In the second part of the last century oil producing and consuming nations' interests were seen as mutually exclusive. The former sought to push prices higher, while the latter tried to push them lower. The creation of the Organization of Petroleum Exporting Countries (OPEC) in 1960 and the founding of the International Energy Agency (IEA) in 1974 in response to the oil-price shock of 1973-74 embody this confrontation between oil producers and consumers. Opposing misperceptions, however, did not serve the interests of either producers or consumers and, indeed, contributed to a broad destabilization of global oil markets and the international system.
Consequently, in the last few decades these opposing perceptions have been gradually replaced by a growing realization of shared interests between all major participants in the oil industry. OPEC, representing the major oil-producing nations, has launched a number of dialogs with other producers such as Russia and major consumers like China. Equally important, the European Union, representing major oil-consuming nations, has engaged major producing regions such as Russia, the Gulf Cooperation Council (GCC), the Caspian Basin, and the Mediterranean Sea, in energy and strategic dialogs. These dialogs reflect the European leaders' strong belief in "mutual dependence" or "interdependence" between Brussels and major producing regions.
Jose Manuel Durao Barroso, president of the European Commission (EC), echoed this sentiment when he said, "All of us, consuming, producing, and transiting countries alike, are becoming more and more dependent on each other. Security of supply is important for us, but other countries seek security of demand. This is the age of energy interdependence."
Within this context, OPEC and the EU have been involved in a strategic dialog since 2005. At the end of 2003 and in recognition of their mutual interdependence, the Dutch EU presidency, the EC, and the president of the OPEC Conference agreed to launch this initiative.
The dialog is seen as a natural extension of the close relations that have existed for decades in many areas of activity involving members of the two organizations. The EU is the main trade partner for many of the OPEC members. On the other hand, the EU collectively imports about 40% of its oil from OPEC. Brussels aims at more-stable international oil markets and prices and an attractive investment climate, a more transparent market, better market analysis and forecasts, and technological and international cooperation. OPEC seeks coordination of petroleum policies, fair prices for petroleum products, assured and regular supply to consuming nations, and a fair return on capital to those investing in the industry.
Since the inception of the dialog, six annual meetings at ministerial level had been held (June 2005, December 2005, June 2006, June 2007, June 2008, and June 2009). The next meeting is scheduled for June 2010. In addition, three roundtables were held to address specific topics of interest. The first one (November 2005) focused on oil market developments, second (May 2007) addressed energy policies, and the third (October 2008) discussed carbon capture and storage policy.
The EU's concerns
The lack of indigenous energy sources has been a major concern and a key challenge to sustaining the EU member states' high standards of living. In the late 2000s, energy produced within the EU represents 46% of the total consumed. This indigenous production comprises nuclear energy (30%), solid fuels (22%), natural gas (20%), and oil (14%). Regardless of the relative share of each source, the overall production is projected to decline.
Most of Europe's indigenous oil comes from the North Sea, with the UK and Norway as the major producers. As a producing theater, the North Sea is mature. Future production is likley to be influenced mainly by technological advances and the design of fiscal regimes. The region's inhospitable climate and great depths requires sophisticated and expensive technology.
The Arctic shelf is believed to contain substantial oil deposits. According to some estimates, the Arctic holds 25% of global undiscovered hydrocarbon resources. However, extremely harsh weather, technological challenges, substantial investment requirements, and unresolved territorial conflicts among Canada, Denmark, Norway, Russia, and the US mean that full utilization of the region's hydrocarbon resources will take time.
Consequent limitation of indigenous energy supply poses a serious challenge and threatens the sustainability of economic prosperity in the EU.
In November 2008 the EC introduced a second Energy Security and Solidarity Action Plan (the first was adopted in March 2007). The plan focuses on five areas: the diversification of energy supplies, a greater focus on energy in the EU's international relations, improved oil and gas stocks, energy efficiency, making better use of the EU's indigenous energy reserves.
