Balance of power

OPEC, less commonly known as the Organization of Petroleum Exporting Countries, is frequently in the news. Much of the world sees the organisation as solely responsible for the oil price. But really, its quota approach is an attempt to control supply, with market demand creating the price. OPEC's real and clearly stated aim is to look after its members' interests, while it pitches itself as a custodian of the oil industry.

"OPEC's top priority is to supply the world with enough oil and generate a reasonable income for oil producing countries," said Abdalla El-Badri, secretary general of OPEC. "And also to have fair investment [opportunities] for international oil companies (IOCs).

"If you look to the past, we used to have some conflict with the IOCs. But for maybe the last 10 to 15 years we have reached an understanding, where we can invest and cooperate together, so we can both earn a fair return on our investment."

The relationship between OPEC and its member countries is one of information and data sharing. Quotas exist, but production figures indicate that these are more guidelines than absolutes. There is also talk of OPEC and its members starting on a process of cooperative research - into areas such as enhanced oil recovery and alternative energy sources - but El-Badri acknowledges that this is part of a long-term strategy, which is just getting started.

Diversity & dominance

Much is made of a growing diversity in world oil and energy supplies. Some argue that OPEC's influence has dwindled in the face of this diversification, but the organisation offers some figures that quickly put this position into perspective.

"OPEC controls about 80% of world reserves and produces only 40-41% of its oil," said El-Badri.

"We would like to see more and more oil discovered, this will enhance the share of oil in the energy mix.

"At this time oil is the only feasible source of energy. Fossil fuel as a whole makes up 90% of commercial energy use and oil is dominant in that energy mix. The world has not come up with any sound alternatives that will replace it. Crude, whether it comes from OPEC or non-OPEC producers, helps to solidify the position of oil as the dominant source of energy."

With these numbers, it is easy to see why OPEC claims global energy diversity plays no part in discouraging investment. OPEC's World Oil Outlook predicts non-OPEC crude oil supply will peak at 48 million barrels per day (bpd) in 2015, then decline slowly back to 2005 levels, circa 45 million bpd, by 2030. The money OPEC countries are putting into infrastructure will help them stand ready to fill any shortfall as non-OPEC output wanes.

"We are investing US $130 billion dollars in 140 projects, to increase production by about 6.5 million bpd," said El-Badri. "If we go to 2020, the requirement that OPEC is supposed to add to production is about 9 million bpd. This will need further investment of between US $230-$500 billion, so if there is any non-OPEC shortfall, OPEC will be able to add more oil to the market."

The investment required is as significant as it is undefined. The uncertainty about just how huge the amount of cash needed will be is encouraging a more inclusive approach to investment.

"It is no secret that NOCs and OPEC member countries dominate oil and gas activities," said El-Badri. "But at the same time they are opening the door for IOCs to get in, invest and bring their technology and financial backing. Production sharing agreements (PSA), through bidding, are the best way to do this. They are a fair agreement that can be reached between an NOC and IOC, allowing them to share the cost of the investment and its benefits."

Risk & return

When it comes to carrying the burden of investment risk, El-Badri sees room for more partnerships, particularly in the downstream sector.

"I would like to see joint ventures between producers and consumers, as far as refineries are concerned. You cannot have successful investment downstream unless everyone shares the risks and benefits. But it's a long process and needs a stable market."

In OPEC's view this stable market can be achieved by creating security of demand, assuring OPEC countries of a return on their investment. The organisation currently predicts that, from now until 2020, it will need to produce an additional 9 million bpd, on top of replacing the depletion of existing production. It is this need for expansion that will generate demand for large sums of investment cash, but OPEC wants to be sure that the oil produced will have a home.

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