Details

When

November 7, 2005, 9:00 am - December 18, 2018, 10:51 pm

Where

1761 N Street NW
Washington, 20036 (Map)

The panel discussion "Where Will the Energy Come From" took place at the 59th annual conference in November, 2005.

Featuring:

Hermann Franssen, David Goldwyn, Raad Alkadiri

Introduction:

Hermann Franssen

Adjunct Scholar, Middle East Institute

This session will be on oil, the lifeblood of our modern society, the lifeblood of Middle East economies. If it were not for oil, science and technology, we would not be where we are today. It just happens to be a fact of life that 60 percent of that oil that we so depend on in our modern economy is in the Middle East.

We have three presentations today. The first one is by David Goldwyn, who heads Goldwyn International Strategies. You’ll find the bio data in your handout. He will talk a little bit about the general issue of oil and then more specifically about Libya. Then I will follow with a little talk about the general oil situation as I see it and the importance of the Middle East in it, and then a little bit more about Saudi. Then the third speaker will be Raad Alkadiri, who is the director of the Country Strategies Group at Petroleum Finance Corporation, who will focus exclusively on Iraq. So we’ll get three important countries that will be handled by this panel.

The first one will be David Goldwyn.

First Panelist

David Goldwyn

CEO, Goldwyn International Strategies

Good morning, everyone. My thanks to the Middle East Institute, Ned Walker and David Mack for inviting me today. It’s a pleasure to share the panel with such experts as we have here. Raad, if I’ve stolen any of your slides, thank you.

I want to make five points today. I know there are energy experts and non-energy experts in the audience, so forgive me if I’m over-detailing or over-simplifying. But the points are essentially there. That the world is going to need a lot more oil over the next 10-20 years, just assuming that we have global economic growth about the way it’s been for the last 20 years. The investment needs to get that, find that oil, develop it and get it to market are going to be huge. If the projections on the non-OPEC part of the world are even half-right, the call on OPEC, the amount of oil we’re going to need from OPEC, is going to be huge. The question is, can they deliver it? I think the answer is, maybe not. Those countries within OPEC, and outside frankly that have a competitive economic framework that can attract the capital they need to develop, are likely to deliver the market. Those that don’t, won’t. I’ll talk about Libya as an example of one that has right now a framework that is competitive.

There’s two kinds of producers in the world. There are the ones that have lots of reserves and produce a lot, and there are the ones that have lots of reserves and don’t produce as much as they can. You can see on the reserve holders who the top ten countries are in the world in terms of oil reserves. But if you look at who the top ten producers are, they’re different. The primary reason for that is OPEC, because some countries choose as a matter of strategy to restrain and prolong their reserves. So you see countries that are in the top ten like Kuwait and the UAE, top ten in reserves that are not in the top ten in terms of production. You’ve got Norway, Mexico, Canada and UK, which don’t show up in the top ten on reserves but are the top ten in production.

So the real question isn’t so much where’s the oil, but who’s going to produce it.

This slide is a projection of what the world’s going to need in 2030. It more or less assumes we’ll have 2.0-2.2 percent global economic growth. The third column should be 2030, not 2003. You can see that if we’re using 75 million barrels of oil a day right now, we might need 128 million barrels a day, assuming there’s no huge change in technology or greater increase in world demand. And probably double the amount of natural gas. If you translate that into how many dollars does it take to find and develop that oil, we’re talking hundreds of billions of dollars every year over the next 20 years.

If projections about non-OPEC — the Caspian sort of peaking in 2015, Gulf of Guinea peaking about 2015 — are true, then OPEC’s market share, the call on OPEC to supply the market because they’ve got the reserves, is going to be at 50 percent in 2030, but you see it’s basically increasing over time as the non-OPEC reserves we know about right now decline.

So the key questions are going to be for OPEC in particular, where’s the money going to come from? Are they going to use their own money to invest in exploration and production or are they going to use somebody else’s money, in the sense of the international oil companies? If they are going to use somebody else’s money, is the country stable enough so that oil workers want to work there and people want to invest there? Is the regime that they have for investment enough so that companies won’t get punished for cutting a deal with them by having their stock prices marked down? Is the commercial framework one that is going to be attractive?

