1

Cosmopolitan ClubCosmopolitan Club

Organization of the Petroleum Exporting CountriesVienna, Austria

Oil & Development:Oil & Development:The role of OPEC: A historical perspectiveThe role of OPEC: A historical perspective

and outlook to the futureand outlook to the future

24 March 2005Vienna

Dr Adnan Shihab-EldinDirector, Research DivisionActing Secretary General

2

OPEC and EU-15 Real GDP and Real GDP/CapitaOPEC and EU-15 Real GDP and Real GDP/Capita

Index: Comparison OPEC and EU-15 Real GDP and Real GDP per Capita

100

120

140

160

180

200

220

197019721974197619781980198219841986198819901992199419961998200020022004

OPEC Real GDP per Capita EU-15 Real GDP per Capita

1970=100

Average annual growth rate 1970-2004

3.4%

1.0%

2.4%

2.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Real GDP Real GDP per capita

OPEC EU-15

3

Crude oil prices in historical perspectiveCrude oil prices in historical perspective

2000

“Seven sisters”

4

OPEC Member CountriesOPEC Member Countries

Islamic Republic of Iran 1960Iraq 1960Kuwait 1960Saudi Arabia 1960Venezuela 1960Qatar 1961Indonesia 1962Socialist People’s Libyan Arab Jamahiriya 1962United Arab Emirates 1967Algeria 1969Nigeria 1971

5

Selected Macroeconomic Indicators for OPEC Member Countries,2003

Selected Macroeconomic Indicators for OPEC Member Countries,2003

Algeria 1,766 68.4Indonesia 960 15.5Iran, I.R. 2,010 77.1Iraq 789 99.1Kuwait 17,942 92.6Libya, S.P.A.J. 4,064 94.6Nigeria 448 92.3Qatar 32,945 69.9Saudi Arabia 9,327 92.3United Arab 24,244 44.3Venezuela 3,463 84.6

GDP/Capita(US$)

Percentage of Oil Exports in Total Exports

%

Total OPEC 1,785 68.2

Sources: Direct Communication to the Secretariat. International Monetary Fund, International Financial Statistics,IMF World Economic Outlook database. UN, Handbook of World Development Statistics. World Bank, WorldDevelopment Indicators.The Economist Intelligence Unit, Country Reports. National Sources. Secretariat's estimates.

6

OPEC StatuteOPEC Statute

“The Organization shall devise ways and means of ensuring the stabilisation of (oil) prices in international

markets, with a view to eliminating harmful and unnecessary fluctuations

“Due regard shall be given at all times to the interests of the producing nations and to the necessity of securing: a steady income to the producing countries; an efficient,

economic and regular supply of petroleum to consuming nations; and a fair return on their capital to

those investing in the petroleum industry”

7

OPEC’s developmentOPEC’s development

1960Five Founder Members

OPEC formed to safeguard legitimate national interests, when petroleum industry dominated by established industrial powers

Intervening yearsNew Members

OPEC faced formidable challenges, impacting across spread of pricing spectrum and compounded by factors far removed from simple market economics

TodayVast experience of petroleum issues

Acute awareness of realities and sensitivities of performing on world stageProduction agreements make major contribution to market stability

8

OPEC Reference Basket Price(US$ / b)

OPEC Reference Basket Price(US$ / b)

51

16

22

28

34

40

46

52

Jan Feb Mar Apr May May Jun Jul Aug Sep Oct Nov Dec

?

9

Main reasons behind the rise in prices in 1Q 2005:Main reasons behind the rise in prices in 1Q 2005:

Continued strength in oil demand led by the respectable performance of the world economyLate & lasting cold spell in the Northern HemisphereIncreasing market anxiety over forward capacity tightnesscoupled with geopolitical tensionsExpectation of strong demand outstripping growth in non-OPEC supply over the medium-term, leading to increasing production requirements from OPECAll these act as a driving force behind rising activity of non-commercials (pension & index funds in particular), exacerbating the current ‘bullish bias’ with further pressure on prices & volatility

10

OPEC R. Basket price in nominal & in real terms(Base: 2004=100, US$ / b)

OPEC R. Basket price in nominal & in real terms(Base: 2004=100, US$ / b)

36

68

72

8077

68

0

10

20

30

40

50

60

70

80

90

1970 1975 1980 1985 1990 1995 2000 2005

Oil Price

Real *

*/ inflation and exchange rate adjusted.

