By Daniel Canty
OPEC Secretary General Abdalla El-Badri speaks exclusively to Oil & Gas Middle East editor Daniel Canty.
EXCLUSIVE: Secretary General, Abdalla El-Badri speaks exclusively to
Oil & Gas Middle Easteditor Daniel Canty at the OPEC nerve-centre in Vienna.
OPEC can trace its origins back to 1949, but became the organisation we know today in 1960. Nearly half a century later the organisation is still going strong, and is one of the major forces in global economics, international trade, and, through it’s members votes, certainly one of the most influential organisations in the Middle East.
Regularly under fire from G20 economies when prices are high, its image in much of the world is that of an overarching cartel with the express mission of enriching its members at the expense of all others. In the period 2007-2008 when prices skyrocketed, the organisation became public enemy number one and a soft target for politicians around the world.
For those working in the oil industry, OPEC states or not, the dizzy heights of $147 oil seem but a distant memory, despite only peaking a year ago this month. So much has passed since then for upstream players. Following a precipitous freefall to $32 just a few months ago, the industry went about a drastic belt-tightening exercise, seeing projects cancelled, put on hold, and for many in this region, colleagues made redundant.
Naturally, OPEC member oil receipts for the first half of 2009 will be significantly down on a year past, which begs the question: How much price control does the organisation have in the face of prevailing global economic situations?
Taking the reigns as secretary general of OPEC in 2007, HE Abdalla El-Badri has steered the organisation through the oil industry’s most volatile period. In June, he took the time to share his views on the role of the organisation looking ahead, and the opportunity to level some home truths at OPEC’s most vociferous critics.
Speaking candidly to
Oil & Gas Middle Easteditor Daniel Canty at the organisation’s surprisingly humble headquarters in Austria’s capital, Vienna, El-Badri is keen to outline that the cooperative maintains its founder’s values, and beyond that, stability is his objective.
“OPEC’s mission was established by our founders in 1960 in Baghdad, and in short, its role is to safeguard the interests of the member countries. By coordinating policies among member states, our goal is to have a stable oil market with an adequate supply to the world,” he says.
Whilst import-reliant nations crow when the price is high, the secretary general stresses that without the good-time capital influx, future availability in an energy hungry world could be jeopardised.
“Investing in new capacity to safeguard against any shortage from the supply side is a primary mission of OPEC. Since 1960, OPEC member state reserves have been substantially increased because of sustained investment in exploration and production,” explains El-Badri.
The responsibility to maintain supplies, and have ample production capacity ready for when the global economy demands it, falls quite squarely with OPEC. Of course, outside of the 12 member states, there is oil to be found, but the majority sits with OPEC founder and full members.
Staying ahead of the demand curve is an expensive business, and one plagued with long-lead times. From initial discovery to bringing a field to full production and export-ready status can take many years, and today’s oilfields demand ever-more complex solutions to exploit the resources fully.
El-Badri emphasises that the Organisation’s members have met this challenge with aplomb. “In 2000 OPEC percentage of global oil resources was 77.8% of crude oil reserves, and by 2008 our percentage was 79%.
In total that represents resources of 845 billion barrels in 2000, and in 2008 over 1 trillion barrels, so our reserves and proportion have increased, even though we have been producing throughout that period.”
The world to date has produced around 1 trillion barrels of oil, and according to the secretary general, OPEC now has more than a trillion barrels in reserves. Bear in mind this oil is held exclusively by the 12 member countries.
“On top of this OPEC resource base there is the North Sea, Canada, USA, Mexico, and Russia to name just a few, so there is capacity for oil to remain the dominant hydrocarbon fuel for the foreseeable future, at least 50 years,” observes El-Badri.
The Secretary General acknowledges that other fuel sources are a growing part of the global energy portfolio, but in meeting future world energy demand, clearly the responsibility sits with the dozen member states he speaks for.
“We have a lot of sources of energy such as the growing LNG market, and non-conventional energy is an important parts of the overall energy mix. We support and encourage these as part of the global portfolio, but oil will remain the lion’s share of world energy supply in the coming decades, and by that we are confident that’s the case for half a century.”
Meeting the challenge
OPEC member countries have embarked upon substantial investments in the upstream to ensure the oil is there when the global economy decides to improve. OPEC crude oil production is projected to increase to around 36.9 million barrels per day by 2010, up from 31.7 million barrels per day in 2005. In addition to this, Iraq’s recovery should contribute significantly to raising OPEC overall production capability. Similarly, production capacity of NGL and other liquids will be expanded by around 2 million barrels per day to reach 6 million barrels per day by 2010.
In order to meet these ambitious targets, El-Badri says over 100 of the planned projects are forging ahead despite the fallout of the global recession.
“Right now we have 150-plus projects in upstream oil and NGLs at this time, but because of the price and excess capacity we are postponing 35 projects until after 2030.”
Pushing ahead with these projects is a critical obligation of the organisation, and OPEC members are doing this at a time when their oil receipts are clearly smarting from the consequences of the global economic crisis, which has impacted demand significantly. In 2008, global oil demand growth was in decline for the first time since the early 1980s, and oil demand for 2009 is forecast to fall by around 1 mb/d.
In April El-Badri addressed the 10th International Oil Summit, in Paris, and highlighted the fact that OPEC member countries are already shouldering a good deal of the responsibility for turning the global economy around. “At our March meeting, we maintained oil output at existing levels, despite the [then] low price environment and the market’s persisting crude oil stock overhang. OPEC’s objective, as ever, is to bring about long lasting market stability.”
