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OPEC

Organization of the Petroleum Exporting Countries

LO N G – T E R M S T R AT E GY

OPEC LO N G – T E R M S T R AT E GY

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Foreword

The Organization of the Petroleum Exporting Countries (OPEC) was

established in Baghdad, Iraq, in September 1960. Its Members are

Algeria, Indonesia, the Islamic Republic of Iran, Iraq, Kuwait, Nigeria,

Qatar, Saudi Arabia, Socialist People’s Libyan Jamahiriya, the United

Arab Emirates and Venezuela. The main guiding texts for the Organi-

zation are the OPEC Statute, approved in January 1961, the Solemn

Declaration, stemming from the first Summit of OPEC Heads of State,

held in Algiers in 1975, and the Caracas Declaration from the Second

Summit of OPEC Heads of State, held in Venezuela in 2000.

On its 45th Anniversary, OPEC adopted a comprehensive long-term

strategy, on the occasion of its Ministerial Conference Meeting

in Vienna, 20 September 2005. The Conference expressed its ap-

preciation of the efforts that lie behind the development of this

strategy. The Conference thanked HRH Prince Abdulaziz bin Salman Bin

Abdulaziz Al-Saud, Chairman of the Meetings of the Deputy Ministers

of Petroleum/Energy on Long-Term Strategy; HE Dr Bernard Mommer,

Vice-Chairman; all Heads and Members of Delegations to these meet-

ings; as well as the Staff of the OPEC Secretariat involved.

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This strategy, which was prepared over a period of two and a half

years, provides a coherent and consistent vision and framework for

the Organization’s future. It recognises the important role of oil in the

world economy at large and for the socio-economic development of

OPEC Member Countries. The Strategy defines specific objectives and

identifies the key challenges the Organization faces now and in the

future. Benefiting from a scenario-approach for the energy scene, it

is designed to be robust and adaptive throughout the various possible

futures.

This document provides an overview of the key issues which have

been addressed.

Vienna

March 2006

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Introduction

The OPEC Long-Term Strategy recognises the important role of oil in

meeting future global energy demand and for the socio-economic de-

velopment of OPEC Member Countries, and provides a coherent and

consistent vision and framework for the Organization’s future. The ob-

jectives for the Strategy relate to the long-term petroleum revenues

of Member Countries, the stability of the world oil market with fair

prices, and the security of regular supply to consumers, as well as the

security of world oil demand.

There are key challenges that may constitute constraints for OPEC

in the attainment of the objectives of the Strategy. A major hurdle

relates to the uncertainties surrounding future demand for OPEC oil,

stemming from, inter alia, future world economic growth, consuming

countries’ policies, and technology development, as well as from future

non-OPEC production levels.

These uncertainties are explored in three internally-consistent scenar-

ios that depict contrasting futures of the global energy scene. These

scenarios, named respectively Dynamics-as-Usual (DAU), Protracted

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Market Tightness (PMT) and Prolonged Soft Market (PSM), map out a

coherent and credible set of assumptions for these drivers of change.

The key implications that emerge from these scenarios are described

in the following section.

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How might oil demand evolve?

The DAU scenario envisages a future where the drivers of change shap-

ing the scenario continue their past patterns and, thus, no particular

departure from these trends is assumed.

Global economic growth is robust in this scenario, but no different

to average growth rates observed over the past 15 years. However,

there are substantial uncertainties over future economic growth aris-

ing from the complex interplay of domestic and global determinants of

that growth, including such diverse factors as demographics, advances

in technology, capital availability and trends in commodity prices,

domestic policies and global trade developments, regimes, environ-

mental policies and financial regulations.

Both lower and higher rates of economic growth are considered in

the PSM and PMT scenarios respectively. For example, even without

assuming the arrival of a recession, there are genuine and persistent

worries about the long-term health of the world economy, especially

regarding growing international imbalances, resulting, in particular,

from some countries’ current account and budget deficits. On the

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Demand growth is uncertain

mbd

20

25

30

35

40

45

50

55

60

PSM

PMT

DAU

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60

70

80

90

100

110

120

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PSM

PMT

DAU

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other hand, a synergistic combination of positive economic and geo-

political circumstances could conceivably unleash sustained longer-

term growth at significantly higher levels than assumed in the DAU.

Oil demand is also greatly affected by consuming countries’ policies.

