Oil summit notes industry challenges, uncertainties

Three main challenges facing the oil industry—stable and reasonable prices, security of both demand and supply, and the relationship between national oil companies (NOCs) and international oil companies (IOCs) —were the predominant themes of the 8th International Oil Summit held Apr. 5 in Paris.

Doris Leblond
OGJ Correspondent

PARIS, Apr. 13 -- Three main challenges facing the oil industry—stable and reasonable prices, security of both demand and supply, and the relationship between national oil companies (NOCs) and international oil companies (IOCs) —were the predominant themes of the 8th International Oil Summit held Apr. 5 in Paris.

The general stated consensus on the need for "stable and reasonable oil prices" was marred by controversy between the Organization of Petroleum Exporting Countries and the Organization for Economic Cooperation and Development (OECD) countries on whether oil production and demand are being properly balanced.

Claude Mandil, executive director of the International Energy Agency, said: "Demand growth has exceeded the capacities put on the market, which currently are barely balanced." This is especially true, he said, with refinery upgrading capacity, which "reduces the usefulness of even the small crude buffer.

"Alongside strong economic growth and concerns in the upstream, the downward trend in oil refining spare capacity has pushed oil prices to current high levels," he said, adding that the bulk of new capacity will be in the Middle East and Asia but only if investments are sustained.

Concerning crude capacity, Mandil noted: "Even if we are happy with increasing investments in Middle East countries of OPEC, we think the rate of investment and capacity growth is not enough to meet future oil demand."

However OPEC Pres. and UAE Energy Minister Abdullah bin Dha'en Al Hamli countered that the oil market is much better balanced and that this year the world economic performance will remain at the same level as in 2006 and will be "correctly supplied." He said recent high oil prices have been pulled along by geopolitics, and there is no need for OPEC to meet before the scheduled September meeting.

Demand security needed
Nevertheless, Al Hamli was concerned about what he called the "mixed message" on future oil demand during 2010-20. OPEC's crude capacity is to increase to nearly 40 million b/d in 2010 from 35 million b/d in 2006. He insisted that oil-producing countries need "a backup of [demand] security" to engage in further investments to increase oil production.

Besides soaring costs, which are inflated so much that producers must scrap some projects, demand security is being eroded by the widely publicized environmental concerns that are leading consumer countries to reduce fossil fuel dependence by switching to renewables and biofuels, by energy conservation, and by increasing strategic petroleum reserves.

"We cannot produce more oil than the world will buy," Al Hamli said. He added that OPEC strongly supports carbon dioxide capture and storage, which he described as "a win-win technology" for sustainable development.

Qatar's Second Deputy Premier and Minister of Energy and Industry Abdullah Bin Hamad AL-Attiyah, also expressed concern for the future when he asked consuming countries to consider demand security and not create constraints such as high taxes on fossil fuels or establish subsidies to promote alternative energy supplies that "are not economically viable."

He called on OECD countries to invest in downstream supply chains such as refineries and LNG receiving terminals to complement producing countries' efforts.

To achieve OPEC's mission of a stable and sustainable energy market, Al-Attiyah said, "We are implementing important projects aiming at increasing our crude oil production capacity from approximately 800,000 b/d to 1 million b/d."

Al Hamli said he believed, like Al-Attiyah, that "there is enough oil and gas to last for many years." He said, "The instability we have faced in the past is because of not recognizing the linkages in the energy markets."

Listing "three key uncertainties in the oil outlook," Fatih Birol, IEA chief economist and head of the agency's economic analysis division, examined the pace and nature of China's economic growth. If China's GDP growth should fall to 7% from the current 9%, the country would need 11 million b/d of oil over the next 10 years, up from the past year's 7 million b/d. If growth should remain at 9%, oil needs would jump to 14 million b/d, Birol said.

Other uncertainties he listed were the expected 8%/year production decline in mature oilfields during 2007-30 and oil demand coming from regions where there are subsidies on oil products.

IOCs and NOCs
The third challenge facing the industry is the changing relationship between IOCs and NOCs, which is impacting oil production via access to reserves. Representatives from the four OPEC countries attending the summit—Qatar, Algeria, the UAE, and Saudi Arabia—expressed the necessity and advantages of maintaining partnerships with IOCs, even through new ways might be found to suit each of the partners.

Sonatrach's Pres. and CEO Mohammed Meziane said the concept of partnership "is central to Sonatrach's vision and strategy." The challenge to compete successfully in today's business environment "is prompting both NOCs and IOCs to join their efforts along the value chain for more close cooperation," he said.

Ibrahim Al-Muhanna, advisor to Saudi Arabia's energy minister, maintained that mutual cooperation is needed, adding that Saudi Aramco is itself "an IOC working closely with oil companies in different parts of the world."

But Nader Hamad Sultan, chairman of Ikarus Petroleum Holdings and former chief executive of Kuwait Petroleum Corp., was more confrontational, charging that the "new Seven Sisters" are now the rule makers and want to control everything. "Are the NOCs competing with the old Seven Sisters, or don't they need them? Have IOCs become too big with more riches than the [gross domestic product] of the countries they work in?" he asked.

Hard-line resource nationalists such as Venezuela, Bolivia, and Russia did not attend the summit, but the two IOCs invited as keynote speakers—Royal Dutch Shell's Chief Executive Jeroen van der Veer and Total's Chief Executive Christophe de Margerie—favored cooperation with NOCs rather than competition.

"Easy oil doesn't need Shell and is not for IOCs, said Van der Veer. "Difficulties provide more than a number of opportunities for Shell and room for others."

De Margerie also said NOC-IOC cooperation is needed. New production "will be largely based on huge high-tech projects," and NOCs should bring their investment effort more in line with IOCs, or be more open to let them invest "because new developments are an industrial, financial, political, and human challenge." What is needed, he said, is confidence based on "mutual understanding and respect."

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