OPEC Ministers Foresee Supply Crunch, Price

UNCLAS SECTION 01 OF 02 VIENNA 000363 SIPDIS,SENSITIVE E.O. 12958: N/A TAGS: EPET ENRG SENV KGHG AU SUBJECT: OPEC Ministers Foresee Supply Crunch, Price Spikes; Hard Line on Climate, Biofuels Sensitive But Unclassified - Entire Cable. ¶1. Meeting March 18-19 under the aegis of OPEC's biannual International Seminar in Vienna, OPEC ministers and industry CEOs: -- supported the March 15 decision to hold production targets steady, with no indication of medium-term cuts; -- were unanimous in predicting the current investment drought will mean a future supply crunch and price spikes; -- sought new long-term contract mechanisms to smooth price volatility; and -- signaled a continued hardline against greenhouse gas limits for LDCs and against pro-biofuel policies. Broad Support for Holding Production Targets Steady - - - - - - - - - - - - - - - - - - - - - - - - - - ¶2. OPEC Secretary General Abdalla Salem el-Badri (Libya) and OPEC energy ministers expressed support for the Board of Governors' March 15 decision to hold targets steady. Al Badri spoke of the need to restore world economic confidence. Speaking in moderate tones, Iranian oil minister Gholam-Hossein Nozari said that OPEC members must continue to improve their public image (adding that all market participants should work for Middle East stability and avoid "unilateral" destabilizing moves). Industry CEOs concurred, saying that any OPEC move to restrict supply and drive up prices this year would simply kill demand. Consumer country representatives, such as UK Energy Minister Michael O'Brien and IEA Executive Director Nobuo Tanaka, expressed support for OPEC's March 15 move and advocated continued investment to ensure future supply. Oil Supply Crunch, Renewed Price Spikes Inevitable - - - - - - - - - - - - - - - - - - - - - - - - - - ¶3. The conference manifested a broad consensus among OPEC member governments, IOCs, NOCs, and industry observers that a medium-term oil supply crunch and return to 2008- style price spikes are inevitable once the world economy recovers. SecGen Al Badri said flatly "at current prices, OPEC members won't invest in any new capacity" -- a sentiment echoed by Iran's Nozari and other OPEC energy ministers with the nuanced exception of Saudi minister Ali Al-Naimi and Iraqi oil minister Hussain Al- Shahristani (who focused solely on the development of Iraq's production capacity). ¶4. Royal Dutch Shell CEO Jeroen van der Veer highlighted the remarkable industry consensus on the coming supply crunch and price instability -- even "back of the envelope" calculations show this -- calling for better NOC/IOC partnerships and more favorable tax/investment regimes. Van der Veer fretted that gas and oil supply could become collateral victims in the run-up to Copenhagen unless governments focus on the highest emitters (coal and heavy oil). UK analyst Paul Stevens argued that it's not only weak demand/weak prices which are killing future capacity: IOCs are destroying their own human resources through cutbacks, and most NOCs (which rely on budgetary allotments) have too little clout to get sufficient funding whatever the prevailing oil price. "Fair pricing" -- More than Cheap Talk? - - - - - - - - - - - - - - - - - - - - ¶5. The conference featured familiar calls by OPEC members for "fair pricing" (with hints that a "fair" equilibrium oil price would be at least $60-$70/barrel) and mechanisms to smooth price/demand fluctuations. Unsurprisingly, many pointed out that higher and more stable energy prices would help ensure investment in future supply. Somewhat novel was a detailed presentation by Eni CEO Paolo Scaroni on contracting mechanisms to promote long-term oil price stability despite the inevitable variations in quantities demanded and supplied. These would include -- "take-or-pay" clauses such as those common in natural gas supply contracts, and -- contract mechanisms to remunerate suppliers for their capacity including spare capacity (along the lines of some electricity markets). Scaroni argued that spare capacity has value for consumers by promoting security of supply -- and deters speculation -- but producers currently get a negative return on spare capacity, exacerbating swings in supply VIENNA 00000363 002 OF 002 and prices. Scaroni offered ENI leadership to study price stability measures through an industry working group and in coordination with the International Energy Forum (IEF) in Rome (NOTE: Scaroni slides emailed to EEB/ESC/IEC). OPEC Hardline Against Climate Change Deal; Gives Money to Anti-Biofuels Research - - - - - - - - - - - - - - - - - - - - - - ¶6. While UN Framework Convention on Climate Change/UNFCCC Executive Secretary Yvo de Boer pleaded for OPEC members to join a post-Kyoto climate deal, veteran Saudi negotiator Mohammad al-Sabban was uncompromising, signaling that OPEC members will not pay into any UNFCCC mechanism nor accept a deal that commits LDCs to binding emissions targets. OECD countries are the historical sources of climate-related emissions and must respect their existing UNFCCC commitments to bear the lion's share of the emissions cutbacks and to finance the full mitigation and adaption burden for developing countries, Al-Sabban argued. He highlighted familiar OPEC data about high oil taxes in wealthy countries who subsidize domestic coal production and now heavily subsidize biofuels. Oil producers are already disadvantaged and won't let Copenhagen drive a further wedge between them and LDC markets, he said. COMMENT: Al-Sabban's remarks strongly suggested that OPEC members are looking to LDCs for future oil demand despite whatever steps climate- related cutbacks OECD countries implement. END COMMENT. ¶7. At the conference, OFID (OPEC's development arm) rolled out a major study arguing that future biofuels promotion will exacerbate hunger and deforestation. The OPEC-funded study was conducted by Austria's IIASA (International Institute for Applied Systems Analysis),a multi-national research institute and a leading modeler of land-use issues and their effects on climate change and food supply/prices. ¶8. NOTE: A list of speakers is available at http://www.opecseminar.org/itec/opec09/speake rs.htm The full conference program is available at http://www.opecseminar.org/itec/opec09/brochu re.htm Post has electronic copies of many presentations and can provide them upon request. KILNER