Wednesday, April 21, 2010

OPEC

What is OPEC?

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 13 oil-exporting developing nations that coordinates and unifies the petroleum policies of its Member Countries. OPEC seeks to ensure the stabilization of oil prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations, due regard being given at all times to the interests of oil-producing nations and to the necessity of securing a steady income for them. Equally important is OPEC’s role in overseeing an efficient, economic and regular supply of petroleum to consuming nations, and a fair return on capital to those investing in the petroleum industry.

When was OPEC founded?

OPEC was founded at a meeting held on 10–14 September 1960 in Baghdad, Iraq, by five oil-producing countries: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. These countries are referred to as the Founder Members of the Organization. OPEC was registered with the United Nations Secretariat on 6 November 1962 (UN Resolution No. 6363).

Which countries are members of OPEC?

The OPEC Statute stipulates that: “any country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of Member Countries, may become a Full Member of the Organization, if accepted by a majority of three-fourths of Full Members, including the concurring votes of all Founder Members”. The Statute further distinguishes between three categories of membership: Founder Member, Full Member and Associate Member. Founder Members of the Organization are those countries which were represented at OPEC’s first Conference, held in Baghdad, Iraq, in September 1960, and which signed the original agreement establishing OPEC.

Full Members are the Founder Members, plus those countries whose applications for membership have been accepted by the Conference. An Associate Member is a country which does not qualify for full membership, but which is nevertheless admitted under such special conditions as may be prescribed by the Conference. There are currently 13 OPEC Member Countries.

How does OPEC function?

Representatives of OPEC Member Countries (Heads of Delegation) meet at the OPEC Conference to coordinate and unify their petroleum policies, in order to promote stability and harmony in the oil market. They are supported in this endeavour by the OPEC Secretariat, directed by the Board of Governors and run by the Secretary General, and by various bodies, including the Economic Commission Board and the Ministerial Monitoring Sub-Committee. Member Countries consider the current oil market situation and forecasts of market fundamentals, such as economic growth rates and petroleum demand and supply scenarios. They then consider what changes, if any, they might make to production. For example, at previous Conferences Member Countries have on several occasions decided to raise or lower their collective oil production so as to maintain stable prices and steady supplies to consumers in the short, medium and long term.

What is the OPEC Conference?

The Conference is the supreme authority of the Organization. It consists of delegations normally headed by Their Excellencies the Ministers of Oil, Mines and Energy of Member Countries. The Conference generally meets twice a year — in March and September — and in Extraordinary Meetings whenever required. It operates on the principle of unanimity. It is responsible for the formulation of the general policy of the Organization and the determination of the appropriate ways and means of its implementation. The Conference also decides on applications for membership to the Organization, and on reports and recommendations submitted by the Board of Governors on the affairs of the Organization. It approves the appointment of Governors from each Member Country and elects the Chairman of the Board. Moreover, the Conference directs the Board to submit reports or make recommendations on any matter of interest to the Organization, and considers and decides upon the Organization’s budget, as submitted by the Board.

Who are the Heads of Delegation?

The Heads of Delegation to OPEC are the official representatives of each Member Country to the OPEC Conference. They are, therefore, normally Their Excellencies the Ministers of Oil, Mines and Energy of Member Countries.

What is the Board of Governors?

The Board of Governors, can be compared to the board of directors of a commercial company. The Board is composed of Governors nominated by Member Countries and confirmed by the Conference. The Board directs the management of the Organization; implements Resolutions of the Conference; draws up the Organization’s annual budget and submits it to the Conference

for approval. It also decides upon any reports submitted by the Secretary General, and submits reports and recommendations to the Conference on the affairs of the Organization.

As stated in Article 20 of the OPEC Statute, the role of the Board of Governors is to:

· Direct the management of the affairs of the Organization and the implementation of the decisions of the Conference;

· Consider and decide upon any reports submitted by the Secretary General;

· Submit reports and make recommendations to the Conference on the affairs of the Organization;

· Draw up the Budget of the Organization for each calendar year and submit it to the Conference for approval;

· Nominate the Auditor of the Organization for a duration of one year;

· Consider the Statement of Accounts and the Auditor’s Report and submit them to the Conference for approval;

· Approve the appointment of Directors of Divisions and Heads of Departments, upon nomination by Member Countries, due consideration being given to the recommendations of the Secretary General;

· Convene an Extraordinary Meeting of the Conference; and

· Prepare the Agenda for the Conference.

What is the Economic Commission Board?

The Economic Commission Board (ECB) is a specialized body operating within the framework of the Secretariat that assists the Organization in promoting stability in the international oil market. The ECB is composed of National Representatives from Member Countries, the Secretary General and a Commission Coordinator (who is ex-officio the Director of the Research

Division).

What is the Ministerial Monitoring Sub-Committee?

The Ministerial Monitoring Sub-Committee (MMSC) was established in February 1993 at the 10th Meeting of the Ministerial Monitoring Committee and given the mandate to monitor oil production and exports by Member Countries. The MMSC comprises three Heads of Delegation and the Secretary General.