Taxation of energy products is often seen not only as a means of rais-

ing revenue, but also as a means of controlling demand in addressing

environment and energy security issues. Policies demonstrate signifi-

cant discrimination against oil, involving not only higher tax rates, but

also subsidies for competing fuels. Great uncertainty exists in relation

to future developments of consuming countries’ policies and is con-

sidered one of the main constraints in ensuring adequate security of

demand.

Further uncertainty stems from the impacts on oil demand of

technology development. In particular, in the transportation sector,

conventional internal combustion engines could continue to achieve

significant fuel economy improvements, while hybrid vehicles may

witness a significant growth. While in all scenarios, oil will remain the

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main fuel over the next 20 years, the introduction of non-oil fuelled

vehicles and the use of alternative fuels, such as biofuels, are drivers

that could affect oil demand growth patterns in this sector.

2010 2015 2020

Protracted Market Tightness 2.2 3.5 5.4

Prolonged Soft Market –1.7 –3.9 –6.9

World demand in the scenarios:differences from DAU

mbd

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The outlook for oil demand must be seen very much in the context of

these uncertainties. In the DAU scenario, oil demand increases annu-

ally by, on average, 1.5 mbd, with around 75 per cent of the increase

to 2020 coming from developing countries. The transportation sector

is the single most important source of increase and represents close to

half of the expected rise in oil demand.

Nevertheless, demand growth, subject to the uncertainties outlined

above, could turn out to be considerably different. For example, a

long-term tight market situation could be envisaged, characterised by

a high sustained oil demand, principally from higher economic growth.

Such potential developments have been explored in the PMT scenario.

In this scenario, by 2020 demand is more than 5 mbd higher than in

the DAU.

On the other hand, over the next 10-15 years, lower demand growth

must also be considered as a credible alternative to these DAU figures.

In fact, downside risks are seen even greater than upside potential:

lower economic growth could emerge, characterised by increased

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regionalism and protectionism, which may well combine with policy

measures designed to reduce demand. Implications of these possible

alternative trends have been examined in the PSM scenario, with

demand 7 mbd below DAU values by 2020.

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Another major area of uncertainty that impacts the demand for OPEC

oil and further complicates making appropriate and timely investments

in OPEC countries concerns the development in non-OPEC supply. A

number of factors, such as oil prices, upstream legal and fiscal regimes

and investments in non-OPEC countries, technology advancements

and exploration successes, will shape future scenarios regarding non-

OPEC supply.

Future technological progress may also lead to the development of

significant amounts of unconventional oil and alternative fuels. How-

ever, under all scenarios, it is still expected that non-OPEC production

growth will slow over the medium term.

Non-OPEC supply prospects also uncertain

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Uncertain future demand and non-OPEC supply translate into a broad range of demand for OPEC oil in the scenarios

mbd

20

25

30

35

40

45

50

55

60

PSM

PMT

DAU

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60

70

80

90

100

110

120

2020191817161514131211100908070605040302012000

PSM

PMT

DAU

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In meeting the future growth of world oil demand, oil resources are

large and sufficient, and oil supply will not peak within the consid-

ered timeframe. Moreover, the size of the global upstream investment

challenge will not be markedly different from the past, despite the

growing volumes, as capital will be increasingly used more efficiently

in lower cost OPEC Countries.

Over the longer-term, OPEC will be relied upon to supply most of

the incremental barrel demanded. However, the uncertainties over

future oil demand and non-OPEC supply translate into a broad range

of demand levels for OPEC oil. This complicates the planning for

appropriate and timely investments in OPEC Countries and, conse-

quently, increases the risks associated with under-, as well as over-

investment.

In these scenarios, the amount of oil that OPEC is projected to supply

over the next 10-15 years could range by as much as 10 mbd or more.

A central challenge is associated with the lack of security of demand

and the need for adequate flexibility to adapt to a wide range of

Broad range of future demand for OPEC oil

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potential growth in demand for OPEC oil that stems from these great

uncertainties over the coming years, particularly given the long lead

times involved.

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It is important to note that the challenge related to making the

appropriate investment in the oil industry extends along the entire

supply-chain. In particular, close attention should be paid to the down-

stream sector.

The profile of incremental global demand is overwhelmingly for light

and clean products, while incremental supply comprises significant

volumes of sour medium and heavy crude grades. The combination

of this with the move to ever-stricter product quality and envi-

ronmental regulations represents a challenge for the downstream

industry, especially in the context of uncertain demand growth.