The challenge for these countries is going to be huge because if we are going to meet those demand figures I showed you — this chart shows basically where countries are now, where now I think is 2004, where they need to be, and how much growth would be required.

Saudi Arabia is going to 16 million barrels a day by 2030. That’s pretty huge growth. Look what Iran has to do to go from 4 million to 7 million. Iran hasn’t seen that kind of growth with the framework that it’s had in decades. Iraq — Raad will talk about Iraq, but the idea of any growth in Iraq right now seems more of a very long-term dream. Then you have questions in terms of political stability on some of the others.

So we’re talking about really huge amounts of money, really huge amounts of growth, and there’s just frankly a lot of skepticism about whether or not that’s going to happen.

The lesson that we’ve learned over the last ten years is that most OPEC countries increase their production when they partner with international oil companies. So you see 30 percent of the — that’s the IOC participation in OPEC oil production has grown over the last few years. So you see some of the countries that are really growing fast — Algeria, Qatar and soon Libya — are ones that partner with IOCs.

Of the other OPEC countries, the only company, the only country that has increased its capacity without using international oil companies is Saudi Aramco. Nobody else has done it. So either that’s going to happen or it’s certainly grounds for insecurity.

Which brings me to Libya. Libya could be a strategic player in the oil markets. It certainly has the reserves — 39.1 billion in proven reserves, which is about the size of Nigeria or Kazakhstan. But their production is a million barrels a day below at least Nigeria right now. They’re at 1.48 million barrels a day now. They’ve got a lot of gas as well. But they’re very much under-explored and underdeveloped, and part of that’s because of sanctions and part of that’s because of the Libyan revolution, which was probably the number one reason why Libyan oil production declined. Revolutions do a whole lot more to decrease production than sanctions or anything else. People kind of fled and didn’t come back.

So the potential is huge. Libya’s goals for growth are tremendous also. They want to go to 3 million barrels a day by 2010, but they want to go to 2 million barrels a day by next year. They’ve got a very ambitious drilling program, 50 wells a year for the next 10 years. They plan on increasing their reserves by 50 percent — or they’ve actually seen an increase in their reserves of 50 percent between 2005 and 2010. There’s a lot of investment there. Libya is going to be pushing for an increase in its reserves not just to show the world what a big producer they are but so they can bargain within OPEC for increased production. They’re looking at many more rounds for investment, refinery upgrades. They’re going to require that a third of the production in Libya be refined for the European market. So they’re going to be pretty strategic to the global market.

Their investment model is pretty good and they do things two ways. One is this EPSA-4, that’s the Exploration and Production Sharing Agreement. That’s sort of an open tender process. The other is by bilateral negotiations. The EPSA-4 model, by world standards, was quite competitive. It’s production sharing — companies get to bulk reserves, they like that. It was a transparent process, essentially you bid the shares that the government got to take, and if there was a tie then the bonus broke the tie. So that’s put in your bid, open the envelopes — a here’s who won kind of a system. That’s pretty transparent and that’s the kind of thing at least the US government encourages countries to do.

That’s one model, and that’s really for the long-term oil, because all of those projects will take 7-10 years to produce.

The other model is the bilateral model, which is to negotiate across the table with a company either for integrated deals, and that’s if you’re going to have production but you’re also going to have refinery downstream, or for enhanced oil recovery, which is to increase your existing infrastructure and your existing fields and get more production. Libya has been under sanctions since 1986 so you can imagine the state of their infrastructure right now and the potential for increasing production.

The EPSA-4 part of this has gone pretty well, and I’ll show you some of the winners in the next couple of slides. But the bilateral model has gone less quickly. Shell has closed an important deal for LNG. Oxy has reentered and actually already increased production this year. But Oasis and then there are rumors about BP and Anadarko and Total, there are rumors of these companies negotiating with the Libyans but not a lot of movement yet. I’ll come back to what that means for their role in production in a minute.

In terms of EPSA-4, the first round, the big winner was Oxy, where they were the operator in many blocks. The other US winners that were significant are Chevron-Texaco and Hess. In the first round companies got to bid a decent share for them to keep of the production and they had bonuses that were sort of reasonable or standard.

