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.
"The consumers want security of supply and we don't blame them," said El-Badri. "But at the same time, we would like to see what the future demand for our oil will be, so we can invest and not face shortages.

"If I invest to get additional supply and nobody is using it - some call it excess capacity, we call it idle capacity - it needs to be maintained, you cannot just leave it in the ground. After five or six years you will not find it.

"If OPEC countries don't have security [of demand] then they will use their money somewhere else: they will invest if you use their product. We know security of demand is difficult and we need to co-operate, but that only comes through dialogue. We are talking to the EU, the Chinese and the Japanese, though we've not really spoken with the US yet.

"People say when the price goes up ‘let's increase production', but it's not that easy. It takes two to three months to increase production and the same time to pull it back, if it's not needed."

When asked about the option of fixed-term, fixed-price contracts between producers and consumers, to guarantee the security of demand, El-Badri is clear that these would not be an option.

"I don't encourage fixing prices because of guaranteed demand," he said. "We are not dictating the price, the market is doing that. Oil should be open, should be for everybody; we don't encourage any fixed price [deals]."

Technology & alternatives

El-Badri is keen to promote new technologies, to make the development and use of the world's oil reserves cleaner and more efficient. He sees hydrocarbons as the main source of energy for the ‘foreseeable future', but thinks that oil is currently over taxed.

"I think the time has come to stop burdening the barrel," he said. "[Consumer countries] are buying oil cheaply, but selling it very expensively. They are buying petrol from member countries cheap compared to the price I see at the pump. Instead of just burdening the barrel with more taxes, that money should be used in research to help use oil more cleanly.

"I would like to see far more research being carried out, aimed at mitigating the presence of CO2 found in fossil fuels as a whole. Such a development would be beneficial for both the oil industry and the world at large. There are adequate reserves to last for the foreseeable future, which justify this kind of research, the efforts and the money.

"I don't think the OPEC countries have the financial and technical capabilities to [develop] clean technology, but we can participate and encourage new developments in clean fossil fuels and oil in particular."

When it comes to alternative fuels, El-Badri says OPEC is open to any suggestions that make the energy markets more stable. In fact, OPEC's World Oil Outlook takes account of the rise of biofuels, but El-Badri urges care when it comes to committing resources to just one alternative.

"First of all, we are not against an energy mix and we encourage other sources of energy to come into the market," he said.

"But it seems to me there is a lot of media coverage and a lot of emphasis on other sources of energy, especially biofuels, as if they will replace oil.

"Of course, in principle, we have no problem. But as we see it, there is no magic solution to replacing fossil fuels. I'm concerned that with all the emphasis on biofuels, and with the subsidies they receive, that we may, after a number years, discover they are not the right source to replace fossil fuels."

El-Badri suggested that OPEC member countries were vulnerable to thinking that another source of energy might be coming into the market, because of the level of publicity surrounding alternatives such as biofuels. He indicated that this may lead some to conclude that demand for their oil may drop, causing a reduction in investment. According to El-Badri, the problem this presents could be future shortages.

"The whole world would be affected," he said. "So we would like this matter to be taken very seriously. We think we should work on clean oil, clean coal and another source of energy; all should be developed together, so the world will not face energy shortages at any time in the future."