What is the OPEC Secretariat?

The OPEC Secretariat functions as the Headquarters of OPEC. It is responsible for carrying out the executive functions of the Organization, in accordance with the provisions of the Statute, under the direction of the Board of Governors. The Secretariat consists of the Office of the Secretary General, the Research Division, and the Petroleum Market Analysis, Energy Studies, Data Services, PR & Information, and Administration & Human Resources Departments. The

Secretariat was originally established in Geneva, Switzerland, in 1961, but was moved to Vienna, Austria, in 1965. The 8th (Extraordinary) Meeting of the OPEC Conference approved the Host Agreement with the Austrian Government in April 1965, prior to the opening of the Secretariat on September 1, 1965.

Why does OPEC set oil production quotas?

The OPEC Statute requires OPEC to pursue stability and harmony in the petroleum market for the benefit of both oil producers and consumers. To this end, OPEC Member Countries respond to market fundamentals and forecast developments by coordinating their petroleum policies. Production quotas are one possible response. If demand grows, or some oil producers produce less oil, OPEC can increase its oil production to prevent a sudden rise in prices or shortfall in supply. OPEC might also reduce its oil production in response to market conditions as a means of countering falling prices or a glut on the market.

What is OPEC’s current production ceiling?

OPEC’s crude oil production ceiling and individual Member Country output limits are set out in the official OPEC quotas.

Can an OPEC Member Country change the rate of its oil production?

OPEC aims to stabilize the international oil market by ensuring a balance in supply and demand. In doing so, Member Countries are allocated production quotas. These are reviewed periodically in the light of market developments and a variety of other indeces.

Does OPEC control the oil market?

No, OPEC does not control the oil market. OPEC Member Countries produce about 40 per cent of the world’s crude oil and 15 per cent of its natural gas. However, OPEC’s oil exports represent about 55 per cent of the oil traded internationally. Therefore, OPEC can have a strong influence on the oil market. OPEC seeks stability in the oil market and endeavours to deliver steady supplies of oil to consumers at fair and reasonable prices. The Organization has achieved this in a number of ways: sometimes by voluntarily producing less oil and sometimes by producing more in response to a shortfall in supplies as occurred, for example, during the 1990 Gulf Crisis and the 2003 war in Iraq.

How does OPEC oil production affect oil prices?

The Oil and Energy Ministers of OPEC Member Countries meet at least twice a year to review the market situation with the objective of stabilizing it. Should their assessment indicate that demand will rise or outstrip supply, they call on Member Countries to increase production to meet demand. Conversely, when it is forecast that demand will lag behind supply, they take action to ensure a balance is maintained. However, when OPEC makes its production agreements, it does so with the expectation that non-OPEC producers will actively support the Organization’s measures, since this will make OPEC’s decisions more effective and to everyone’s benefit. The impact of OPEC output decisions on crude oil prices must be considered separately from the issue of changes in the prices of oil products such as gasoline or heating oil. There are many factors that influence the prices paid by end consumers for oil products. In some

countries, taxes comprise 70 per cent of the final price paid by consumers, so even a major change in the price of crude might have only a minor impact on consumer prices.


How does OPEC influence world trade?

OPEC has long been aware of the need for improvements in world trade. In 1975, OPEC backed calls for the creation of a new international economic order based on justice, mutual understanding and a genuine concern for the well-being of all people in the world. OPEC also called on industrialized and developing countries to come together, to solve the problems facing poor countries and to look for ways of establishing a better economic system by allowing increased trade and exchange of knowledge. OPEC Member Countries established the OPEC Fund for International Development in January 1976 to promote cooperation between OPEC Member Countries and other developing states and, in particular, to help poorer, low-income non-OPEC countries in their pursuit of social and economic advancement. The OPEC Fund is active in many regions, including Africa, Asia, Europe and Latin America. It has supported a wide range of projects, from providing clean water and energy to remote communities, to building schools, hospitals and roads, and developing industry, farming and trade opportunities. Since its establishment, the OPEC Fund has made commitments totaling nearly US$7.5 billion, two-thirds of which has already been disbursed. OPEC also plays an important role in promoting and sustaining world economic growth by ensuring steady supplies of oil at reasonable prices.

What is OPEC’s attitude towards fuel-efficiency?

OPEC is happy to see technological improvements that make transportation cleaner, safer and more efficient. The Organization would like more people to enjoy the benefits of personal mobility in an environmentally sustainable manner. OPEC has always recognized that crude oil is a finite resource, by managing it’s production the Organization aims at conserving this scarce resource so that many generations will be able to benefit from its use. During the twentieth century, oil dramatically transformed the world for industrialized countries, and is poised to do the same for the developing world today. Technologies that enhance fuel efficiency are, therefore welcome.

Does OPEC support environmental policies?

