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Sun 28 Nov 2010 12:00 AM

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A golden year

50 years ago the formation of OPEC changed big oil forever. After half a century in the driving seat, where does the planet’s most powerful cartel see itself today?

A golden year
Oil ministers pose for a group picture during the 156th meeting of the OPEC conference at the new OPEC headquarters in Vienna on March 17, 2010.

Since the Organization of Petroleum Exporting Countries was formed
in September 1960, much has changed in the oil industry and the world at large.
It has been a challenging time for an evolving organization like OPEC, but one also
of significant achievement.

The organisation held a series of official engagements throughout
the course of this year, at which the secretary general, Abdalla Salem El-Badri,
highlighted some of the issues its members had faced, and where he felt the market
was headed. “As we all know, the last few years have been particularly difficult
for all attached to the oil industry and the global community at large. Every country,
indeed every facet of society, has been affected to varying degrees by the worst
global economic downturn in 70 years,” said El-Badri.

Indeed, the recession saw OPEC at the centre of one of the most
turbulent boom-bust periods of its long and eventful history – one that called into
question much needed long-term upstream investment.

“Thankfully, the worst appears to be over. The world economy
is clawing itself back up from the depths of the precipice it occupied over the
past two years which means that oil demand is once again entering the growth curve
it held for so many years before the financial crisis erupted,” he said.

El-Badri said that the resumption of demand growth spelled good
news for the organisation, which, he added had been doing all in its power to maintain
order and calm during what has been an uncertain period. He paid a passionate tribute
to the member countries for their decisive role in helping shape the global recovery.

“In their concerted response, OPEC Member Countries have shown
great camaraderie, purpose and responsibility. Their policy decisions and actions
have not only rescued oil prices and restored stability to a very volatile market
they have been instrumental in bringing about conditions that have supported economic
recovery.”

El-Badri stressed that this confirmed OPEC’s standing as one
of the most influential and respected institutions in the world today. “Its undeniable
commitment to the welfare of both its members and the global community is matched
by a level of experience, knowledge and awareness that stands it in good stead to
tackle any eventuality. It certainly has come a long way since its inception almost
a half century ago,” he said.

To celebrate the 50th Anniversary, six key achievements have
been highlighted by the executive committee. These help provide an understanding
of where the Organization has come from, how it has developed and how these achievements
can be built on in the future.

First up is security of supply. Since its formation in 1960,
OPEC has attached great importance to the provision of a frontline energy source,
namely working to ensure a stable, secure, well-managed oil sector. The very first
resolution of the Organization aims to achieve stable oil prices, “with a view to
eliminating harmful and unnecessary fluctuations”; a steady income for producing
nations; an efficient, economic and regular supply of petroleum to consuming nations;
and a fair return on their capital to investors. These principles are enshrined
in the OPEC Statute, which was first adopted shortly after, in January 1961, and
has provided the statutory beacon for the Organization’s actions in the market ever
since.

OPEC has demonstrated its commitment to market order and stability,
even though, in practice, this can sometimes be hard to achieve. This can be viewed
in the experiences of the past few years, with the growing scale of the paper market
and the expanding role of speculation.

However, over the past 50 years, the oil market has remained
adequately supplied, and OPEC has responded, as and when necessary, to market developments
and unforeseen happenings. For example, when capacity from Iraq and Kuwait were withdrawn from the market
in 1990, other OPEC Members increased exports to help meet the shortfall. And from
2003 to 2006, OPEC responded swiftly to a demand surge and supply disruptions in
the market by increasing its production by more than 5 mb/d.

The most recent of the Solemn Declarations, the ‘Riyadh Declaration’,
which concluded the Third OPEC Summit held in Saudi Arabia, also underlines how the
Organization’s objectives, whilst remaining in line with those from 1960, have evolved.
The Declaration states that the OPEC Heads of State and Government “have agreed
on the following principles to guide our Organization and Member Countries’ economic,
energy and environmental endeavours, within the following three themes: stability
for global energy markets; energy for sustainable development; (and) energy and
environment.”

