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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


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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
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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.

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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.

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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

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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

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

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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.

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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

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“… 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

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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.

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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

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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

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“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.

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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.

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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

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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.

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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 93, A-1020 Vienna, Austria


Telephone: +43 1 211 12-0
Telefax: +43 1 216 43 20
www.opec.org