In the second round that Libya had, there were a lot more bidders. Exxon Mobil was the only US winner. Here you see a lot more national oil companies and a lot more smaller players won.

There are three things of significance here. One is you see India, Pertamina, BG, ENI, CNPC — you see a lot of national oil companies and European companies in there. The production share, which is the amount that the companies get to keep, was significantly smaller in the second round than it was in the first round. And the bonuses were higher. So from Libya’s perspective, they’re doing better. Competition is very fierce. They’re one of the few places that’s open for investment. So they’re doing all right.

But the real significance is that because these EPSA-4 deals are all about 7 to 10 years from now, the real decisions in Libya – which is, what’s it going to do for the next 7-8 years? — remain to be made, because those deals are going to be done probably across the table, although they’re talking about what they call a DIPSA round, a development production sharing agreement, which is where you’d have a tender process for people to come in and negotiate to increase or enhance existing fields. From a market perspective it probably doesn’t matter which way it goes as long as it goes quickly. So the real increase in Libyan production over the next 7-8 years, real cash flow to the regime, is going to come from enhanced oil recovery and from infrastructure improvement. All of those negotiations are still open now.

The constraints on whether they’re going to succeed or not are several. One is there’s an awful lot of companies that want to do deals with Libya and not an awful lot of Libyans to do deals with. The capacity is pretty thin. You have a bureaucratic problem in that you had the national oil company and they eliminated the energy ministry. A couple years ago the General Peoples Congress put back the energy ministry. So now, in terms of people who are going to decide whether you’re going to do a deal and even how you’re going to do a deal, you’ve got the national oil company, you’ve got the energy ministry, you’ve got the prime minister, and then you’ve got the General Peoples Congress. You’ve got probably a lot of people who liked things the way they were who wouldn’t like them to change. So what this means is decisions aren’t getting made.

The other constraint, which is really mostly for US companies, are the state of the rapprochement with Libya and the continuation of Libya on the terrorism list and the sanctions that go with it. The issue for the US companies is their cost of doing business is about 30 percent higher than their European competitors, mostly because of the paperwork they have to do to get licenses for their equipment. But the other thing is that for the US government, rapprochement, Libya coming off the terrorism list, is all about national security: is Libya going to do what the US has asked or not? The commercial consequences are frankly not of importance. For Libyans, that’s not the case. For the Libyans, they see the relationships with US companies as the vehicle in order to move the US government. This is not well founded. But it also means that the ability of US companies to do these bilateral deals is difficult. The pace of negotiations is difficult and these days it’s even difficult to get visas to go to Libya.

So the state of that rapprochement, the way the United States relates to Libya, Libya’s own performance in meeting the concerns that the US has expressed, will really tell whether Libya is going to rapidly increase its production over the next year or so. It will certainly determine whether US companies are going to play a major role or whether that’s going to be deferred a year until the bilateral issues are resolved.

But the one thing that is clear is that Libya is on a path to be a competitor. It will be a competitor within OPEC for more quota. It will be a competitor on the world market in terms of increasing production. It has adopted a framework that is going to put it at the front of the pack in terms of increased production for the market. I think that will have ripple effects in OPEC and will have ripple effects strategically. Libya will be very important as a gas supplier to Europe and that will play in the politics. How the US and Libya get along and how they play in the world market and whether US companies play a role there remains to be seen.

Thank you.

Another Speaker:

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Moderator's Commentary

Hermann Franssen

Adjunct Scholar, Middle East Institute

Thank you very much, David, for an excellent lead-in to the overall and the Libyan situation.

I will go very quickly through the first part and then go through basically what I’m supposed to talk about a little bit more, Saudi Arabia.

First of all, I think it’s quite clear where the goodies are — 60 percent of the world’s oil reserves are in this area. Nothing will change this. Whether we like it or not, that’s where it is, and 40 percent of the gas. It happens to be areas that are relatively low-populated so there’s an awful lot of that oil is available for export. If that happened to be in China — if all this oil were in China — forget about the export market, because they would consume it themselves.