OPEC remains committed to ensuring stable, secure, reasonably
priced supplies of crude oil to the market at all times. And in the medium-term,
there are significant OPEC Member Country investments committed; both for the upstream
and downstream.

It is clear, however, that with such big, costly and lengthy
undertakings in mind, security of supply needs to go hand-in-hand with security
of demand, and reasonable prices need to prevail.  The overall goal is for all stakeholders to focus
on improving inclusivity, cooperation and transparency; to provide a stable setting
in which investments and expansion flourish, economies witness stable growth, and
where better access to modern energy services help make energy poverty a thing of
the past.

A golden age

When OPEC was set up in Baghdad in 1960, there were some who predicted
that the Organization would not last long. Fifty years on, however, that initial
small group of developing countries has evolved into a group of 12 that is respected
far and wide as an established part of the international energy community. It has
survived and it has prospered.

It has not been an easy task to advance such influence and standing,
particularly given the nature of its establishment. The main catalyst for its birth
came when a group of multinational oil companies — the so-called Seven Sisters —
who, at that time were the dominant force in the oil market, unilaterally reduced
the posted prices of the crude they supplied. These firms effectively controlled
the quantity of oil extracted and decided how much was sold, to whom, and at what
price. In reality, it was a time when the international petroleum industry, outside
of the former Soviet Union, was under the control
of the established industrialized powers.

So in 1960, five oil-producing countries — Iran, Iraq, Kuwait,
Saudi Arabia and Venezuela — joined together around the premise of cooperation,
with a commitment to safeguard their legitimate national interests and to ensure
order and stability in the international oil market. There was no fanfare, no glare
of major publicity from the international media, just five developing nations setting
about the business of defending their legitimate interests.

The odds were stacked against them, in a world previously dominated
by the established industrialised powers. Yet, little by little, OPEC began to make
its mark. In this light, the formation of OPEC was a brave act, a pioneering act,
an act that demonstrated that even developing countries had rights. Their indigenous
resources were more than just a convenience for others; a concept that every nation
around the world can appreciate.

Since its humble beginnings, the organization has had its shares
of ups and downs, but it is evident that it has grown in stature and achieved an
astonishing degree of success. It has provided member countries with the support
and the confidence to assert their interests in the petroleum industry, particularly
in terms of what the United Nations Charter says is the inalienable right of any
country to exercise permanent sovereignty over their natural resources.

It has also helped maintain stable and regular supplies of oil
to the market; expand its role on the global stage; helped enhance and build better
cooperation and dialogue among producers and consumers, and created a facility —
the OPEC Fund for International Development — for channeling aid to developing nations.

That is not to say that the Organization can sit back and rest
on its successes and achievements. It recognizes that the global oil market is an
ever evolving entity; one that requires constant monitoring and appropriate actions.
The past 50 years have been important, but it is the next 50 years that the Organization
is now focusing on.

Building NOC muscle

When OPEC was formed in 1960, and many of its National Oil Companies
(NOCs) formed in the years after, the world oil industry was very different to that
of today. Outside the self-contained former Soviet Union,
it was dominated by the multinational oil companies, which controlled the quantity
of oil extracted, managed how much was sold and to whom, and determined the price.
Host governments were paid small royalties, in contrast to the large profits made
by the multinationals of that time — known as the Seven Sisters — which were the
forerunner to many of today’s International Oil Companies (IOCs).

Since then, however, the voices of those host countries and their
NOCs have grown louder, as they pushed forward the inalienable right of all countries
to exercise permanent sovereignty over their natural resources in the interest of
their national development. OPEC has helped provide a platform that has enabled
its NOCs to flourish; by affording them a stronger global presence, not only in
the oil industry, but in global trade and environmental negotiations, particularly
by enabling the pooling of knowledge, resources and intellect.

