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									   Organization of the Petroleum Exporting Countries




     OPEC
LO N G – T E R M S T R AT E G Y
                     OPEC L O N G – T E R M S T R A T E G Y


Foreword
  The Organization of the Petroleum Exporting Countries (OPEC) was
  established in Baghdad, Iraq, in September 1960. Its Members are
  Algeria, Indonesia, the Islamic Republic of Iran, Iraq, Kuwait, Nigeria,
  Qatar, Saudi Arabia, Socialist People’s Libyan Jamahiriya, the United
  Arab Emirates and Venezuela. The main guiding texts for the Organi-
  zation are the OPEC Statute, approved in January 1961, the Solemn
  Declaration, stemming from the first Summit of OPEC Heads of State,
  held in Algiers in 1975, and the Caracas Declaration from the Second
  Summit of OPEC Heads of State, held in Venezuela in 2000.


  On its 45th Anniversary, OPEC adopted a comprehensive long-term
  strategy, on the occasion of its Ministerial Conference Meeting
  in Vienna, 20 September 2005. The Conference expressed its ap-
  preciation of the efforts that lie behind the development of this
  strategy. The Conference thanked HRH Prince Abdulaziz bin Salman Bin
  Abdulaziz Al-Saud, Chairman of the Meetings of the Deputy Ministers
  of Petroleum/Energy on Long-Term Strategy; HE Dr Bernard Mommer,
  Vice-Chairman; all Heads and Members of Delegations to these meet-
  ings; as well as the Staff of the OPEC Secretariat involved.


                                                                        
    This strategy, which was prepared over a period of two and a half
    years, provides a coherent and consistent vision and framework for
    the Organization’s future. It recognises the important role of oil in the
    world economy at large and for the socio-economic development of
    OPEC Member Countries. The Strategy defines specific objectives and
    identifies the key challenges the Organization faces now and in the
    future. Benefiting from a scenario-approach for the energy scene, it
    is designed to be robust and adaptive throughout the various possible
    futures.


    This document provides an overview of the key issues which have
    been addressed.


    Vienna
    March 2006





                     OPEC L O N G – T E R M S T R A T E G Y


Introduction
  The OPEC Long-Term Strategy recognises the important role of oil in
  meeting future global energy demand and for the socio-economic de-
  velopment of OPEC Member Countries, and provides a coherent and
  consistent vision and framework for the Organization’s future. The ob-
  jectives for the Strategy relate to the long-term petroleum revenues
  of Member Countries, the stability of the world oil market with fair
  prices, and the security of regular supply to consumers, as well as the
  security of world oil demand.


  There are key challenges that may constitute constraints for OPEC
  in the attainment of the objectives of the Strategy. A major hurdle
  relates to the uncertainties surrounding future demand for OPEC oil,
  stemming from, inter alia, future world economic growth, consuming
  countries’ policies, and technology development, as well as from future
  non-OPEC production levels.


  These uncertainties are explored in three internally-consistent scenar-
  ios that depict contrasting futures of the global energy scene. These
  scenarios, named respectively Dynamics-as-Usual (DAU), Protracted


                                                                       
    Market Tightness (PMT) and Prolonged Soft Market (PSM), map out a
    coherent and credible set of assumptions for these drivers of change.
    The key implications that emerge from these scenarios are described
    in the following section.





                     OPEC L O N G – T E R M S T R A T E G Y


How might oil demand evolve?
  The DAU scenario envisages a future where the drivers of change shap-
  ing the scenario continue their past patterns and, thus, no particular
  departure from these trends is assumed.


  Global economic growth is robust in this scenario, but no different
  to average growth rates observed over the past 15 years. However,
  there are substantial uncertainties over future economic growth aris-
  ing from the complex interplay of domestic and global determinants of
  that growth, including such diverse factors as demographics, advances
  in technology, capital availability and trends in commodity prices,
  domestic policies and global trade developments, regimes, environ-
  mental policies and financial regulations.


