In the Pipeline: Oil group can look to a strong future

The Organisation of the Petroleum Exporting Countries (Opec) is celebrating its 50th anniversary amid wishes of a stable oil market and the recovery of the world economy.

So much is written about the history of Opec and about its past successes and failures that it often eclipses thoughts about the future.

With Opec's proven reserves at 1.029 trillion barrels, or 77.2 per cent of the world's reserves, there is no escaping the fact that the future of Opec and that of the world oil market are inseparable.

Financial crisis

The outlook for the market is set against the impact of the financial crisis of the second half of 2008 and its repercussions.

It may take a few years before long-term economic growth is resumed at an average annual rate of three per cent to the year 2030, according to Opec.

World population is projected to grow from around 6.7 billion in 2009 to 8.3 billion in 2030, especially in the developing countries where oil demand is growing fast.

Increasing productivity as a function of technological progress, education and training would improve the prospect for more efficient energy and oil use, while oil prices are likely to follow the behaviour of upstream costs and the cost of marginal liquid barrels such as Canadian tar sands oil.

Therefore, prices are assumed by Opec to be in the range of $70 (Dh257) to $100 per barrel in 2008 dollars.

Energy policies

Energy policies — in particular the US Energy Independence and Security Act — and the EU climate change and energy efficiency legislative packages would also impact the outlook in addition to the inroads of bio-fuels and renewable energy.

While the above concerns are common to all forecasts, Opec forecasts oil demand to likely be 106 million barrels a day (mb/d) in 2030, much lower than forecasts of a few years ago.

On the supply side, there have been many cancellations and delays of projects due to the crisis but this trend is now reversed since prices stabilised at $70 to $80 per barrel. Therefore non-Opec supplies are likely to grow by 4 mb/d to 2030 essentially from expensive non-conventional oils. Opec supply, having recently fallen drastically, is expected to resume growth to 41 mb/d in 2030.

The International Energy Agency (IEA) prepared its outlook against the same background where the collapse of oil prices in 2008 and their rebound in 2009 affected the outlook.

Oil demand is expected to increase to 105 mb/d in 2030, very similar to the Opec estimate.

But the IEA sees the majority of oil production in 2030 as coming from "fields yet to be developed or found" and that "sustained investment is needed mainly to combat the decline in output at existing fields, which will drop by almost two-thirds by 2030".

This is favourable to Opec where many fresh fields are available for development and the demand for Opec oil by 2030 is likely to be 52.9 mb/d, which is much higher than the Opec estimate.

Another recent forecast by the American Energy Information Administration (EIA) sees world demand in 2030 at close to 104 mb/d and Opec oil production at almost 44 mb/d.

Therefore, the available base case forecasts are in agreement that supplies from Opec will grow, though at lower rates than foreseen a few years ago.

Sustainability issues

However, there are other scenarios around these base cases due to different economic growth scenarios or different policy options of producers and consumers.

For example, the above forecasts can be described as "carbon loaded" and considering the perceived risk of rising carbon emissions, the IEA and others question the sustainability of such a path — especially with rising concerns about climate change.

If carbon emissions are limited to an atmospheric concentration of 450 parts per million, which would limit global temperature rise to 2 degrees centigrade as a realistic target, oil demand in 2030 is projected to fall substantially to 89 mb/d and Opec production is expected to be 47 mb/d as compared to 52 mb/d in the referred scenario because non-Opec production is expected to fall faster.

Similarly, the EIA forecasts a situation where economic growth is much lower, thereby oil demand in 2030 is estimated at 95 mb/d and Opec production at 40 mb/d.

Only in the case of substantially higher oil prices will demand be further reduced and Opec production could be around 32 mb/d or lower than its current production.

If one takes a moderate view, it seems that the future of Opec is assured. But the organisation needs to steer carefully to foster stability and prevent volatility in prices.

Even further down the road, Opec would probably play a relatively more important role as other regions run out of reserves and technology evolves in such a way to allow higher recovery factors from Opec oil fields. Opec may indeed be around to celebrate its centenary.

The writer is former Head of the Energy Studies Department at the Opec Secretariat in Vienna.