This is basically the kind of infrastructure. It also shows that Saudi is the key actor, because it has all the spare capacity. Nobody else has spare capacity. Unfortunately in today’s market the spare capacity they have cannot be utilized because we don’t have the refining capacity to run the kind of crude they have left in their system. Part of today’s problem in the oil patch is the downstream sector, the refining sector, where we can’t really turn the kind of crude that is left in surplus, which is in Saudi Arabia, in our refineries and turn it into low-sulfur products. We just don’t have that capacity. That problem will probably be with us for the next five years, so whatever happens in the crude oil market and the refining market, it will remain a serious problem for several more years to come, until somebody decides to add more capacity in the refining sector.

Then the Atlantic basin, which is the United States and Europe and that, we don’t expect that anybody is going to build new refineries. So it has to be in Asia and it has to be outside of the OECD countries to export it to our countries.

Saudi Arabia is obviously key. Saudi Arabia, when you compare it with NATO, you have Luxembourg in NATO and you have the United States in NATO. One is a 500-pound gorilla, the other one is the rhesus monkey. We have the same within OPEC. Saudi Arabia is the 500-pound gorilla and then you have a couple of hundred-pound gorillas and then you have some rhesus monkeys. You have one in there that’s just hanging in there because it’s actually a net importer of oil at the moment, it’s kind of on the balance.

So Saudi Arabia, 25 percent, at least as they listed, of the global reserves, 11 percent of production — can do more, will do more. It has been basically the two pillars of oil supply security in the past 25 years have been the IEA for short-term and Saudi — whenever there was a problem, Saudi had the spare capacity, put it on the market, kept oil prices reasonable. Played a perfect role, was this very nice alliance we had with the Saudis. We give you security, you give us oil at a reasonable price. It worked perfectly until 9/11.

They have done their job and even after 9/11, in 2004, when the Venezuelan strike, the Saudis came to help and put more oil on the market, and prices came back to a more reasonable level. The same in 2003 during the US invasion into Iraq — again Saudi came to the rescue. But then by 2004 they ran out of spare capacity so right now there is no spare capacity in the system.

But Saudi was, is and will be the key to oil supply security and reasonable oil prices, whatever that is. Most people would not consider $60 oil, which we have today, or $52 for the OPEC basket, reasonable but it all matters what you consider to be reasonable. That’s the market price. My own guess, and I will just say that for the record here, I think there’s a very good possibility that in the next couple years oil prices will come down. The main reason is that we may see a new spurt in non-OPEC production coming out in 2007-2008, and we may have two things: perhaps a global recession or a significant slowdown in the economy over the next couple of years, and we may see also the impact of $50-60 oil on the global economy bringing demand growth down somewhat. But that does not change the overall picture longer-term.

I just want to point it out so people don’t come back and say if oil prices were to come down to $35 in 2007 — hey, you told us that supplies are going to be tight. I think the market is still cyclical but the basic trends are upward.

Here shows again Saudi had the spare capacity — they didn’t do that on purpose, it happened to be developed in the 1970s when oil consumption was rising at 6 percent per year. They built that capacity but they used it wisely over that period. Subsequently we have benefited greatly from that. Now we have no more spare capacity. Saudi is expanding capacity so hopefully we may see some growth in spare capacity in the years to come.

With changing market conditions, as I mentioned, there’s also changing political conditions. We cannot say that the war in Iraq was fought for oil but oil certainly was one of the many components. We had at that time, you may recall, some of the neocons, particularly in the academic institutions, talking about Saudi being the kernel of all evil. We had to get rid of Saudi and we had to diversify our supply. We were to move into Iraq, privatize the oil sector, and in five years’ time Iraq would rival Saudi Arabia as the main producer. Unfortunately that did not work out. Iraq today is producing 40 percent less than under the end of Saddam’s regime.

In the end, what we have achieved? We’re actually more dependent. The world is more dependent on Saudi oil than ever before and will continue to be very dependent on Saudi oil for decades to come.

So we have to remember when we make all these analyses that the world needs this much oil — this is their oil, it’s not our oil. These countries will decide what they produce, what is in their enlightened self-interest.

I should also tell you that it does make a lot of difference who is in control. We have seen during the Iranian revolution — just before the Iranian revolution, Iran was the number-one global oil producer at 6 million barrels a day, and the two decades average after the Iranian revolution, production was 50 percent of what it was under the Shah.