  Both lower and higher rates of economic growth are considered in
  the PSM and PMT scenarios respectively. For example, even without
  assuming the arrival of a recession, there are genuine and persistent
  worries about the long-term health of the world economy, especially
  regarding growing international imbalances, resulting, in particular,
  from some countries’ current account and budget deficits. On the


                                                                      
    30

    25

    20
    2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 2020




    Demand growth is uncertain
    mbd
    120

                                                                     PMT
    110
                                                                     DAU
    100                                                              PSM

    90


    80


     70


    60
     2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 2020





                   OPEC L O N G – T E R M S T R A T E G Y




other hand, a synergistic combination of positive economic and geo-
political circumstances could conceivably unleash sustained longer-
term growth at significantly higher levels than assumed in the DAU.


Oil demand is also greatly affected by consuming countries’ policies.
Taxation of energy products is often seen not only as a means of rais-
ing revenue, but also as a means of controlling demand in addressing
environment and energy security issues. Policies demonstrate signifi-
cant discrimination against oil, involving not only higher tax rates, but
also subsidies for competing fuels. Great uncertainty exists in relation
to future developments of consuming countries’ policies and is con-
sidered one of the main constraints in ensuring adequate security of
demand.


Further uncertainty stems from the impacts on oil demand of
technology development. In particular, in the transportation sector,
conventional internal combustion engines could continue to achieve
significant fuel economy improvements, while hybrid vehicles may
witness a significant growth. While in all scenarios, oil will remain the


                                                                       
           main fuel over the next 20 years, the introduction of non-oil fuelled
           vehicles and the use of alternative fuels, such as biofuels, are drivers
           that could affect oil demand growth patterns in this sector.




    World demand in the scenarios:
    differences from DAU
                                                                    mbd

                                             2010      2015      2020
    Protracted Market Tightness               2.2       3.5       5.4
    Prolonged Soft Market                    –1.7      –3.9      –6.9





                   OPEC L O N G – T E R M S T R A T E G Y




The outlook for oil demand must be seen very much in the context of
these uncertainties. In the DAU scenario, oil demand increases annu-
ally by, on average, 1.5 mbd, with around 75 per cent of the increase
to 2020 coming from developing countries. The transportation sector
is the single most important source of increase and represents close to
half of the expected rise in oil demand.


Nevertheless, demand growth, subject to the uncertainties outlined
above, could turn out to be considerably different. For example, a
long-term tight market situation could be envisaged, characterised by
a high sustained oil demand, principally from higher economic growth.
Such potential developments have been explored in the PMT scenario.
In this scenario, by 2020 demand is more than 5 mbd higher than in
the DAU.


On the other hand, over the next 10-15 years, lower demand growth
must also be considered as a credible alternative to these DAU figures.
In fact, downside risks are seen even greater than upside potential:
lower economic growth could emerge, characterised by increased


                                                                     
     regionalism and protectionism, which may well combine with policy
     measures designed to reduce demand. Implications of these possible
     alternative trends have been examined in the PSM scenario, with
     demand 7 mbd below DAU values by 2020.




0
                             OPEC L O N G – T E R M S T R A T E G Y


Non-OPEC supply prospects also uncertain
          Another major area of uncertainty that impacts the demand for OPEC
          oil and further complicates making appropriate and timely investments
          in OPEC countries concerns the development in non-OPEC supply. A
          number of factors, such as oil prices, upstream legal and fiscal regimes
          and investments in non-OPEC countries, technology advancements
          and exploration successes, will shape future scenarios regarding non-
          OPEC supply.


          Future technological progress may also lead to the development of
          significant amounts of unconventional oil and alternative fuels. How-
          ever, under all scenarios, it is still expected that non-OPEC production
          growth will slow over the medium term.