At a time when all economic indicators in general were reeling, he added that by sustaining output, OPEC was clearly mucking in where it could.
“We can all appreciate that the fall in oil prices since last summer has offered some short-term relief to consumers. According to some institutions, today’s oil price is providing a stimulus of some $1 trillion to the struggling global economy. However, we believe the figure is much, much larger. If we consider the last half of 2008 and 2009 together, the figure may reach $2 trillion and OPEC’s share accounts for some $800 billion of this. At least some of this stimulus is already being felt by the whole world,” he said.
In gearing the exporting nation’s industrial efforts for a demand upswing, despite the dreary growth forecasts mentioned above, OPEC is sticking to its mandate to provide solid, reliable exports in a way that many non-conventional and renewable energy providers are not. Indeed, across the world scores of renewable projects have been cancelled or put on hold as cash-strapped governments and charities balk at the cost, or are simply unable to attract sensibly priced credit.
El-Badri remains unconvinced that oil’s gains will be the force that halts or reverses such green shoots of recovery. “I always encounter the question of what is the right price for oil. Truly, I don’t have a price tag. We don’t push for a very high price, and we don’t want a very low price either. A moderate price level is best for producers and consumers to live together without any volatility in the market,” he says.
“If we go back to July 2008, largely because of speculation, the price shot up to $147, not for the long-term, just the short term. We know from the past that a very high oil price is not sustainable, and actually increases volatility in the market. A stable price allows OPEC members to invest in new capacity, upstream and downstream – we are investing in both at the moment.”
Lessons have been learnt from the volatility which preceded the rollercoaster oil price run in 2008.
“From last year’s experiences we’ve learnt that a very high oil price does not really benefit anybody. We asked many times in 2008 for countries where speculation activity was driving the price up, for controls to be put in place. OPEC cannot eliminate speculation and we cannot eliminate hedging – these are fact of the market – but guidelines and a standard must be put there so that excessive speculation and hedging do not negatively impact the oil market.”
Pushed for an optimum level, El-Badri concedes that we have not yet reached or breached a price environment that is detrimental to an economic recovery. “I think that a price of up to $80 will not harm world growth. $70 - $80 would not harm or destabilise the global economy.”
To remedy the excesses witnessed throughout 2007 and 2008 El-Badri is eager to offer a solution of sorts.
“I think having a standard for the market which prevents excessive activities would be a better solution than long-term fixed price contracts. If you have a fixed price that only takes into account one factor, which is the cost of the oil. In reality, taxes, equipment costs, material costs, transportation and production are all floating costs associated with getting that oil to market, so I am not in favour of fixing just one side of the equation. A standard price range that the market can follow would be preferable.”
OPEC decisions clearly have ramifications which reach beyond the realm of normal trade or traditional producer – consumer relationships. As touched upon previously, the G7 governments and often their domestic media are keen to point the finger of blame at the organisation, partly for deflection of negative attention, but also because the cost of energy touches everyone and every industry.
The secretary general is more than aware of this acute and unwanted attention, but is resolute in his defence of OPEC production quotas and tools.
“The notion that OPEC members are keeping all the money when the oil price is high is flawed. Firstly, 50% – 60% of revenues from the sale of crude oil are re-injected back to the consumer nations, principally North America, Europe and Asia,” he explains.
“Equipment, clothes, medicines, cars - all of these are bought from G7 countries with the oil revenues received by OPEC member states. Also, the money that consuming nations generate through taxation is actually greater than the revenue that OPEC receives for the oil itself. Taxes from G7 countries 2002 to 2006 stood at $2.31 trillion. OPEC member revenues were $2.045 trillion. There’s a $300 billion discrepancy there, and yet OPEC draws the criticism.”
El-Badri refuses to be drawn on specific nations, but concedes that taxation unjustly impairs the relationship between producer and consumer countries.
“When oil reached its high last year, none of the G7 reduced their taxes. All of the G7 looked to, and called upon OPEC to influence the price through supply side measures.”
OPEC meets regularly at its Conference sessions to establish and agree upon suitable production quotas for its members. Through this mechanism the supply of almost half of the world’s marketed oil is decided, and to a large extent, in theory at least, its price influenced. Deciding this daily production quota is the first step, but the effectiveness of the decision is dictated by compliance from the member states. It is not uncommon, however, for some members, for a variety of reasons, to not stick to their allocation, thus upsetting the balance and influence of that agreement.
“When we meet and look at market development we look to the future. We examine what the global economy and oil demand is likely to be from the core fundamentals. When we take the decision to establish the production allocation to every member country, for us here at the secretariat – we are really shooting for that overall target.”
“Of course, some countries adhere to that, everybody tries, but countries do not always completely adhere to their production allocation. The most important thing for us is the overall target and that’s what we are concerned with. If we see the adherence is low, we alert that country to that fact. We advise everyone at the conference sessions and advise them how they are performing.”
Despite the responsibility that falls at the Secretariat’s office, combined with the significant influence that position holds, El-Badri is modest in his appraisal of the task at hand and the job he has done through oil’s most volatile period.
“I am here to help my member countries. I am really comfortable when my experienced team compile reports that are presented to the members and actions from that will have an effect on the global oil market. Ultimately, for me to serve is an honour,” he concludes.