The two plans underline that the most likely EU scenarios up to 2020 lead to increased imports of fossil fuels, in particular oil. This confirms the importance of fostering the dialog between consumers and producers in a world of growing interdependence, in order to create the appropriate conditions of investment all along the supply chain.
The EU's energy consumption comprises oil (37%), gas (24%), solid fuels (18%), nuclear (14%), and renewable (7%). The dominant (79%) share of fossil energy is projected to remain stable in the foreseeable future. Meanwhile, the EU member states' total production of oil is expected to decline. In short, the already large gap between indigenous energy production and consumption is projected to further grow, leading to deeper dependence on foreign supplies.
Oil is projected to maintain its significance due to its predominance in transportation, where substitution possibilities are limited. Despite improved technology, oil production in the EU will continue its decline due to scarce proven reserves (less than 1% of the world's total). This means that the growing gap between consumption and production will continue to be filled by imported oil. By 2020, oil import dependence is expected to remain high (92-93%). Currently, the EU imports most of its oil–in diminishing order of importance–from OPEC, Russia, Norway, and Kazakhstan.
For a long time most OPEC members have sought to reduce their heavy dependence on oil revenues and create other sources of income. These efforts have largely failed. Oil revenues represent the main source of income for most OPEC members.
This heavy dependence has heightened OPEC's concern about the security of demand. Over the years, OPEC leaders have expressed their dismay regarding some of the environmental, fiscal, and economic policies adopted by consuming countries.
For a long time OPEC leaders have called on consuming nations to adopt fair and equitable treatment of oil by ensuring that their environmental, fiscal, energy, and trade policies do not discriminate against oil. They also have expressed their concern that taxation of petroleum products forms the largest component of the final price to consumers in the major consuming countries and called upon them to reconsider their policies with the aims of alleviating this tax burden on consumers, pursuing just and equitable terms of trade between developing and developed countries, and sustaining growth of the world economy.
They have emphasized the connection between demand security and supply security and recognized that with globalization the economies of the world and energy markets are integrated and interdependent. They have urged all parties to find ways and means to enhance the efficiency of financial petroleum markets with the aim of reducing short and long-term price volatility. They repeated their call on consuming governments to adopt transparent, nondiscriminatory, and predictable trade, fiscal, environmental, and energy policies and to promote free access to markets and financial resources.
As major oil producers and exporters heavily dependent on oil revenues, OPEC members have adopted a cautious stance on the climate change controversy. They reiterated that the process of production and consumption of energy resources poses different local, regional, and global environmental challenges. Meanwhile, they stressed, human ingenuity and technological development have long played pivotal roles in addressing such challenges and providing the world with clean, affordable, and competitive petroleum energy for global prosperity.
OPEC leaders underscore that they share concern that climate change is a long-term challenge and recognize the interconnection between addressing such concerns and ensuring secure and stable petroleum supplies to support global economic growth and development. Furthermore, they stress the importance of cleaner and more-efficient petroleum technologies and demand that all policies and measures developed to address climate change concerns be balanced and comprehensive. Finally, OPEC leaders claim that the economic recession, together with new legislation and regulations in many consuming countries, has added to longstanding uncertainties about future demand and has led to downward revisions to the long-term oil outlook, reemphasizing again the issue of security of demand.
The EU-OPEC dialog
Since the inception of the EU-OPEC dialog in 2005, the two sides have addressed a number of issues including oil prices and markets, labor and investment, technological cooperation, sustainable development, refining, biofuels and other renewable energy, and climate change.
On oil prices and markets, EU and OPEC representatives have agreed to pursue efforts aimed at achieving greater market stability, with reasonable prices consistent with the need for global economic growth and steady revenue streams for producing countries that allow for the expansion of upstream and downstream capacity. They underlined that oil price volatility leads to uncertainty over future demand, lowers investor confidence, and affects economic and social development in both regions. Instead, increased transparency and predictability would serve common interests and contribute to stability of international markets.
