Opec's El-Badri on the euro and oil dinosaurs

16 December 2008

Despite record revenues, oil cartel Opec faces some tough decisions, such as whether to abandon dollar pricing.

For Opec’s 13 members, 2007 was in many ways a golden year. The cartel increased its share of world oil production, while the cost of a barrel rose to $100, capping a remarkable quadrupling of prices in the past five years alone.

To many outsiders, the only real test for the cartel was whether it would invest its record $650bn windfall wisely. But with rising revenues have come other pressures, particularly for the cartel’s secretary general, Abdalla el-Badri, who only took on the position in January 2007.

Consuming nations led by the US have been pushing for Opec member states to increase the amount of oil they produce to help reduce the price of oil on international markets.

El-Badri acknowledges that Opec, as the public face of oil, is invariably blamed for high oil prices. Yet he argues that his group only has the power to dictate supply, which is not the only factor in its price.

Nonetheless, Opec’s critical role was made clear in early February after comments by El-Badri about the prospects of the oil cartel switching from the dollar to the euro. The euro quickly rose almost half a cent against the dollar to $1.4547 (MEED 8:2:08).

Pricing is clearly a contentious issue, but after working in the oil business for more than 40 years, El-Badri is proving to be a trusted diplomat to lead Opec through such debates.

Price fluctuations

The group has committed $150bn to boost oil production by 5 million barrels a day (b/d) by 2015. But as with the stock market, oil price fluctuations are often driven by traders looking to make a profit. “This is a free market, we can do nothing about it,” says El-Badri. “The fluctuations we are seeing at this time are not in the interests of anybody.”

The secretary general role was vacant for almost three years before El-Badri was lured from his previous job as chairman of Libya’s state-run National Oil Corporation (NOC).

An experienced oil man, El-Badri remains alert to the fact that while strong global demand and high prices are driving economic growth in many member countries, Opec faces a series of difficult economic issues.

Perhaps the most immediate is the slowing US economy and whether any financial malaise will spread to two of Opec’s key markets: China and India.

El-Badri says he is not too concerned about the likelihood of a recession in the US, despite the recent downturn. “We do not see a crash in the US economy and we don’t even see a recession,” he says. “We may see a slowdown [but] I hope what we are seeing at this time is just some kind of bubble.”

He does, however, concede that world economic growth will slow down, although not by as much as some fear. “Last year, growth was about 5.3 per cent for the world as a whole, and this year we are forecasting 4.7 per cent,” he says. “Even now, we are hearing 4.1 per cent, but I don’t think 4.1 per cent is realistic. I think it is too low.”

Forecasting demand

While that drop alone will not hurt Opec members, El-Badri is exasperated about the effect the negative economic outlook is having on Opec’s ability to forecast demand.

“The world, the US and the EU are constantly concerned about the security of supply, and we are with them,” he says.

“However, at the same time, we are saying it is a two-way street. Let us see how much we can depend on your forecast as far as demand is concerned. They will never give us the exact numbers.”

While Opec’s five-year target of adding 5 million b/d is a “fact”, according to El-Badri, the cartel forecasts it will need to produce 32-41 million b/d by 2020 to satisfy demand - a range of 9 million barrels. In investment terms, Opec members will have to commit about $230-500bn to meet these targets.

“That is why we need to see where demand is,” he says. “If we know the trends, we can forecast, we can invest, we can add more quantity, so we can have extra capacity for when there is a crisis.”

This need for greater clarity in the market is a theme that El-Badri refers to several times. It is, after all, an important factor in the way oil prices are determined.

Another factor, and one of the key issues at Opec’s third summit held in Riyadh in November, was the rapid rise of a new type of oil trader, run by hedge funds, which are seen as partly to blame for sharp, volatile shifts in the price of oil. In 2007, hedge funds and other speculative investors were responsible for one-third of all trades on the Intercontinental Exchange, a key market for setting oil prices, up from 0.2 per cent of trades in 2002.

While Opec held a workshop with the EU on this issue in 2007, El-Badri says it is not up to the oil organisation to seek more regulation in this part of the market.

Sharing guidelines

“We looked at the impact of financial markets on the oil price [and] saw that there was an effect, and of course we are not really trying to eliminate it,” he says.

“However, we are saying [to the market] ‘share with us some guidelines’. At this time, there are no guidelines, it is just open for everybody. Opec cannot do it. There is no way that we can [make guidelines]. We will just take the consequences.”