11

OPEC Reference Basket ($US/b)OPEC Reference Basket ($US/b)

4

10

16

22

28

34

40

46

52

Jan-

97Ap

r-97

Jul-9

7O

ct-9

7Ja

n-98

Apr-9

8Ju

l-98

Oct

-98

Jan-

99Ap

r-99

Jul-9

9O

ct-9

9Ja

n-00

Price Band

Apr-0

0Ju

l-00

Oct

-00

Jan-

01Ap

r-01

Jul-0

1O

ct-0

1Ja

n-02

Apr-0

2Ju

l-02

Oct

-02

Jan-

03Ap

r-03

Jul-0

3O

ct-0

3Ja

n-04

Basket 6 Month Moving Average

Apr-0

4Ju

l-04

Oct

-04

Jan-

05

Unusualprice surge

signaling new episode ?

Stability within the band

12

Who gets what in a liter of oil in G-7 ?2004, US $ / litre

Who gets what in a liter of oil in G-7 ?2004, US $ / litre

0.00 0.20 0.40 0.60 0.80 1.00 1.20

United Kingdom

Italy

Germany

France

Japan

Canada

USA

Austria

USD/litre

Crude FOB PriceIndustry MarginTax

13

OPEC R. Basket pricein US$ & Euro, (2002-2005)

15

20

25

30

35

40

45

50

Jan-

02

Mar

-02

May

-02

Jul-0

2

Sep-

02

Nov

-02

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep-

03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Sep-

04

Nov

-04

Jan-

05

Mar

-05

Nominal USD Nominal EURO US$ 46.6/bbl

€ 35.2/bbl

14

Cumulative change of oil OPEC R. Basket pricein US$ & Euro, (2002-2005)

0

5

10

15

20

25

30Ja

n-02

Mar

-02

May

-02

Jul-0

2

Sep-

02

Nov

-02

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep-

03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Sep-

04

Nov

-04

Jan-

05

Mar

-05

Cum

. Chg

./bbl

Cumulative Chg. USD Cumulative Chg. EUROUS$ 28.3/bbl

€ 14.4/bbl

15

Composite barrel analysis: Austria vs. EUComposite barrel analysis: Austria vs. EU

28%33%25%27%

60%55%

60%55%

12%

12%

15%18%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2002 2002 2004 2004

AUSTRIA EC AUSTRIA EC

Eur

o/Li

tre

Crude CIF Price Tax Industry Margin

16

OPEC crude oil production, 2002-2005(based on secondary sources, mb/d)

OPEC crude oil production, 2002-2005(based on secondary sources, mb/d)

28.1

24.9

30.1

18

21

24

27

30

N-02 F-03 M-03 A-03 N-03 F-04 M-04 A-04 N-04 F-05-3

-2

-1

0

1

2

3

4

OPEC-11 Iraq OPEC-11

Production Cumulative change in production

17

OPEC’s objectives are today as valid as they were in 60’s

OPEC’s objectives are today as valid as they were in 60’s

Stable marketsReasonable pricesSteady revenues

Secure supplyFair returns to investors

Short, medium and long terms

18

OPEC R. Basket price in nominal & in real terms2000 - Mar 2005 , (Base: June 2000=100, US$ / b)

OPEC R. Basket price in nominal & in real terms2000 - Mar 2005 , (Base: June 2000=100, US$ / b)

Year Average since 2000

2000 27.42001 23.1 25.32002 24.4 25.02003 28.1 25.82004 36.0 27.92005* 43.0 28.7

*/ year to date.

48

28

36

16

20

24

28

32

36

40

44

48

52

Jan-00M

ar-00M

ay-00Jul-00S

ep-00

Nov-00

Jan-01M

ar-01M

ay-01

Jul-01S

ep-01N

ov-01Jan-02M

ar-02

May-02

Jul-02S

ep-02N

ov-02

Jan-03M

ar-03M

ay-03Jul-03S

ep-03

Nov-03

Jan-04M

ar-04M

ay-04

Jul-04S

ep-04N

ov-04Jan-05M

ar-05

Nominal Adjusted Band (exchange & inflation)

