Sustainable Energy Future

Published on 28th April 2016

The last two years have been a challenging time for the oil industry.  At times it has felt as though the industry has been in constant flux, as investments, projects, margins and jobs have been cut. While the short-term focus remains on returning balance and stability to the market, something I will return to later, it is also vital that we do not lose sight of the medium- and longer term outlook. All timeframes are inter-linked; what happens in the short-term will have knock-on impacts for the industry’s prospects.

This will be the focus of my remarks this morning, with a specific emphasis on some of the main topics of the conference’s overall theme – “restoring profitability”, “prices”, “the current environment” and “COP 21.”  And how all this fits into what is central to the industry’s future – ensuring that the required investments are made.

Before this, in order to set the scene, I feel it is important to provide some key pointers related to our energy and oil future.

First, the global economy is estimated to more than double in the period to 2040. Second, passenger car ownership rates are expected to increase from just over 1 billion today to close to 2.2 billion by 2040. The number of commercial vehicles on the road is also anticipated to more than double.  And we will no doubt see more flights being taken.

Third, with billions of people still having no access to electricity and many more still relying on biomass for their basic needs, there is huge potential for socio-economic development in terms of expanding access to modern energy services. Fourth, world population is projected to reach around 9 billion by 2040, an increase of over 1.7 billion from today’s level. Fifth, there is last year’s COP 21 agreement to counter the threat posed by climate change, which all OPEC Member Countries were part of.  Let me stress that OPEC welcomes this agreement.

So looking ahead, the basic challenge is twofold:

Given the points I have just outlined we expect global energy demand to increase by almost 50 per cent by 2040.  So how can we ensure there is enough supply to meet demand? How can this growth be achieved in a sustainable way, balancing the needs of people in relation to their social welfare, the economy and the environment?

Of course, we will see further actions to improve energy efficiency across our economies. This is essential. From the perspective of what will make up the future energy mix, it is clear that all forms of energy are required.  However, it is crucial we appreciate just what each energy source can provide in the decades ahead.

There is no doubt that renewables, such as solar and wind, will continue to significantly expand their role.  OPEC Member Countries recognize and support their development.  Many investments are being made by Member Countries in this sector. Nuclear and hydropower will also maintain their share in the global energy mix in the years ahead. Overall, non-fossil fuel energy is expected to make up around 22 per cent of the global energy mix by 2040. It means that fossil fuels will still need to supply more than three-quarters of the energy mix by 2040.

I realize that others may have slightly different numbers, but given current energy and technology expectations, I do not see any outlook predicting that non-fossil fuels will come close to overtaking fossil fuels in the decades ahead.

COP 21

Given what I have just described, I find it hard to understand the view that fossil fuels may not be needed in the decades ahead. Fossil fuels remain abundant, and are necessary for our future.  Just as they have been an essential part of our past. They have positively impacted the lives of billions over the centuries.  They have provided heat, light and mobility.  And they have been central to the development of the industrial civilization as we know it today.

As an industry, we should be proud of these achievements.  For oil, the products derived from this precious natural resource are fundamental to our daily lives.  And they will be vital to many more billions of people in the years ahead.

Yes, there are environmental issues regarding the emissions that come from fossil fuels.  But I believe that this is a challenge that can be overcome. I am a believer that solutions can be found in technologies that reduce and ultimately eliminate these emissions.

We need to look at the development and use of cleaner fossil fuel technologies, such as carbon capture and storage and many others in the future.  At OPEC, we recognize the importance of continually looking to advance the environmental credentials of oil, both in production and use.

The current oil market environment

I think we can all appreciate that we have witnessed some tough times for the industry over the past two years. The current cycle has been supply-driven, with much of the additional supply in recent years coming from high-cost non-OPEC production.  In the three-year period between 2013 and 2015, non-OPEC supply increased by over 5 million barrels a day, while OPEC production actually saw a slight contraction.

In looking at 2016, we do see a further rebalancing of supply and demand as we move through the year.  And as with previous cycles, I have no doubt that the industry will come through this one. However, uncertainties remain.  Here, I am specifically referencing stock levels.

Since the end of 2013, OECD commercial stocks have seen their five-year average move from a negative level of 85 million barrels to a surplus of around 350 million barrels today.  It should also be noted that more than three-quarters of this overhang is in North America.  There is no doubt this has strongly impacted crude prices. For the same period there has also been a rise in non-OECD inventories, plus an expansion in some non-OECD strategic petroleum reserves.

It is essential both OPEC and non-OPEC producers, as well as consumers, look to address the issue of the stock overhang.  As we have seen in previous cycles, once this overhang starts falling then prices start to rise.

Here, we need to remember that low oil prices are bad for producers today and lead to situations that are bad for consumers tomorrow. And high oil prices are bad for consumers today and lead to situations that are bad for producers tomorrow.

The investment challenge facing the industry

To put it simply: for any industry, investors will only put money into projects if they see demand for their product and have expectations for a profitable outcome. This is natural. All investments require certain conditions.  For example, in terms of security of demand, we need to recognize that this is just as important to producers as security of supply is to consumers.  Its absence can lead to investment uncertainty, and, in turn, future market instability.

Producers do not want to waste precious financial resources now on infrastructure that might not be needed in the future.  At the same time, however, if timely and adequate investments are not made, then future consumer needs might not be met.

Of course, in the current oil market environment we are already witnessing significant investment cuts due to low oil prices.  For example, global exploration and production spending fell by around 20 per cent last year, and a further 15 per cent drop is anticipated this year.  This is a major concern for an industry that generally sees investments increasing year-on-year.

To put these investments concerns in some context, we see oil-related investment requirements of around $10 trillion over the period to 2040.  This is to help meet an increase of around 17 million barrels a day over the period, with demand reaching close to 110 million barrels a day.

New barrels are also needed to not only increase production, but to accommodate for decline rates from existing fields. The current environment is evidently putting this future at risk.  It is vital to keep in mind the link between the marginal cost, the price and investments.

We need more energy. We need to reduce emissions. And we need to make sure the required investments are made.

In the short-term, we need to try and return the market to a balanced situation.  With prices returning to levels where investors feel more comfortable and confident in making the necessary long-term investments, and where supply does not outstrip demand, and vice versa.

It is important to recall that the previous high oil-price cycle was the outcome of a lack of investment in more supply.  And the low oil-price environment we find ourselves in today is the result of too much investment in high-cost production during that previous period.

A more balanced market is clearly beneficial to us all – both producers and consumers. And in the long-term, we need to lay a practical and realistic energy path.  It is one that requires investments in all energies, both fossil fuels and non-fossil fuels.

OPEC recognizes that the challenges related to the environment and climate change are a concern for us all.  And we will continue to push to improve energy efficiency and develop cleaner energies.

Yes, we need to continually push to develop more renewables. Yes, we need hydropower and nuclear.  And yes, we need to appreciate the need to develop cleaner fossil fuel technologies, given the future role of fossil fuels.

Appreciating how expectations for our energy future play out over all timeframes is essential.  It can help us in delivering a sustainable energy future; for all producers and for all consumers too.

By HE Abdalla S. El-Badri,
OPEC Secretary General.

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