Future refining capability needs to be considered in terms of both

the adequacy of secondary processes – for example, to upgrade

heavy streams and to meet tight targets for sulphur – and crude

distillation capacity.

Thus, tightness in the downstream sector could potentially be a main

source of volatility, especially if the necessary investment in the

refining sector is not undertaken in a timely manner.

The downstream is also important

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OPEC’s Long-Term Strategy covers various issues, such as oil market

stability, upstream and downstream investment, technology, the role

of OPEC National Oil Companies, multilateral negotiations, in particular

those related to trade and the environment, and the important relation-

ships with both producers and consumers, as well as with international

organisations and institutions.

In addition, the need to be flexible and adaptive led to the inclusion

in the Strategy of elements that are pertinent to specific situations as

explored in the three scenarios.

The strategy re-emphasises OPEC’s commitment to support oil mar-

ket stability. It builds upon the fundamental recognition that extreme

price levels, either too high or too low, are damaging for both produc-

ers and consumers, and points to the necessity of being proactive

under all market conditions.

Oil price volatility renders all the more difficult the interpretation of

price signals, whether they are an indication of structural change or

Elements of the Strategy

“... extreme price levels,

either too high

or too low,

are damaging for

both producers

and consumers ...”

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a reflection of temporary phenomena, and thereby affecting the

ability to support longer-term market stability. Given the dynamic

and complex behaviour of oil markets, there is a need to support

fair and stable prices, sustainability of supply, and security of

demand.

In a tight market environment, too high oil price levels may affect

the prospects for economic growth, especially in developing coun-

tries, and therefore threaten future oil demand growth. On the other

hand, low oil price levels would place strains upon the aspirations of

OPEC Member Country populations for their economic development

and social progress. The use of ´leading indicators` to assist in foresee-

ing economic downturns and upturns that affect oil demand and supply

should be a fundamental tool, to help avoid excessive market tightness

or softness. Other developments, such as policies and technological ad-

vances, should also be closely monitored.

In supporting market stability and security of supply to consumers,

OPEC will continue to expand its production capacity, both to meet

“The use of ‘leading

indicators’ to assist in

foreseeing economic

downturns and upturns

that affect oil demand

and supply should be a

fundamental tool …”

“… there is a need to

support fair and stable

prices, sustainability

of supply, and

security of demand.”

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“The timing and size

of capacity expansion in

Member Countries …

should be such that a

reasonable level of spare

capacity is available.”

the increased demand for its oil and to maintain an adequate level of

spare capacity. The timing and size of capacity expansion in Member

Countries in the medium- to long-term, however, should be such that

a reasonable level of spare capacity is available. Yet large and inher-

ent uncertainties concerning the scale of projected future OPEC oil

production signify a heavy burden of risk in making the appropriate

investments.

Oil market stability also requires adequate investment in refining ca-

pacity, as well as pipeline systems and storage facilities. OPEC National

Oil Companies have an interest in considering undertaking part of the

investments required through expanding and upgrading domestic re-

fineries for product export or investing in consuming countries. How-

ever, the primary responsibility for downstream investment remains

with major consuming countries and international oil companies.

Measures are needed to improve the investment climate for refinery

expansion and operation. Close co-ordination in this area between

consuming and producing countries would be beneficial to address

and avoid downstream bottlenecks.

“... the primary

responsibility for

downstream investment

remains with major

consuming countries and

international

oil companies.”

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OPEC Member Countries should strive to strengthen co-operation in

upstream and downstream scientific research and technological devel-

opment among themselves and with international institutions. OPEC

stresses the importance of technology-based responses to the need to

protect the environment, in relation to both air quality and climate

change concerns.

The oil industry has a long history of successfully improving the envi-

ronmental credentials of petroleum, both in use and production, and

research and development in this area should be supported. OPEC also

calls for the promotion of the development of technologies that ad-

dress climate change concerns. One promising example is that of car-

bon dioxide capture and storage technology, in particular for enhanced

oil recovery, where suitable and feasible. In this regard, international

collaborative efforts are needed to develop large-scale demonstration

projects.

OPEC National Oil Companies should enhance their competitive per-

formance and develop close co-operation among themselves in various

“OPEC also calls for

the promotion of the

development of technologies

that address climate change

concerns. One promising

example is that of carbon

dioxide capture and

storage technology ...”

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areas such as technology and knowledge- and experience-sharing.

In OPEC Member Countries, the application of advanced upstream

technologies can potentially reduce costs further, increase recov-

ery rates, and open up frontier areas, thereby maintaining com-

petitive, cost-effective and successful exploration and development

activities.