19

OPEC crude oilOPEC crude oil

Proven reserves 891 billion barrels78.3% of world figure

Production > 30 million barrels a day~ 40% of world figure

Cheaper to exploit than non-OPEC oilIncreasing call on OPEC oil in coming years

51% world oil market projected for 2025

20

Oil Demand Outlook, mb/dOil Demand Outlook, mb/d

Reference 2010 2015 2020 2025 OECD 50.7 52.0 53.0 53.9 DCs 33.8 39.2 45.1 51.3 Transition economies 5.3 5.6 5.9 6.1 Total World 89.9 96.8 104.0 111.3

“Four-fifths of the increase in demand of 28 mb/d over the period 2005–2025 comes from developing countries Transportation continues to be the dominant source of growth (~60 %)Many uncertainties: GDP, technology, policy – substantial downside risks

21

Annual growth in oil demand, 2004-2025,Reference, mb/d pa

Annual growth in oil demand, 2004-2025,Reference, mb/d pa

0.0

0.2

0.4

0.6

0.8

1.0

1.2

OECD DCs Transition economies

Asia

OPEC & other exp.

N. America

W. EuropeOECD Pac.

Africa & M.E.Latin America.

FSUother

Asia: 66% of DCs increase, especially China & India huge potential (e.g. low vehicle ownership)But possible constraints: infrastructure, policies

ChinaWorld Asia China

GDP Growth (%) 3.5 4.7 6.2Oil Demand Growth (%) 1.6 2.7 4.1Oil Demand Growth (mb/d) 1.5 0.76 0.35

2004-2025

22

Vehicle intensities 1970-2025Vehicle intensities 1970-2025

0.1

1

10

100

1000

100 1000 10000 100000GDP per capita ($95)

vehi

cles

per

1,0

00

China

S. AsiaOther DCs

transition economies OECD

23

Oil Production Outlook, mb/dOil Production Outlook, mb/d

Reference (DAU) 2005 2010 2020 2025OECD 21.5 21.7 20.6 19.9DCs excl. OPEC 15.9 17.6 18.8 18.3Russia & Caspian 11.8 13.3 15.2 15.6

Non-OPEC 51.2 54.8 57.2 56.7OPEC (incl. NGLs) 32.1 35.0 46.8 54.5

World 83.2 89.9 104.0 111.3

Short- to medium term, non-OPEC production continues to rise, plateaus at 55-57 mb/dKey sources of increase: Latin America, Africa, Russia and CaspianRussian exceptional growth not sustainable (infrastructure constraints): eventually plateaus at 11 mb/dOECD production expected to declineRate of increase in non-OPEC supply subject to considerable uncertainty after 2010.OPEC increasingly supplies incremental barrelAlso: significant medium term uncertainties.

24

OPEC responseAccelerated expansion of OPEC production capacity

OPEC responseAccelerated expansion of OPEC production capacity

20

25

30

35

40

45

2004 2005 2006 2007 2008 2009 2010

mb/

d

Announced OPEC capacity plans

Range of required OPEC productionLow

Base

High

25

Investment in production capacityInvestment in production capacity

The bulk of incremental supply to meet demandgrowths will come from OPEC, in particular the ME:

To meet increase in overall demandTo replace exhausted reservesTo cope with unexpected shortages (adequate spare capacity)

⇒Oil must & can be cleaner, safer and more efficient

26

What about medium- to long-term outlook ?What about medium- to long-term outlook ?

Drivers of uncertainties over future supply & demand growth & future scale of investment that will be required

The world economy

Energy policies impacting supply/demand

Technology developments

Oil price path

27

Cumulative OPEC investment requirements:Huge uncertainties in future oil demand translate into huge

uncertainties and risks for future OPEC investment

Cumulative OPEC investment requirements:Huge uncertainties in future oil demand translate into huge

uncertainties and risks for future OPEC investment

0

50

100

150

200

250

300

350

400

450

2010 2015 2020 2025

$(20

03) b

illion

$70-95bn

$122-173bn

$185-269bn

$258-382bn

If OPEC balances the market, the uncertain volume requirements translate into huge ranges of anticipated capital outlay needs

Already by 2010 an estimated uncertainty of $25 billion exists between the reference case and the low economic growth case

This a central concern: where lies the onus of maintaining sufficient spare capacity?

Impact of lower economic growth

28

Change in fundamentals ?Increasing tightness in world refinery capacity

Change in fundamentals ?Increasing tightness in world refinery capacity

60

65

70

75

80

85

90

95

1993 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08

World refinery capacity (mb/d)

World oil demand (mb/d)

?