                                                                               
     Uncertain future demand and non-OPEC supply translate into a broad range of demand for
     OPEC oil in the scenarios

     mbd
     60

     55                                                                       PMT
     50                                                                       DAU

     45
                                                                              PSM
     40

     35

     30

     25

     20
     2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 2020







     120
                             OPEC L O N G – T E R M S T R A T E G Y


Broad range of future demand for OPEC oil
          In meeting the future growth of world oil demand, oil resources are
          large and sufficient, and oil supply will not peak within the consid-
          ered timeframe. Moreover, the size of the global upstream investment
          challenge will not be markedly different from the past, despite the
          growing volumes, as capital will be increasingly used more efficiently
          in lower cost OPEC Countries.


          Over the longer-term, OPEC will be relied upon to supply most of
          the incremental barrel demanded. However, the uncertainties over
          future oil demand and non-OPEC supply translate into a broad range
          of demand levels for OPEC oil. This complicates the planning for
          appropriate and timely investments in OPEC Countries and, conse-
          quently, increases the risks associated with under-, as well as over-
          investment.


          In these scenarios, the amount of oil that OPEC is projected to supply
          over the next 10-15 years could range by as much as 10 mbd or more.
          A central challenge is associated with the lack of security of demand
          and the need for adequate flexibility to adapt to a wide range of


                                                                             
     potential growth in demand for OPEC oil that stems from these great
     uncertainties over the coming years, particularly given the long lead
     times involved.





                     OPEC L O N G – T E R M S T R A T E G Y


The downstream is also important
  It is important to note that the challenge related to making the
  appropriate investment in the oil industry extends along the entire
  supply-chain. In particular, close attention should be paid to the down-
  stream sector.


  The profile of incremental global demand is overwhelmingly for light
  and clean products, while incremental supply comprises significant
  volumes of sour medium and heavy crude grades. The combination
  of this with the move to ever-stricter product quality and envi-
  ronmental regulations represents a challenge for the downstream
  industry, especially in the context of uncertain demand growth.
  Future refining capability needs to be considered in terms of both
  the adequacy of secondary processes – for example, to upgrade
  heavy streams and to meet tight targets for sulphur – and crude
  distillation capacity.


  Thus, tightness in the downstream sector could potentially be a main
  source of volatility, especially if the necessary investment in the
  refining sector is not undertaken in a timely manner.


                                                                       

                                                 OPEC L O N G – T E R M S T R A T E G Y


                         Elements of the Strategy
                             OPEC’s Long-Term Strategy covers various issues, such as oil market
                             stability, upstream and downstream investment, technology, the role
                             of OPEC National Oil Companies, multilateral negotiations, in particular
                             those related to trade and the environment, and the important relation-
                             ships with both producers and consumers, as well as with international
                             organisations and institutions.

“... extreme price levels,   In addition, the need to be flexible and adaptive led to the inclusion
          either too high    in the Strategy of elements that are pertinent to specific situations as
              or too low,    explored in the three scenarios.
       are damaging for
         both producers      The strategy re-emphasises OPEC’s commitment to support oil mar-
     and consumers ...”      ket stability. It builds upon the fundamental recognition that extreme
                             price levels, either too high or too low, are damaging for both produc-
                             ers and consumers, and points to the necessity of being proactive
                             under all market conditions.


                             Oil price volatility renders all the more difficult the interpretation of
                             price signals, whether they are an indication of structural change or


                                                                                                   
     “… there is a need to    a reflection of temporary phenomena, and thereby affecting the
support fair and stable       ability to support longer-term market stability. Given the dynamic
     prices, sustainability   and complex behaviour of oil markets, there is a need to support
            of supply, and    fair and stable prices, sustainability of supply, and security of
     security of demand.”     demand.