We have also seen — also remember then for the record, the case of Kuwait, which has the most democratic regime in the GCC. They have been discussing at least since 1998 seriously with the parliament to bring in the Western oil companies in the northern fields. Still no resolution. So democracy doesn’t mean more oil. Democracy could in fact mean less oil. So we have to remember that. Regime change might be not to our benefit as far as oil prices are concerned and may actually work against us.

The House of Sa’ud, whether we like it or not, has done a great job for the Western world in terms of making oil available at reasonable prices for the past 25 years. They’re working on it again to add capacity to make this possible in the future.

So the key long-term issues really that you have to say are in this world of oil. Out of the 6.5 billion people in this world, only a billion people have really greatly benefited from the world of oil. Five and a half billion people really have benefited. China and India today, which are the two emerging giants, consume 2 barrels per person per year. We consume 26 barrels per person per year. Just to get China to go to the level of where Thailand is today, they need 16 million barrels a day of oil. Today they consume 7. If they want to go to Taiwan’s level of oil consumption, they will need 49 million barrels a day, which is more than half of today’s world’s production. So where will these countries go? How will they develop? Can they develop on $50-60 oil? Big question mark that nobody knows.

All these models we and others show you — David showed it again — we need 120 million barrels a day by 2025. Need? What’s need? Need comes out of a model at a certain price. The market always balances, whether we get 120 or 100 million barrels a day, the market always will balance.

I call it my caviar example. Every time I go through Heathrow Airport, I look at the price of caviar. The price of caviar — there was a time 30 years ago when Herman Franssen could eat caviar. Today you go to Heathrow Airport and you see that one kilo of caviar is almost $2,000. Is there a shortage of caviar? No. If you’re willing to pay the price, $2,000, you can get all the caviar in the world. Until the last sturgeon will be there, there will be caviar, but at what price?

So the question we are talking about, how much oil will be available at what price? There is the Energy Department’s assessment, reference case on the 20 million barrels a day. What David said. They always have a low-growth scenario, but then it comes out of low economic growth and higher prices. One of the reasons why you’re going to have high growth is, look here, there’s a chart of vehicles per thousand people. Look at the big gorilla on the top — that’s us. Look at the little one at the bottom who wants to become like us — that’s China. So the Chinese car market may go up from about 20 million to 120 or 160 million by 2025. When all these Chinese are going to drive cars, Exxon Mobil and everybody else will be very happy if they’re in that market.

This is the problem on the supply side. Sadad Al-Husseini, the former executive vice president of Saudi Aramco, produced this. What unfortunately happens, people look at more oil coming out of this and that country. But there is depletion of existing reservoirs. That is this nice green line. That’s a 3-5 percent decline in existing fields. Over a 25-year period, that goes down very quickly. So by 2025 we would need basically the equivalent of ten Saudi Arabias to meet that demand that the DOE is telling we need by 2025. You’re going to have ten new Saudi Arabias? I don’t know where they’re going to come from, but that’s what you would need to get 120 million barrels a day. Even the most conservative companies in our area, which is Exxon Mobil, the most successful major in the world, they project that non-OPEC production is going to plateau. Even if you include natural gas liquids, which is liquids that come with oil, and even if you include Canadian tar sands — the whole shebang, all together — you see it’s plateauing in the middle of the next decade.

Where does the growth then have to come from? OPEC. Thirty million barrels, 40 million barrels, 50 million barrels? Is that possible? Will it happen? It’s their oil, it’s not our oil. We know very little about it, whether it can be done or will be done.

This is what happened to the reserves in these countries. Can we rely on these reserves? See how they jumped up in 1987 in all these countries without any drilling activity. So the reserves in many of these countries are suspect. They’ll watch, but they’re not SEC type of reserves. Here you see for Saudi, the Aramco perception and an independent consultant, Mr. Zagar, who was a consultant to Aramco, a different view.

So there are different perceptions. It also depends whether you believe they are SEC type of estimates or whether there is a lot more “I believe in it.”