Refinery utilization rates (% of capacity)

Avg. 2003 Avg. 2004USA 93.3 93.7EU-16 89.0 90.0Singapore 71.7 84.4

29

Renewal of oil resourcesRenewal of oil resources

Cumulatedproduction

125

Proved reserves

145

Non recovered oil385

New discoveriesNon conventional

resourcesConventional resources

Gtoe

*35

**50

100

Rec

uper

a tio

ny i

eld

(%)

New discoveries and extensions

> 100

Improved recuperation110 40

Highly heavy oils andasphaltic sands

685 (in place)

* Present average yield** Forecast average yield (towards 2020) Offshore

Source: IFP/Direction des

Etudes Economiques

Incr

eas e

of r

e co v

ery

y ie l

d

30

Clean oil technologyClean oil technology

Increases in oil use are expected to be accompanied by technological advances that will improve their environmental credentials

Making fuller use of many technologies will point towards more sustainable energy patterns, as well as alleviating some of the downside risks to oil demand and the resulting uncertainties in the magnitude and timing of future investment requirements

The identification of opportunities for cooperation on technological issues is therefore considered an important objective

Examples:I. Reductions in gas flaringII. CO2 capture, use and storageIII. Oil gasification

31

CO2 Emissions ReductionCO2 Emissions Reduction

Energy efficiency increase

Fuels with lower CO2 emissions

CO2 capture and sequestrationSleipner A

Sleipner T

CO2Aquifère d ’Utsira

Sleipner OuestRéservoir de gaz : formation de Heimdal

Injection de CO2 - Puits A16

Sleipner WestPuits de production

32

Dialogue and cooperationDialogue and cooperation

Industry much better-off with underlying consensus on handling major issues of mutual

concernBig advances in recent years, especially in Asia

1st Round Table of Asian Oil and Gas Ministers, New DelhiInternational Energy Forum Secretariat, Riyadh

Annual dialogue with China, Japan, South KoreaJoint OPEC/non-OPEC meeting in Oman in October

33

34

Oil Revenues as Percentage of GDP for OPEC MCs(1971-2004)

Oil Revenues as Percentage of GDP for OPEC MCs(1971-2004)

0

10

20

30

40

50

60

1970 1975 1980 1985 1990 1995 2000

Per

cent

age

0

200

400

600

800

1,000

1,200

1000

billi

on U

S$

Oil Revenues as % of Nominal GDP Oil Revenues Nominal GDP

0

10

20

30

40

50

60

1970 1975 1980 1985 1990 1995 2000

Per

cent

age

0

200

400

600

800

1,000

1,200

1000

billi

on U

S$

35

OPEC’s landmark declarationsOPEC’s landmark declarations

Declaratory Statement of Petroleum Policy in Member CountriesVienna, 1968

Inalienable right, as expressed by the UN, of all countries to exercise permanent sovereignty over their natural resources in the interests of their national development

Conference of Sovereigns and Heads of State of OPEC Member Countries(First Summit) Algiers, 1975

First “Solemn Declaration”. Led to establishment of:

OPEC Fund for International DevelopmentUS $7.0 billion committed*US $4.7 billion disbursed*

*Since 1976

Second Summit of Heads of State and Government of OPEC Member CountriesCaracas, 2000

Second “Solemn Declaration”

36

Average annual real GDP growth rates (PPP),% pa

Average annual real GDP growth rates (PPP),% pa

Reference (DAU) 2004-05 2006-10 2004-25 OECD 3.3 2.4 2.4 DCs 6.4 5.0 4.8 China 8.5 6.5 6.2 FSU 7.2 3.7 3.7 World 4.6 3.5 3.5

Average growth in the OECD economies of 2.4% pa over the period 2004–2025For developing countries, considerable technological catch-up potentialChina is a significant uncertainty but expected to remain fastest growing region

Economic growth in the reference case is relatively optimistic regarding the long- term health of the world economy

37

World energy demand by fuel type (mtoe)World energy demand by fuel type (mtoe)

0

1000

2000

3000

4000

5000

6000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Oil

Coal

Hydro/nuclear/renewable

Gas

2000-2010

2010-2020

2020-2025 2000 2025

Oil 1.6 1.8 1.7 40.1 36.9Solids 1.9 2.0 1.8 26.0 25.2Gas 2.9 3.1 3.2 23.3 29.9Hydro/Nucl./Ren. 1.1 0.8 0.7 10.6 8.0Total 1.9 2.1 2.0 100.0 100.0