Over the past few decades these NOCs have gradually increased
in size, stature and strength, with their roles, responsibilities and capabilities
advancing enormously. They are now considered to be in the vanguard of the industry’s
present, and its future. This ever-expanding role becomes further apparent when
looking at the definition of what is an IOC or an NOC. It is not as straightforward
as it was in the past. In some cases, the lines that previously distinguished the
two are becoming increasingly blurred. In many instances, we see mutually beneficial
relationships evolving, as the energy landscape becomes more complex and interdependent.

Moreover, it is clear that many NOCs are moving towards being
IOCs as they invest and build capabilities overseas. It is to be expected. It is
a natural progression. And the trend is set to continue in today’s fast-moving,
high-tech, interdependent, global oil industry.

Whatever the evolving nature of IOCs and NOCs and their relationships,
the key word when discussing the two, remains: cooperation. The benefits are clear.
NOCs and IOCs share many challenges in the industry and are thus well-placed to
find common, effective and sustainable solutions throughout the energy value chain.
There is a need for strong relationships and partnerships between all stakeholders,
based on complementary strengths and mutual interests.

Going forward, OPEC attaches great importance to the continued
strengthening of its Member Country NOCs, and the further development of positive
and constructive NOC-to-NOC and NOC-to-IOC relationships. This was made clear in
the Organization’s Long-Term Strategy adopted in 2005, which recommends that OPEC
Member Countries strive to strengthen cooperation in upstream and downstream scientific
research and technological development among themselves and with international institutions,
as well as widening and deepening dialogue with all industry stakeholders.

Sustainable
development

Since its very early beginnings, OPEC, whose membership comes
from the developing world, has placed a high priority on easing the plight of impoverished
nations, in particular by helping them pursue the goals of sustainable development.
At the First OPEC Summit in Algiers
in 1975, the Sovereigns and Heads of State of our Member Countries, in a Solemn
Declaration, reaffirmed “the natural solidarity which unites their countries with
the other developing countries in their struggle to overcome under-development.”

This has also entailed the establishment of many effective bilateral
and multilateral aid institutions, including the OPEC Special Fund, now the OPEC
Fund for International Development (OFID), which was a direct result of the First
Summit. The Fund was inaugurated the following year to promote South-South solidarity
through cooperation between OPEC Member Countries and other developing countries;
primarily by helping provide the financial resources those countries need to realize
their economic and social development goals.

From the outset, the Fund has directed its resources to where
they have the greatest impact on the lives of the poor, such as primary healthcare,
basic education, water supply and sanitation, transport and agriculture, and rural
development, while allowing the key decisions to be made by the beneficiary governments
and the people themselves.

Its methods of funding include public sector loans for development
projects and programmes; balance of payments support and debt relief under the Heavily
Indebted Poor Countries Initiative; trade financing; support to private enterprises;
grants for technical assistance, food aid, research and humanitarian relief work;
and contributing to the resources of other development organizations, such as the
International Monetary Fund (IMF) for its Poverty Reduction Strategy Trust Fund,
the International Fund for Agricultural Development and the Common Fund for Commodities
whose activities benefit developing countries.

By the end of January 2010, over 120 countries from the developing
world — Africa, Asia, Latin America, the Caribbean, the Middle East and Europe —
have benefited from OFID’s assistance, with the level of cumulative development
assistance extended by OFID standing at US$11,682 million.

In fact, relative to their per capita income, OPEC Member Countries
have done a lot more to alleviate poverty in poorer developing countries than the
richer nations of the world. For example, Saudi Arabia has consistently earmarked
a near four per cent of its annual budget for the purpose of aid, which it makes
through bilateral and multilateral channels.

Going green

The oil industry, through human ingenuity and technological development,
has a long history of successfully improving the environmental credentials of oil,
in both production and use. And OPEC Member Countries — both individually and collectively
— have themselves been at the forefront of many important environmental-focused
developments.