Despite increasing integration of the physical and financial oil markets, the two sides have expressed their concern that futures price are based on a narrow volume of physical trading in major benchmark crudes, pointing to the need for more representative physical benchmark contracts.
Regarding labor and investment, the EU and OPEC have acknowledged some of the main challenges facing the development and stability of oil markets, particularly the current and projected shortage of skilled labor and rising costs of upstream and downstream operations. Many experienced professionals are likely to retire in the next decade. Acknowledging this, the industry has taken steps to hire and train a new generation of experts. However, the global recession threatens further erosion of the skill base.
Similarly, production cost increases since the early 2000s mean that national and international oil companies are spending twice as much to undertake the same amount of work as in 2000.1
Technology and training
To address the current and projected shortage of qualified professionals and skilled workers, the EU and OPEC created a task force to examine a joint technology center. The study covered an operational scheme, including the criteria for the location, operational scope, structure, and budget. The task force was also mandated to review all EU and OPEC programs related to the education and training of young professionals and propose concrete measures and actions.
The task force has considered two main options. In the first one the EU-OPEC technology center would consist of a virtual electronic platform that would allow networking among energy researchers and experts of EU and OPEC countries from various disciplines and from different universities and research institutions. The platform would also offer computer-supported education and training programs.
In the second option, the technology center would exist physically with a budget and staff. The proposed center would focus on petroleum technologies; environment-related technologies; demand and supply forecasting; networking; and knowledge management, training and education.2
The EU and OPEC, collectively and as individual state members, have contributed to global efforts to alleviate poverty in less-developed countries. In 2005, the EC founded the Energy Facility as a cofinancing instrument to support projects on increasing access to sustainable and affordable energy services for poor people living in rural areas in Africa, Caribbean, and Pacific countries. More than 1.6 billion people in these regions do not have access to electricity. Access to energy is a fundamental prerequisite for economic growth and social well-being.
The Energy Facility has roots in the EU Energy Initiative launched by the EU in 2002 during a world summit on sustainable development in order to confirm its commitment to poverty alleviation and eradication. The First Energy Facility was launched in 2005 with a total budget of €220 million. On Nov. 30, 2009, a Second Energy Facility was launched with a total budget of €200 million.3
Much OPEC financial assistance is channeled through the OPEC Fund for International Development (OFID). In 1975, financial ministers of member states proposed a new multilateral financial facility to channel OPEC aid to developing countries. Known initially as the OPEC Special Fund, the institution was one of several bilateral and multilateral development institutions set up by the OPEC and Arab countries.
The fund, which was originally intended to be a temporary facility, started operations in August 1976 with an initial endowment of $800 million; within a little over a year its resources had doubled. It directly extends loans to developing countries and channels donations from member states to other development institutions including the International Monetary Fund Trust Fund and the International Fund for Agricultural Development. The OFID became a fully fledged permanent international development agency in May 1980.4
The main objective of the fund is to reinforce financial cooperation between OPEC member states and other developing countries by providing financial support to assist the latter countries on appropriate terms in their economic and social development efforts. The fund is authorized to engage in all necessary activities to achieve this objective. These include providing concessional loans for balance-of-payments support, granting concessional loans for the implementation of development projects and programs, making contributions to eligible international agencies, and financing technical assistance activities.5
The EU and OPEC in 2007 commissioned a study aiming to provide historical background and examine likely future developments in the oil refining industry up to 2020. The study emphasized investment needs in the refining industry and the role of refining in oil markets. It also assessed the relationship between crude oil and product prices and developments in the refining industry as well as the impact of potential future policies.