This is a very complicated one but basically Sadad Al-Husseini, the former executive vice president of Saudi Aramco, is basically saying forget about huge incremental production coming out of the Middle East. It’s not going to be there. Saudi has huge reserves, it will produce more oil — it’s almost guaranteed that the additional 2 million barrels that the Saudis promised us will indeed come on stream. Saudi will be producing probably 12 million barrels a day, whether it’s 2009, 2010 or 2011, but somewhere in that period, depending on whether they can get the right set of people. They will have that additional capacity.

But what about the others? There are great doubts about them. Iraq, we had the previous session. We’ll hear further from Raad. Lots of potential but it’s extremely unstable and no major investments will go in there until that changes. The others? There’s really not much opportunity for significant growth.

So if you basically add that up — this is based on the Saudi side. This is, again, a picture that Sadad Al-Husseini produced at the Oil and Money Conference. He said they can comfortably produce 10 million barrels a day, which is the current level of production of capacity, until 2045. They can go up to 12, which I think Saudi will do, and go up to 2035. After that we need to add some new reserves. Saudi Aramco argues they can go much longer than that, they can even go to 15 million barrels a day for 50 years. But again, that deserves — I think up to 12 million barrels a day, they have made a very good case to the world, in great detail, field by field, where it’s going to come from. So we can basically accept that as a given.

But beyond that, it gets back to what I call the Nicene Creed versus Descartes: I believe versus I can prove. In my business we have too much “I believe” and not enough “I can prove.” If our future depends, and I believe it does, on the availability for this world of oil at reasonable prices, we have to move from the Nicene Creed to Descartes. We have to not only believe, we have to prove. I’m not yet there and I think we’re probably going to see — I agree with Sadad Al-Husseini on that — we’re not going to see the high numbers that DOE and others expect us to get out of that part of the world.

Aside from the purely technical issues — I’m neither a reservoir engineer nor an active petroleum geologist, so I cannot determine — these will have to be determined by people who are expert in this area. But aside from the purely technical ones, there are a lot of non-technical issues. The conservation issue. These are not oil companies, these are countries that have no other source of income but oil or gas. They’re not going to produce the oil quickly like in our company, at a peak, a short plateau, a decline. They’re looking at 30 years at least of plateau in order to provide long-term job opportunities and income for their people. All of them are going to do that.

Then the issue of backward-bending supply: What is the interest for Kuwait or Abu Dhabi to increase production? What are they going to do with the money? Buy more fighter aircraft or whatever? There’s just not enough they can buy with that kind of money that they are earning. So there is that issue.

Then there are a lot of other issues. We look at this in the absence, when we look at these scenarios of the future, the absence of domestic political and international political issues. We need this much oil. Look at these countries’ demographies, the serious problems they’re going to have in finding jobs for huge numbers of people. 50 percent of the people are at age 20 or younger. Huge unemployment problems that in turn, again in Saudi, relate to the education. Dr. Kechichian from the RAND Corporation wrote in one of his papers that only 3 percent of Saudi graduates from universities can actively participate in the private sector. That is probably why up to 90 percent of the private sector workforce are still foreigners. It’s going to take time to turn it around. I think Saudi has a very good new ruler who is bound to bring about reform. But we have to see whether the reform will be accepted and whether it will in fact be introduced. High income may not be working in their favor.

Then there are the external issues, both in Saudi and others. I completely agree with the previous panel. If we were to go out of Iraq today without having solved the security problem, we create first of all a complete vacuum. We will make it difficult for Saudis and others. They will have to accommodate to Iran and to other actors in the region. They will then have to move themselves increasingly from the United States at a time when the world is going to depend much more on their oil and other oil in the region. The role of Iran in the region will have to be redefined. The future of Turkey, Palestine, the Kurdish issue. The regional spread of fundamentalist Islamic movements. Our role in the Middle East, whether it’s positive or negative, naïve or realistic.

All this is part and parcel of the outcome of this oil picture. So it’s not a simple “we need this oil and they’re going to produce it.” It’s far more complex and I think deserves a great deal more of our attention.

The third speaker is Raad Alkadiri, very well known in this area. He is originally Iraqi so knows his native country well, and he will speak on Iraq, which is after Saudi Arabia the next largest country in terms of oil potential in the world.

