Cooperation: The Key to Global Energy Security

The topic of energy security is deserving of much thoughtful discussion considering that both consuming and producing countries are responsible for the entire energy chain. One of the most pressing challenges facing decision-makers today is to ensure that energy is provided to all people in the world – both rich and poor.

The future growth in energy demand will come primarily from developing nations, and this increase will be met, largely, by fossil fuels. The ultimate question is, therefore, will there be adequate supplies to meet this anticipated increase in demand?

The answer is yes. There is enough oil and gas to last for the foreseeable future.

But in order to provide this energy, oil prices need to be stable to attract adequate levels of investment that will support supply increases, especially in fast-growing regions like Asia.

At the same time, substantial investment is needed to develop cleaner fossil fuel technologies. This would make them sustainable over the long term, as they would be able to meet growing environmental regulatory measures.

Security of Supply

Considering one of the major themes in many global discussions today is security of energy supply, I would like to make a few points about developments in this area over the past few years.

I especially want to point to OPEC's good record in delivering adequate oil supplies to world markets.

OPEC member countries have sufficient security in place to ensure their oil is delivered to world markets.

Considering the Organization's history of consistent supplies, I believe that any pessimistic discussion, which sometimes circulates, could divert serious attention away from developing constructive ways, and providing positive solutions, to collectively meet the world's future energy needs.

Many of OPEC's members have invested billions of dollars in spare capacity to counter any risk of security of supply. They have also built diverse export routes to alleviate any further threats of shortfall.

Let us look at the Organization's track record. In 1991, during the Gulf crisis, OPEC member countries increased their output to make up for any shortfall at the time.

At the turn of the century, when the United States suffered inadequate refining capacity due to clean fuel legislation, coupled with the Californian energy crisis, which saw oil prices rise over $30 per barrel, OPEC put an additional 3.7 million barrels per day on the market.

More recently, after September 11, the Organization made it clear that should prices rise excessively, they would act immediately to make up for any shortage. As we all know, prices headed in the other direction, which I will comment on later.

While I recognise the right of consumers to formulate their own policies concerning security, they also need to recognise that OPEC member countries are proactive in their desire to provide solutions to the world's energy challenges.

Security of Demand

In this sense, we need to widen the dialogue on the topic of security of demand.

While contrasting philosophies appear to exist between consuming and producing nations as to how energy markets should evolve, I believe that some of these issues can be solved through dialogue.

It is often a matter of respecting the concerns of each side. For example, the European Union seems convinced that the liberalization of energy markets will bring cheaper prices.

OPEC member countries believe that energy markets should have a degree of regulation to deliver stable prices over the long term. Basically, OPEC member countries are doing what the United States did for many years; that is, regulating their crude oil sector.

Surely, we ought to recognize the differences in the philosophies between developing and developed countries. Surely, we can all understand that in order for energy to be a healthy, functioning sector, certain levels of prices are needed, and are, in fact, crucial for future supply.

I believe that over recent years, the relationship between oil producing and consuming countries has improved considerably. Both sides have moved closer to understanding the other's concerns.

At the most recent World Petroleum Congress, the International Energy Agency (IEA) and OPEC held their very first press conference together. The two organizations share similar projections concerning the future outlook on energy.

And, while we may have differing philosophies, we respect one another's opinions and are willing to work together in the future.

This type of cooperation was enhanced further at the 8th International Energy Forum (IEF), held recently in Osaka, Japan. The Forum concluded with the agreement to share global oil data.

The decision was also made to establish a permanent IEF Secretariat in Riyadh, Saudi Arabia, to facilitate future dialogue between producers and consumers.

These are landmark steps towards achieving better oil market security, transparency and stability, which, ultimately, is what everyone is striving for.

Oil Market Stability

I will now turn to oil market stability. OPEC has made a considerable effort over recent years to reduce excessive fluctuations in oil prices. The Organization's band of keeping prices within the range of $22 to $28 per barrel has proved to be most successful.

However, this success would not have been possible if OPEC had acted alone. Cooperative efforts by non-OPEC countries lent a lot of weight to OPEC's market stabilization measures.

Let us briefly examine oil prices over the past two years. From January to September 2001, the average price of the OPEC Basket of seven crudes was just below $25 per barrel – practically the desired target of the Organization at that point in time.

After the tragic events of September 11, oil prices started to fall dramatically. If it were not for the cooperation between OPEC and its non-OPEC partners (Angola, Mexico, Norway, Oman and Russia) at the beginning of this year, prices could have dropped to dangerously low levels, similar to what was experienced at the time of the Asian financial crisis, when they fell to $9 per barrel.

This OPEC/non-OPEC cooperation was designed to bring oil prices back within an acceptable price range. These efforts had their desired effect.

Specifically, over the last year, from November 2001 to October 2002, the average of the OPEC Basket was just below $23 per barrel.

I stress that such a price is at the lower end of the OPEC price band, which is acceptable considering world economic growth is still slow.

I would also like to emphasize that our perception of oil prices should not become too influenced by recent world events, where a war premium of several dollars was added to prices.

Crude does fall prey to such wild fluctuations because of its strategic nature. This is why the Organization decided to create a price band that was wide enough to allow for fluctuations, while accounting for seasonal adjustments.