While Opec takes a cautious stance over such issues, it is not timid about taking tough decisions elsewhere to benefit its own members. The declining US dollar, which Opec uses to price almost all its crude, is a source of contention in the group, and a decision on this issue could be made soon.

Iran and Venezuela used the Riyadh summit to highlight the cost of sticking with the dollar, saying they would prefer to switch pricing away from the US currency. Saudi Arabia, aware of the controversial nature of such a move, urged Opec members to hold such discussions in private, to avoid the risk of weakening the dollar even further.

El-Badri indicates that an eventual switch to the euro could take place, although the cartel is unlikely to move too quickly. “It will take some time for the euro to come and maybe we can price the oil in the euro,” he says. “It can be done, but it will take time.”

It would not be the first time Opec has made such a change. In the 1970s, it changed its pricing from a basket of currencies, including sterling, to just the dollar.

Asked if any new switch could take place within a decade, El-Badri says: “Yes. [The switch] from the pound to the dollar took too many years.”

One compromise suggested by many commentators is for Opec to move to pricing its oil with a basket of currencies, giving it a built-in cushion as different currencies fluctuate. El-Badri says asking its customers to pay in a mixture of currencies can be done, but the real change needs to be in the underlying currency in which oil is traded on international markets - the dollar.

“If we want to be brave, we can ask any customer to pay in 20 per cent euro, 30 per cent yen, 10 per cent dollar,” says El-Badri. “You can do that, but that does not mean you are pricing your oil in different currencies. As long as we see the sign in dollars, that means the pricing is in dollars.”

Any switch away from the dollar would be the biggest decision Opec makes during El-Badri’s time in office. But even as it is being debated by member states, there are other, more prosaic issues that also need to be dealt with, such as rising costs.

As well as adding 5 million b/d of oil by 2013, Opec states are expected to add 3 million b/d by 2012 from a series of crude refinery projects. El-Badri says he is not concerned about the ability of member states to meet these production targets, despite cost inflation.

“As far as the exploration - the seismic and the drilling - they will do it anyway even though [costs are] really rising tremendously,” he says. “Everyone is developing and everyone is increasing their capacity.”

But he is cautious about expectations for the construction of new oil and gas facilities in the Middle East.

“The construction itself - that is where you have the hiccups,” he says. “The LNG [liquefied natural gas], the refineries and also the construction of production facilities will take more time.”

Analysts estimate that in the past two years the capital required to build production facilities has doubled, and lead times for equipment and technology have increased.

El-Badri says the effect of this will be experienced by all Opec member countries. “Instead of finishing a project in maybe five years, it will take maybe seven or eight,” he says. “Everywhere there is a delay on projects.”

Many of these projects rely on the input of international oil companies (IOCs). In January, El-Badri described these companies as “the real dinosaurs” of the oil industry, although he conceded their philosophy had begun to change in recent years.

Contentious relationship

The description highlights the often contentious relationship between the oil majors and national oil companies (NOCs), who currently control more than three-quarters of all global oil reserves, but who often need the management skills and technology that IOCs can offer.

While El-Badri laughs at the ‘dinosaur’ reference, he says the relationship between the two sides is “mature”.

“The time has come to co-operate,” he adds. “I advocate joint ventures between NOCs and IOCs in upstream and downstream. I hope [these partnerships] will expand.”

While he would like to see this partnership model rolled out across all member countries, he refuses to comment on specific examples. He says giving access to Saudi Arabia’s reserves, for example, remains an issue for the country itself.

“Every country has its own policy,” he says. “I cannot influence it.”

While Opec countries are enjoying record revenues, El-Badri remains cautious and suggests they should develop their non-energy sectors while oil prices remain high.

“I think the time has come for all member countries to find another source of income,” he says. “They are developing countries so they try to develop themselves. Now it is about time [for change].”

While its members weigh up such moves, the biggest challenge facing Opec and El-Badri is whether to sanction a change from the dollar.

Abdalla el-Badri - career history

  • 1965 - Joins Esso Standard (now ExxonMobil) as as assistant accountant

  • 1983 - Becoms chairman of Libya’s National Oil Corporation(NOC)

  • 1990 - Appointed secretary of Energy and Electricity Ministry

  • 2000 - Named Libya’s deputy prime minister for services, including education and health

  • 2002 - Promoted to deputy prime minister

  • 2004 - Re-elected chairman of NOC

  • 2007 - Appointed secretary general of Opec

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