In climate change-related multilateral fora, it is important for OPEC

Member Countries to continue to have an active role, recalling the

principle of common, but differentiated responsibilities. The interna-

tional community should fulfil its obligations to strive to minimise the

adverse effects of policies and measures on developing country Parties

and, in particular, fossil-fuel exporting developing countries. This could

involve, inter alia, assistance in relation to economic diversification,

transfer of technology and capacity building.

An active OPEC role in trade-related discussions is important, espe-

cially as they relate to issues of concern to developing countries. OPEC

Member Countries should continue enhancing their economic and

“In OPEC Member

Countries, the application

of advanced upstream

technologies can potentially

reduce costs further,

increase recovery rates, and

open up frontier areas ...”

“The international

community should fulfil

its obligations to strive to

minimise the adverse effects

of policies and measures on

developing country Parties

and, in particular, fossil-

fuel exporting, developing

countries.”

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social development by using the comparative advantage offered by

their natural resources.

Dialogue among producers and between producers and consum-

ers should be widened and deepened to cover more issues of

mutual concern, such as security of demand and supply, market

stability, upstream and downstream investment, and technology.

Dialogue should be initiated or intensified with all countries, both

producing and consuming, regional groups, United Nations insti-

tutions, the International Energy Forum (IEF), the International

Energy Agency (IEA), etc. Participation of other producers in OPEC

ministerial meetings as observers should continue, with the pos-

sible expansion of the membership of the Organization, including

Associate Membership.

Despite OPEC’s role in supporting oil market stability, there is still

much preconception and misunderstanding. This calls for the effective

communication of the positive and beneficial role OPEC plays for the

world at large.

“Dialogue ... should be

widened and deepened to

cover more issues of

mutual concern, such

as security of demand

and supply ...”

“… preconception and

misunderstanding …

calls for the effective

communication of the

positive role OPEC

plays for the world

at large.”

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Finally, enhancing cohesion among Member Countries is of crucial

importance. The Organization should expand intra-OPEC interactions,

networking and dialogue at the level of Ministers of Petroleum/En-

ergy and National Oil Companies. Co-operation should also be pur-

sued in the technological and scientific areas of higher education in

Member Countries. Enhancing Member Countries’ resilience by pro-

moting the diversification of their economies and the development

of human capital can contribute significantly to the Organization’s

strategic objectives.

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With this document, OPEC reaffirms its longstanding commitment to

oil market stability, as embodied in the OPEC Statute. OPEC’s role in

this respect is becoming better understood and appreciated, as its

continuous efforts at supporting such stability are increasingly ac-

knowledged as beneficial to the world at large. In supporting security

of supply to consumers, OPEC will continue to expand its production

capacity, both to meet the increased demand for its oil and to offer an

adequate level of spare capacity. This, together with the acceptance

that there are clearly sufficient oil resources, should provide a solid

foundation for future market stability. Moreover, due regard must

be given at all times to the need for fair returns on capital invested

throughout the petroleum industry, fundamental to a balance of in-

terest between all parties. At the same time, the important role of oil

in the economic development and social progress of OPEC Member

Countries must be recognised.

However, the challenge of making these investments is fraught with

significant uncertainties, in particular regarding the rate at which oil

demand may grow. The risks associated with implementing large capital

Concluding remarks

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investments with long lead times in the context of these uncertainties

lead to genuine concern over the possible waste of much-needed finan-

cial resources. The issue of security of demand must, therefore, be re-

garded as an inherent factor in supporting longer-term market stability.

Nevertheless, it is also increasingly recognised that a broader set of

conditions are needed for long-term oil market stability. In particular,

the downstream sector must be a prime focus of efforts in working

towards this objective. This draws attention to the need, particularly

in consuming countries, to adopt an active, forward-looking approach

to this sector, supporting timely investment.

OPEC’s Long-Term Strategy has identified many areas where OPEC

Member Countries, both as individual sovereign nations, as well as

members of an Organization, can support their own pressing needs for

socio-economic development, while playing a vital role in the interna-

tional community. Open, positive, constructive, pragmatic dialogue,

with all parties, must constitute the main means of turning the future

challenges into opportunities in the new energy era.



Obere Donaustrasse ��, A-�0�0 Vienna, AustriaTelephone: +�� -0Telefax: +�� 0

www.opec.org

OPEC


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