OPEC is concerned about the environment and wants to ensure that it is clean and healthy for future generations. In fact, all OPEC Member Countries have ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC). OPEC considers that technology development is important for limiting or reducing greenhouse gas emissions. In this regard, the Secretariat is exploring options to participate in international collaborative efforts in research and development programmes geared at improving carbon capture and storage (CCS) technology. OPEC member countries are also investing heavily to improve the environmental credentials of oil by tackling gas flaring and promoting safer and cleaner drilling, transportation and refining processes. In addition, OPEC participates in many international meetings to remind governments and others debating environmental policies that they must consider the needs of developing countries, especially those that rely on oil for their income. OPEC also supports sustainable economic development, which requires steady supplies of energy at reasonable prices. Many countries have introduced heavy taxes on oil products. In some countries, the price that motorists pay for gasoline is three or four times higher than the price of the original crude oil. Taxes can account for as much as 70 per cent or more of the final price of oil products. As a result of these oil taxes, some governments in oil-consuming countries (especially in Europe where taxation levels are highest) receive much more income from oil than OPEC Member Countries do. OPEC is concerned that many of the so-called ‘green’ taxes that are currently levied on oil do not specifically help the environment. Instead, they are simply added to government budgets and spent on other items. For instance, several industrialized countries are developing policies to limit the use of fossil fuels as a way of reducing their emissions of carbon dioxide (CO2). Many are already levying heavy taxes, particularly on oil products. Yet, studies have shown that the industrialized nations of the Organization for Economic Cooperation and Development (OECD) could cut their CO2 emissions by 12 per cent by 2010 and still maintain their tax revenues if they adopted a pro rata tax system that levied tax on all forms of energy according to their carbon content. OPEC is concerned that some countries may impose environmental and taxation policies that are harmful to those who rely on fossil fuels for a substantial part of their income. Some countries with high oil taxes actually subsidize domestic coal production, despite the fact that coal produces more CO2 than oil.

Can OPEC guarantee security of oil supply?

OPEC will increasingly be called upon to supply the incremental barrel. OPEC has both the capability and the will to do this. Around four-fifths of the world’s proven crude oil reserves are located in OPEC Member Countries. Moreover, these reserves are more accessible and cheaper to exploit than those in non-OPEC areas. In 2030, the OPEC Secretariat reference case sees the Organization meeting almost half the world’s oil demand with supplies of 59.1 mb/d including Natural Gas Liquids (NGLs). Only OPEC nations have significant spare oil production capacity, which is why they are able to increase output at relatively short notice. OPEC’s actions at critical times, such as during the Gulf War, the invasion of Iraq in 2003 and Hurricanes Katrina and Rita in 2005, demonstrated the Organization’s ability to keep the oil market well-supplied in the face of natural disasters and geopolitical crises. Expanding capacity requires substantial investment and a long lead time. For this reason, oil producers and investors are concerned about security of demand just as consumers are worried about security of supply. OPEC recognizes the need for massive investment in exploration, drilling, and the construction of pipelines and other oil related infrastructure. In fact, its Member Countries are investing to ensure a continuous supply of oil to fuel the engine of world economic growth. Consistency, transparency and certainty within the international oil community — as well as a broad-based, equitable approach — are needed to plan for the future in a manner that is in harmony with the requirements of the global economy. The industry is much better off if there is an underlying consensus on how to handle major issues such as price stability, security of demand and supply, investment, environmental issues and sustainable development. This is why OPEC welcomes and encourages the big advances in producer-consumer dialogue and cooperation that have occurred throughout the industry in recent years. Recent statements from major oil consuming nations about their resolve to switch away from oil, and to invest instead in alternatives such as renewable and nuclear energy are likely to prompt Member Countries to review their future capacity expansion plans. For, unless there is some guarantee of demand, oil producing countries will find it unwise to invest in expanding capacity.

Is there any need for security of oil demand?

Yes. Just as oil consumers need steady supplies of oil, oil producers rely on steady demand. If demand changes suddenly, this can have a major financial impact on oil producers, their economies and, by extension, the wellbeing of their people. Oil production is a long-term affair: the oil industry works 24 hours a day, 365 days a year, except for when disruptions are necessary due, for example, to maintenance or bad weather. Oil facilities require huge investments, and investors seek to earn a reasonable return on their capital. A downturn in oil demand could force oil production to slow down or stop. This could physically damage oil fields, reducing the amount of oil that can be recovered in the future. Oil installations could also be damaged. Some facilities, such as those operating in the oceans, are very difficult and expensive to shut down. When production declines, oil producers might be forced to lay off staff. Downstream operators, such as gasoline retailers, refiners and transport companies, could also be forced to cut back on personnel. If oil producers receive lower incomes, they spend less money and import fewer goods from oil consumers. If investors are unsure about the risks and the likely returns from petroleum investments, they may not make those investments. If producers do not invest enough money, or do not do so early enough, the world could face a shortage of oil supplies. However, if oil producers continue to see reasonable prices and stable demand, they will maintain their production and invest on time to meet the growth in demand. Thus, security of oil supply relies upon security of oil demand. Oil producers and oil consumers need to work together to preserve both.

No comments:

Post a Comment