This includes investing billions of dollars over the past decades
in flared-gas recovery projects. This represents a significant contribution to the
reduction — by more than half since the early 1970s — of the amount of gas that
has been flared per barrel of oil produced. OPEC has also held and participated
in a number in workshops on this issue, and is an active participant in the Global
Gas Flaring Reduction Partnership sponsored by the World Bank.

In the Gulf region, where many Member Countries are located,
the very busy sea lanes are highly vulnerable to pollution, with the unregulated
dumping of waste materials a common problem. However, the countries in the region
have been exceptionally proactive in rising to these challenges, in line with international
and regional conventions and agreements.

The Third OPEC Summit held in Riyadh, Saudi Arabia,
in November 2007, had as one of its three core themes: Energy and environment. It
highlighted the importance of promoting collaboration in research and development
in the petroleum field among OPEC science and technology centres, as well as collaboration
with other international centres and the industry. This was underscored by several
Member Countries announcing at the Summit
the creation of a special $750 million fund to invest in clean technology ventures.

In the years ahead, with the world requiring its energy to be
even cleaner, safer and, as far as possible, environmentally benign, and with fossil
fuels continuing to be the leading energy source, OPEC recognizes the importance
of continuing to promote the development and deployment of cleaner fossil fuel technologies.
In this regard, OPEC supports the existing technology of carbon capture and storage
(CCS), which has the potential to contribute up to 40% of emission reductions by
the middle of the century. One CCS project in an OPEC Member Country already exists:
In Salah in Algeria.
Industrialized countries, however, having the financial and technological capabilities,
should take the lead in developing and deploying these types of technology.

In looking at the environmental conundrum, it should be remembered
that for developing countries, poverty alleviation, economic development and social
progress are the overriding priorities and it is clear that people in such nations
will need more energy, not less, to meet their needs. Climate change is in fact
providing these countries with yet more challenges and additional vulnerabilities,
although they have contributed little to the current situation. It means that the
goal of “common, but differentiated responsibilities and respective capabilities”
needs to be to the fore.

It’s good to talk

OPEC was formed around the premise of cooperation, with a commitment
to safeguard the interests of its Member Countries and to ensure order and stability
in the international oil market. This cooperation has since grown stronger as the
Organization has become an established and respected member of the global energy
community. Other oil-producing developing nations have joined, extending the Organization’s
reach to North Africa, West and Southwest Africa,
and the Organization has reached out to other industry stakeholders to help achieve
its longstanding objectives focused on market order and stability.

A major advance in bringing more industry stakeholders closer
occurred in the late 1980s. This followed the 1986 oil price collapse and the realization
among non-OPEC producers — from both the developing and developed worlds — that
market stabilization measures were urgently needed and that OPEC required support
in providing these.

This process expanded further in subsequent years with major
advances in the producer-consumer dialogue in the 1990s, particularly the formation
of the International Energy Forum (IEF), whose specific purpose was to provide the
setting for such dialogue.

OPEC has since effort into expanding dialogues on a variety of
issues between it and other industry stakeholders. In recent years this has included
the International Energy Agency, the European Union, China,
Russia,
and a number of other non-OPEC producers. Interaction with international organizations
is expected to increase further, as OPEC becomes more directly involved in oil-
and energy-related issues that are being addressed at high-level policy platforms,
such as the G-20.

Today, the importance of cooperation between producers and consumers
has never been greater. The reason is that globalization is bringing us all closer
together and there is no getting away from the fact that we live in an increasingly
interdependent world. It is one in which we are continually seeing advancement in
international trade, an explosion of instant mass communication, rapidly advancing
technology and greater mobility, but at the same time, it is one in which energy
poverty continues to blight the lives of billions of people.

The Organisation recognises inclusivity is the key:
thinking and planning ahead to look at the needs and responsibilities of oil producers
and consumers, oil exporters and importers, and developed and developing nations.

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