is, OPEC excluding Iraq) by a total of 3.5 million barrels a day to 27.0 mb/d, with the final increase of 1.0 mb/d coming into effect on 1 November. These decisions were taken, even though OPEC’s assessments had indicated that there was sufficient crude already in the market and that Member Countries were already pumping out levels of crude well above previous ceilings. It was believed that, as well as the actual physical fact of agreeing to these big increase in supply to the market, such actions, in themselves, would also send a powerful psychological signal that OPEC was ready to act in order to help stabilise prices.

A further Extraordinary Meeting of the Conference is scheduled for 10 December in Cairo, to review market developments and, if necessary, adjust the production ceiling agreement accordingly.

With regard to meeting rising demand in the short-to-medium term, OPEC has spare production capacity of around 1.5–2.0 mb/d, which would allow for an immediate additional increase in production. Furthermore, in response to the expected demand growth in the near future, Member Countries have plans in place to further increase capacity by at least 1 mb/d towards the end of this year and through 2005. In addition, plans for additional capacity expansion are available and could be enacted soon; however, this capacity would, typically, become available around 18 months after commencement of this process.

These are all very big issues that we are facing — short term, medium term and long term. And I say “we”, because I am talking about the oil industry as a whole —producers, consumers, governments, the large oil companies, the financial institutions and any other party that has a significant role to play in the general welfare, the effectiveness, the growth and the general evolution of the industry. Market order and stability is a shared responsibility for all parties.

When OPEC makes its production agreements, it does so in the expressed expectation that non-OPEC producers will actively support our measures, since this will make our decisions more effective and we will all benefit from this. When OPEC turns its attention to the future, we envisage this as a collective task for the industry and we seek to get as wide a range of views, opinions, information and data as possible. The challenges facing all of us are too large, too complex and too important to be left to individual, concerned groups.

Big advances in dialogue and cooperation among producers and consumers have been an encouraging feature of the past couple of decades, from large-scale international ministerial gatherings, such as the meetings of the now-institutionalised International Energy Forum, to bilateral or regional contacts that extend across national boundaries. Indeed, the establishment of the Forum’s Secretariat in an OPEC Member Country, Saudi Arabia, bears witness to OPEC’s commitment to dialogue and cooperation. Recent years have also witnessed the development of a closer working relationship between OPEC and the International Energy Agency, to exchange ideas and information. We are involved in a series of joint meetings among OPEC and non-OPEC producers — the most recent was held in Oman earlier this month. We also engage in annual dialogue with high-level energy officials and research institutes from China, Japan and South Korea.

OPEC welcomes all of this. The industry is much better-off if there is an underlying consensus on the means of handling, at least, the major issues that concern all parties — such as price stability, security of demand and supply, investment, environmental issues and sustainable development.

Excellencies, distinguished delegates, ladies and gentlemen,

I have tried to provide an overview of the principal issues that we, in OPEC, believe support the present and future viability of the petroleum industry. It is truly a vast and complex business. There is a strong sense of optimism about the future. However, the benefits for the future can only be achieved through the sustained efforts of able, committed, well-directed personnel. Increasingly, this task will fall upon the shoulders of the young professionals who are now entering the industry. People like you, from whatever branch of the industry you may be in — geologists, reservoir engineers, chemical engineers, energy economists, administrators and countless other indispensable professional affiliations. Sound investment in human capital is essential.

We are confident that you will successfully rise to the challenges facing all of us in an increasingly globalised industry, where technology is enabling us to make remarkable advances in every field of activity and where the orderly, equitable provision of cleaner, safer energy services is seen as an integral part of sustainable development, the eradication of poverty and the general, balanced enhancement of mankind.

Thank you.