                              In a tight market environment, too high oil price levels may affect
                              the prospects for economic growth, especially in developing coun-
                              tries, and therefore threaten future oil demand growth. On the other
                              hand, low oil price levels would place strains upon the aspirations of
                              OPEC Member Country populations for their economic development
                              and social progress. The use of ´leading indicators` to assist in foresee-
      “The use of ‘leading
                              ing economic downturns and upturns that affect oil demand and supply
 indicators’ to assist in     should be a fundamental tool, to help avoid excessive market tightness
      foreseeing economic     or softness. Other developments, such as policies and technological ad-
downturns and upturns         vances, should also be closely monitored.
     that affect oil demand
and supply should be a        In supporting market stability and security of supply to consumers,
     fundamental tool …”      OPEC will continue to expand its production capacity, both to meet



                                                OPEC L O N G – T E R M S T R A T E G Y




    “The timing and size     the increased demand for its oil and to maintain an adequate level of
of capacity expansion in     spare capacity. The timing and size of capacity expansion in Member
   Member Countries …        Countries in the medium- to long-term, however, should be such that
    should be such that a    a reasonable level of spare capacity is available. Yet large and inher-
 reasonable level of spare   ent uncertainties concerning the scale of projected future OPEC oil
  capacity is available.”    production signify a heavy burden of risk in making the appropriate
                             investments.


                             Oil market stability also requires adequate investment in refining ca-
                             pacity, as well as pipeline systems and storage facilities. OPEC National
                             Oil Companies have an interest in considering undertaking part of the
                             investments required through expanding and upgrading domestic re-
         “... the primary    fineries for product export or investing in consuming countries. How-
       responsibility for    ever, the primary responsibility for downstream investment remains
 downstream investment       with major consuming countries and international oil companies.
     remains with major      Measures are needed to improve the investment climate for refinery
consuming countries and      expansion and operation. Close co-ordination in this area between
            international    consuming and producing countries would be beneficial to address
         oil companies.”     and avoid downstream bottlenecks.


                                                                                                   
                                  OPEC Member Countries should strive to strengthen co-operation in
                                  upstream and downstream scientific research and technological devel-
                                  opment among themselves and with international institutions. OPEC
                                  stresses the importance of technology-based responses to the need to
                                  protect the environment, in relation to both air quality and climate
        “OPEC also calls for      change concerns.
         the promotion of the
                                  The oil industry has a long history of successfully improving the envi-
development of technologies
                                  ronmental credentials of petroleum, both in use and production, and
that address climate change
                                  research and development in this area should be supported. OPEC also
  concerns. One promising
                                  calls for the promotion of the development of technologies that ad-
  example is that of carbon
                                  dress climate change concerns. One promising example is that of car-
         dioxide capture and
                                  bon dioxide capture and storage technology, in particular for enhanced
        storage technology ...”
                                  oil recovery, where suitable and feasible. In this regard, international
                                  collaborative efforts are needed to develop large-scale demonstration
                                  projects.


                                  OPEC National Oil Companies should enhance their competitive per-
                                  formance and develop close co-operation among themselves in various


   0
                                                     OPEC L O N G – T E R M S T R A T E G Y




        “In OPEC Member          areas such as technology and knowledge- and experience-sharing.
 Countries, the application      In OPEC Member Countries, the application of advanced upstream
     of advanced upstream        technologies can potentially reduce costs further, increase recov-
technologies can potentially     ery rates, and open up frontier areas, thereby maintaining com-
       reduce costs further,     petitive, cost-effective and successful exploration and development
increase recovery rates, and     activities.
 open up frontier areas ...”
                                 In climate change-related multilateral fora, it is important for OPEC
                                 Member Countries to continue to have an active role, recalling the
                                 principle of common, but differentiated responsibilities. The interna-
        “The international
                                 tional community should fulfil its obligations to strive to minimise the
   community should fulfil
                                 adverse effects of policies and measures on developing country Parties
  its obligations to strive to   and, in particular, fossil-fuel exporting developing countries. This could
minimise the adverse effects     involve, inter alia, assistance in relation to economic diversification,
of policies and measures on      transfer of technology and capacity building.
 developing country Parties
  and, in particular, fossil-    An active OPEC role in trade-related discussions is important, espe-
 fuel exporting, developing      cially as they relate to issues of concern to developing countries. OPEC
                 countries.”     Member Countries should continue enhancing their economic and