During 1995-2007, $385 billion has been invested globally for improving product quality and expanding refining capacity.6 Actual global capacity, however, remains tight, but the tightness is expected to moderate in the midterm with increasing investment. Considerable refining capacity under development is expected to reduce refinery margins from current levels. However, construction bottlenecks are slowing project schedules. The study concluded that EU policy has had an impact on demand patterns. OPEC had requested that such impact be transparent and known to producers and refiners well in advance in order to direct investments and production.
The EU and OPEC are interested in renewable energy including solar, winds, and biofuels. This interest is driven partly by environmental concerns and partly by the realization that oil is a finite source of energy.
Thus, in recent years several renewable energy schemes utilizing the potential of solar energy in several OPEC member states are either under construction or under consideration. Masdar in the United Arab Emirates and the inclusion of the solar plan among projects of the Union of the Mediterranean are cases in point. European investments and technology play a large role in the implementation of these projects.
Despite this mutual interest in and potential of renewable energy, the EU and OPEC are concerned about the sustainability of biofuels and in particular the potential impacts of the large-scale use of biomass for energy purposes. Furthermore, the competition with food over land use and water supply raises important questions. Most projections confirm the availability of enough conventional and unconventional oil resources to meet global energy demand.
The EU and OPEC agree that fossil fuels technologies that moderate emissions of greenhouse gases should be promoted, particularly carbon capture and storage (CCS). A joint meeting was held in Riyadh, Saudi Arabia, in September 2006 on this technology. The participants, mainly from the EU and OPEC, discussed developments in technology, costs, and government regulations related to CCS. Since then the two sides have called for further development and deployment of CCS technology.
The EU strongly supports CCS as a critical solution for combating climate change. Indeed, without CCS, the EU's target to reduce carbon dioxide emissions by 60% by 2050 is not achievable.7 This reflects the recommendations of the European Technology Platform for Zero Emission Fossil Fuel Power Plants (ZEP), a coalition of stakeholders united in support for CCS as a key technology for combating climate change.
The companies, scientists, academics, and environmental nongovernmental organizations that together make up ZEP seek to make CCS commercially viable by 2020 via an EU-backed demonstration program and accelerate research and development into next-generation CCS technology and its wide deployment post-2020. OPEC participates as an observer in ZEP.
It is important to neither overestimate nor underestimate achievements of the EU-OPEC dialog. Since 2005 six meetings at the ministerial level and three roundtables have been held.
The two sides have adopted similar stances on most issues. Most importantly, the dialog underscores two significant developments. First, it has institutionalized cooperation between the two organizations. Second, the dialog has strengthened the interdependence between the EU and OPEC.
European leaders seem to have rejected the notion of "energy independence" and realized that the globalization of the international system suggests that "self-sufficiency" in energy or otherwise belongs to history.
The EU-OPEC dialog highlights the common interest oil consumers and producers share.
- Jackson, P., "Oil Supply–What Blueprint for the Future," IHS Cambridge Energy Research Associates, available at www.cera.com, accessed Mar. 26, 2010.
- "Draft report to the 5th EU-OPEC Ministerial Meeting: Cooperation in Science, Technology, Education and Training, EU-OPEC Energy Technology Center," available at www.opec.org, accessed Mar. 20, 2010.
- European Commission, "External Cooperation Programs," available at http://ec.europa.eu, accessed Apr. 3, 2010.
- OPEC Fund for International Development, "OFID at a Glance: A Brief History," available at www.ofid.org/about/about.aspx, accessed Jan. 11, 2010.
- OPEC Fund for International Development, "The Agreement Establishing the OPEC Fund for International Development," available at www.ofid.org/publications/PDF/AE-engl_fund.pdf, accessed Feb. 9, 2010.
- "EU-OPEC study and workshop on oil refining, Brussels, Jan. 15, 2008–summary and conclusions," available at www.opec.org, accessed Mar. 21, 2010.
- European Commission, "The EU Flagship Program: The Key to Making CO2 Capture and Storage (CCS) Commercially Viable by 2020," available at http://eu.europa.eu, accessed Oct. 3, 2007.