The band guarantees revenue for producing countries and provides a fair return on capital for investors in the industry. It also ensures price stability for consumers.

It should be noted that a convergence in views has emerged between consumers and producers on the desired price band, although consumers may be closer to the lower end of it.

At the IEF recently, the EU Energy Commissioner drew attention to the dangers of low prices in her speech to the Forum. She made it clear that prices lower than $20 per barrel would lead to a sizeable reduction in capital expenditure in the oil industry, as well as tensions on the supply side.

Demand Expectations

This is exactly what we need to avoid if we examine the long-term estimates for energy usage. Forecasters agree that world energy demand will continue to grow for the foreseeable future.

The OPEC World Energy Model (OWEM) projects growth of around 2 per cent a year, up to 2020, with demand in developing countries rising at three-to-four times the rate of industrialized countries.

In absolute numbers, world oil demand is forecast to rise from 76 million barrels per day in 2000, to an estimated 106 million barrels per day in 2020.

Ninety-five per cent of the additional energy demand is expected to be met by fossil fuels, which will account for 91 per cent of demand in 2020.

This market share is slightly higher than in 2000. The reason is a five percentage point swing towards gas, mainly due to its favorable environmental credentials, its sound reserve base and the technological advances made in combined-cycle generation.

Gas will capture market share from each of the other main commercial energy sources to reach a figure of 28 per cent by 2020. But this will still be below the 38 per cent of oil, although it will have overtaken that of solids, which will fall to 25 per cent.

Therefore, around two-thirds of the world's commercial energy is expected to come from petroleum – in other words, oil and gas – in 2020.

As oil-producing countries invest in costly capacity expansion to account for this future demand, consuming countries talk about diversification of supplies, at what will be an increased cost if undertaken in non-OPEC countries.

It is anticipated that OPEC member countries alone will need around $10 billion a year in investment to account for future demand increases. The figure for non-OPEC investment is estimated to be around four times as high as that for OPEC.

The substantial difference in these figures can be explained by both the lower costs for expanding capacity in OPEC, as well as the differences in decline rates, since net requirements will need to cover not only additional capacity, but also maintenance of existing production potential.

Clearly, there are advantages for investing in OPEC's low-cost reserves and our member countries have greatly improved their investment conditions in recent years.

Closer Contact

It is clear, then, that solving the world's energy challenges will involve closer contact between all parties. Increased investment and technology transfer are needed in OPEC member countries to continue to research and develop cleaner fuels, better gas infrastructure and transport, and the development of carbon dioxide sequestration technology.

These steps will ensure that fossil fuel use is entirely compatible with sustainable development.

In conclusion, I can only emphasize that the responsibility for security of supply rests with both consumers and producers. This is especially critical for regions like Europe at this point in time, considering its plans for greater liberalization of energy markets.

Increased dialogue is needed between governments and other industry players to ensure that adequate planning and investment is accounted for when determining how these energy markets evolve.

All these issues remain fundamental challenges. Let us proceed in this spirit of cooperation and adequately cater to the world's future energy needs.

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On July 1, 2002, Dr. Alvaro Silva-Calderon was appointed secretary general of the Organization of the Petroleum Exporting Countries (OPEC). A lecturer for more than 25 years at the Law School of Universidad Central de Venezuela, Department of Mining and Hydrocarbons Law, he is an emeritus professor at the university and has taught in a postgraduate program on the Economy of Hydrocarbons. Dr. Silva-Calderon started his career as a member of the advisory team of Juan Pablo Pðrez Alfonso, which made a significant contribution towards conceptualizing and creating OPEC. He was also president of the regional legislature of his home state of Monagas, one of the most important oil producing regions of Venezuela. Subsequently, he was a member of the National Congress, serving as president of the International Treaties Sub-committee and member of the Energy and Mines Committee.

His long involvement in the mining and oil and gas areas includes the drafting of a bill returning the ownership of oil concessions to the State. This bill paved the way for nationalizing the Venezuelan oil industry in 1976. This, in turn, led to the creation of Venezuela's state oil company, Petroleos de Venezuela, S.A. Later on he served on PDVSA's board as an external director.

His public service career includes posts in several state and national government organizations. He was director of the Supreme Electoral Council of Venezuela and chief legal advisor to the Ministry of Energy and Mines, where he was also director general and vice minister of mines. At the ministry, he played a key role in the drafting and approval of the Gaseous Hydrocarbons Law (1999), Mining Law (1999) and Hydrocarbons Organic Law (2001).

Dr. Silva-Calderon has been a columnist for national daily newspaper El Globo for several years, contributing articles on oil and the impact of oil activities in Venezuela. He is an active member of the Venezuelan Chapter at the World Oil Congress, where he has participated as Venezuelan delegate on several occasions. Dr. Silva-Calderon is a member of the National Energy Council. He was appointed Minister of Energy and Mines of Venezuela on December 28, 2000, a position he held until July 18, 2002. In this capacity, he has actively promoted co-operation within OPEC and with non-OPEC oil producing countries. Thus, he has played a very important role in strengthening the organization and its efforts to stabilize international oil prices. He was also actively involved in coordinating and organizing the Second Summit of OPEC Heads of State, held in Caracas in September 2000.