                                                                                                       
 “Dialogue ... should be        social development by using the comparative advantage offered by
widened and deepened to         their natural resources.
      cover more issues of
     mutual concern, such       Dialogue among producers and between producers and consum-
     as security of demand      ers should be widened and deepened to cover more issues of
           and supply ...”      mutual concern, such as security of demand and supply, market
                                stability, upstream and downstream investment, and technology.
                                Dialogue should be initiated or intensified with all countries, both
                                producing and consuming, regional groups, United Nations insti-
                                tutions, the International Energy Forum (IEF), the International
                                Energy Agency (IEA), etc. Participation of other producers in OPEC
                                ministerial meetings as observers should continue, with the pos-
 “… preconception and           sible expansion of the membership of the Organization, including
     misunderstanding …         Associate Membership.
      calls for the effective
     communication of the       Despite OPEC’s role in supporting oil market stability, there is still
       positive role OPEC       much preconception and misunderstanding. This calls for the effective
        plays for the world     communication of the positive and beneficial role OPEC plays for the
                  at large.”    world at large.



                  OPEC L O N G – T E R M S T R A T E G Y




Finally, enhancing cohesion among Member Countries is of crucial
importance. The Organization should expand intra-OPEC interactions,
networking and dialogue at the level of Ministers of Petroleum/En-
ergy and National Oil Companies. Co-operation should also be pur-
sued in the technological and scientific areas of higher education in
Member Countries. Enhancing Member Countries’ resilience by pro-
moting the diversification of their economies and the development
of human capital can contribute significantly to the Organization’s
strategic objectives.




                                                                  

                     OPEC L O N G – T E R M S T R A T E G Y


Concluding remarks
  With this document, OPEC reaffirms its longstanding commitment to
  oil market stability, as embodied in the OPEC Statute. OPEC’s role in
  this respect is becoming better understood and appreciated, as its
  continuous efforts at supporting such stability are increasingly ac-
  knowledged as beneficial to the world at large. In supporting security
  of supply to consumers, OPEC will continue to expand its production
  capacity, both to meet the increased demand for its oil and to offer an
  adequate level of spare capacity. This, together with the acceptance
  that there are clearly sufficient oil resources, should provide a solid
  foundation for future market stability. Moreover, due regard must
  be given at all times to the need for fair returns on capital invested
  throughout the petroleum industry, fundamental to a balance of in-
  terest between all parties. At the same time, the important role of oil
  in the economic development and social progress of OPEC Member
  Countries must be recognised.


  However, the challenge of making these investments is fraught with
  significant uncertainties, in particular regarding the rate at which oil
  demand may grow. The risks associated with implementing large capital


                                                                       
     investments with long lead times in the context of these uncertainties
     lead to genuine concern over the possible waste of much-needed finan-
     cial resources. The issue of security of demand must, therefore, be re-
     garded as an inherent factor in supporting longer-term market stability.


     Nevertheless, it is also increasingly recognised that a broader set of
     conditions are needed for long-term oil market stability. In particular,
     the downstream sector must be a prime focus of efforts in working
     towards this objective. This draws attention to the need, particularly
     in consuming countries, to adopt an active, forward-looking approach
     to this sector, supporting timely investment.


     OPEC’s Long-Term Strategy has identified many areas where OPEC
     Member Countries, both as individual sovereign nations, as well as
     members of an Organization, can support their own pressing needs for
     socio-economic development, while playing a vital role in the interna-
     tional community. Open, positive, constructive, pragmatic dialogue,
     with all parties, must constitute the main means of turning the future
     challenges into opportunities in the new energy era.



                             OPEC L O N G – T E R M S T R A T E G Y




Organization of the Petroleum Exporting Countries

      Obere Donaustrasse , A-00 Vienna, Austria
               Telephone: +   -0
                Telefax: +    0
                      www.opec.org

								
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