Growth (% pa) Fuel Shares (%)

38

Oil Demand & Net Oil Requirements in Asia 2005-2020, (mb/d)

Oil Demand & Net Oil Requirements in Asia 2005-2020, (mb/d)

2005 2010 2020 % pa mb/dOil demand

OECD Pacific 8.5 8.7 8.9 0.3 0.03South Asia 3.1 4.0 6.4 5.0 0.22South-East Asia 4.3 5.1 6.9 3.2 0.17China 6.7 8.3 11.6 3.7 0.33

Total Asia 22.6 26.1 33.8 2.7 0.75Asian share in total World 27% 29% 33%

Oil supply

OECD Pacific 0.5 0.7 1.0 4.7 0.03China 3.5 3.6 3.6 0.2 0.01Other Asia 2.5 2.6 2.5 0.0 0.00

Total Asia 6.5 6.9 7.1 0.6 0.04

Total Asia Net oil import req. 16.1 19.2 26.7 3.4 0.71

OPEC supply 32.1 35.0 46.8OPEC share in total World 39% 39% 45%

growth (2005-2020)

39

Estimated annual upstream investment requirements 2000-2025, $bn (2003)

Estimated annual upstream investment requirements 2000-2025, $bn (2003)

0

10

20

30

40

50

60

70

80

90

100

OPEC non-OPEC World

2005-2010 2010-2015 2015-2020 2020-2025

?The bulk of incremental supplyto meet demand growths willcome from OPEC, in particularthe ME:

To meet increase in overall demandTo replace exhausted reservesTo cope with unexpected shortages (adequate spare capacity)

40

$/Euro Exchange Rate (January, ’99 – March, ’05)

1.34

0.830.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

Jan-99

Jun-99

Nov-99

Apr-00

Sep-00

Mar-01

Aug-01

Jan-02

Jun-02

Nov-02

May-03

Oct-03

Mar-04

Aug-04

Jan-05

0

7

14

21

28

35

42

$/euro% change

> 35%

41

Refining Spare Capacity in Key Refinery Regions (mb/d)Refining Spare Capacity

in Key Refinery Regions (mb/d)

0

1

2

3

4

5

6

7

8Ja

n-02

Mar

-02

May

-02

Jul-0

2

Sep-

02

Nov

-02

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep-

03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Sep-

04

Nov

-04

EU15 & Norway USA Asia

0

1

2

3

4

5

6

7

8Ja

n-02

Mar

-02

May

-02

Jul-0

2

Sep-

02

Nov

-02

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep-

03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Sep-

04

Nov

-04

EU15 & Norway USA Asia

42

World oil demand growth : Increasing share of lighter products

World oil demand growth : Increasing share of lighter products

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2000

2001

2002

2003

2004

2005

(mb/d

)

Light Products *

Oil Demand Growth

*: Gasoline, Jet Kerosene and Distillate

43

Estimated average G-7 tax earnings vs OPEC oil export values(1999 – 2003), billion US$

Estimated average G-7 tax earnings vs OPEC oil export values(1999 – 2003), billion US$

220

273

0

50

100

150

200

250

300

G-7 OPEC

G-7OPEC

44

Index of Austrian retail diesel price vs. crude pricecomposite barrel analysis: Austria vs. EU (2003-2005)Index of Austrian retail diesel price vs. crude pricecomposite barrel analysis: Austria vs. EU (2003-2005)

I

70

90

110

130

150

170

190

Jan-

03Ja

n-03

Feb-

03M

ar-0

3M

ar-0

3A

pr-0

3M

ay-0

3Ju

n-03

Jun-

03Ju

l-03

Aug

-03

Aug

-03

Sep

-03

Oct

-03

Oct

-03

Nov

-03

Dec

-03

Dec

-03

Jan-

04Fe

b-04

Mar

-04

Mar

-04

Apr

-04

May

-04

May

-04

Jun-

04Ju

l-04

Jul-0

4A

ug-0

4S

ep-0

4S

ep-0

4O

ct-0

4N

ov-0

4N

ov-0

4D

ec-0

4Ja

n-05

Jan-

05Fe

b-05

Mar

-05

Index Diesel Index Brent Dated