OPEC at 50
In September, OPEC celebrated the 50th anniversary of its founding meeting, in Baghdad, in 1960. That was a different world:
Much of OPEC volume was at the order of international partners (Exxon, etc) in key resources in Saudi Arabia, Iraq, Iran, etc, who also set a ‘posting price,’ for the product. A key founding goal was to coordinate production AND to force the companies to work with the producers to establish price.
The average oil price in 1960 was $2.90/bbl, or just under $14 in 2000 currencies.
Global demand was 31 million barrels/day (mmb/d).
The US was both the largest producer (7.9 mmb/d) and the largest consumer (9.89 mmb/d)
Venezuela was the largest OPEC producer (2.8 mmb/d – 10-20% more than today!).
Saudi output averaged less than 1.5 mmb/d (just under 9 mmbd today). OPEC production at 8.25 mmb/d was roughly 25% of global supply. Current OPEC market share averages 35% of global consumption.
The cartel had little effect until two embargoes effectively drove a 12x price hike in the 1970s. The US became a net importer in the mid 1950s, and its own production peaked in 1970. The new environment encouraged significant nonOPEC exploration and development, including the Alaskan North Slope and the North Sea, but also led to both recessions (1974-6 and 1980-2) and steady improvement on efficiency of consumption, especially in the United States, but also Europe and Japan. Today, OPEC faces the usual divergent issues of it history — disparate objectives based on producer demographics and political interests and the resultant role of oil in the local economy and power structure – but also new ones:
Shifting demand mix (OECD to nonOECD) and need to align with high growth customers through JVs and co-investment .
Large oil/population density (Kuwait, Saudi, UAE) versus more dilute per capita energy resource (Iran, Nigeria) Strong technical infrastructure and capability (Saudi, UAE) versus weaker skills (Iran, Nigeria, Venezuela post-PDVSA, Ecuador, Libya)
Disparate resource/ trends – growing (Angola, Iraq, Algeria, Libya), mature (Saudi, Kuwait, UAE), challenged (Indonesia, Ecuador)
Outsized domestic fuel and power consumption due to subsidies are diluting the value of the resource (everywhere)
Major religious schisms between Sunni and Shiite demographics, posing threats to ‘established order’ throughout the region.
It is clear through the capital allocation of the last five years that most members recognize the opportunities (diversification, natural gas, nuclear power, downstream operations) and challenges (subsidies, social state, technical, environmental, water) that make for a different world than at the founding meetings.
However, on a global stage, the ‘enlightened’ members (relative term – UAE, Qatar, Kuwait) recognize a significant opportunity to benefit from emerging market needs and to improve their own economic model. Over the next decade, the region will move closer to adding nuclear fired electricity capability in several countries (as noted), in addition to wind and solar capacity. It will be a struggle between economic and social/power interests to offset the effects of massive subsidies in most member countries, both for electricity and fuel (power and natural gas are essentially free in some markets, well below their economic cost). For outsiders, the biggest question is how Iraqi production develops – the current consensus is a doubling of output by 2015, versus a 4x goal by 2020. I suspect the doubling is too optimistic.
Other Mideast Anecdotes:
Local consultants forecast a need for $70-110 billion investment in power capacity the next decade to meet a 7% annual growth rate in electricity demand, much of which is necessary to provide adequate water for the region.
Saudi natural gas production growth, a focus for nearly a decade, is finally ramping, slated to rise 40% in next four years, primarily to help feed new electricity production and moderate (but not reduce) the waste of burning $75 oil to proved $6/bbl (equivalent) energy into the domestic economy.
Kuwait, which has already signed nuclear technology agreements with both Japanese and French consortia, recently inked a second deal with Russia. Their needs are particularly acute, since the country has an even weaker natural gas resource base than most of its neighbors. The United Arab Emirates, having ordered four reactors from KEPCO (Korean syndicate), has discussed plans for another eight facilities.
Geopolitics – Iran update
Despite its 3.5-4 mmb/d upstream capacity, the country’s exposure to imported gasoline — roughly a third of subsidized (10-20 c/gallon at the pump) demand – has long been its economic Achilles heel. The ongoing litmus test of UN sanctions has been the effectiveness of gasoline exports into the country. Early 2010 evidence of changes in trade patterns, by both BP and Shell, plus a number of high volume traders, were confounded by Chinese and Russian flows. However, the country has reduced both fuel and gasoline subsidies and, ahead of aggressive capacity expansion, substituted for lots imports by blending lower octane (75!) components into its base production. Reports claim that some electricity prices are 10x last year’s levels. The result is a swing from a heavy net import position to exporting some gasoline, over the last three months. A key domestic project, which would greatly reduce normalized import needs, is about two-thirds complete, but requires another $2 billion to fund to completion.