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Third Panelist

Raad Alkadiri

Director of the Country Strategies Group, Petroleum Finance Corporation

Thank you very much. It’s a great pleasure to be here. Thank you, MEI, for inviting me to speak.

There are upsides and downsides to going third in a panel like this. The upside is you know you actually don’t have to talk about oil because it’s going to be covered expertly by the two speakers who’ve been up earlier. The downside of course is they steal all your best one-liners. You have to completely rearrange your speech. Having said that, let’s see how this goes.

Herman said something that I’m going to absolutely disagree with, and that is that the war in Iraq was about oil. Or at least, if it was about oil, it is possibly the most inept performance of the US and the UK in Iraq rather than anything they should be proud of.

If you look at the oil picture, and it’s just something to throw out at the beginning of this speech because it underpins everything else that I want to say — if you look at the picture comparing oil production in January 2003 and then looking at the postwar production profile, what you can see are two things that are evident. One is that prewar production hasn’t been met, since the levels have been dropping. Herman mentioned it. More importantly perhaps for where we’re looking at things now, the trend line has been downwards. If you look at the case really for the last year and a half, almost two years, the trend line in terms of Iraqi exports has been heading south, not north.

I put up rather naughtily — but given Dr. Brzezinski’s speech on Wednesday I figured I could get away with this — the Administration’s assumption for the end of 2003, at least as expressed by Vice President Cheney in the middle of 2003, when he said confidently that by the end of the year Iraqi production will be 3 million barrels a day. I would also add that in terms of the present Iraqi government and the thinking that they are using, oil production by the end of next year they hope to have at 3 million barrels a day, with exports up to 2.5 million barrels a day.

What either of those two assumptions were based on is hard to see given the reality of the situation. The first and most evident problem that’s there is a problem of security. Put very simply, neither the CPA, the US and UK military, nor indeed the present Iraqi government has been able to stop insurgency attacks on oil infrastructure. Those attacks have continued apparently sort of at will by insurgents. A variety of different groups have been involved with them.

But if you look at the area around Kirkuk and you look at that sort of little circle there, it’s worth pointing out that roughly 80 to 90 percent of the attacks that took place last year, as far as I know, actually took place within a 15-kilometer period of pipe. That is what hit exports hardest last year. You had problems below ground appearing in the south and the north over time, but the single issue that has dogged exports out of the north at least, and therefore dogged exports in production overall, has been attacks on those areas.

One would ask, how is it that a 15-kilometer series of pipe can’t be defended? That’s a very good question. But there have been problems all along in terms of getting effective security forces up there, in terms of getting and being able to deal with the security situation throughout this network. But then again remember that a 3 or 4-kilometer period of the road from Baghdad to the airport hasn’t been secured in the last two and a half years, and you begin to put things into perspective.

Beyond security, and security is a very easy reason as to why the oil production in Iraq and the oil sector in Iraq has suffered, beyond that I think you really need to move across and look at the area of politics. Politics has been as much an important factor in undermining the Iraqi sector since 2003 as security has. In terms of long-term problems, arguably it is a bigger problem.

The sector has underperformed, quite frankly, because politics has dominated the thinking rather than technocratic efficiency, rather than thinking that goes directly into the mindset of oilmen and oil producers. You’ve had a politicization of the ministry that’s been intense, where various political parties that have come in and created the new political elite in Iraq have wanted to have their influence in the ministry. You’ve had as a result a diminished role for technocrats. Actually what you have seen is some of Iraq’s best and most experienced technocrats being moved out or certainly being demoted either as a result of this politicization, that they are apolitical or at least have had things to say about how the ministry has been run, or as a result of de-Ba’athification.

There has been corruption on a very large scale, some of it reported, most of it not, but corruption on a scale that’s beginning to hurt how policymaking has taken place.

That policymaking has also been hurt by a regionalization factor. The fact that you have the Kurds taking decisions on their own and arguing that they have every right to. The fact is that in the south there has been a movement for greater autonomy. All of those things have interrupted policy and policymaking. Let’s face it, you’ve had three governments. You’re about to go into the fourth postwar government. Each time you’ve had a government put in place, individuals have been moved around, new ministers, new senior technocrats have been brought in — all of which has hurt the effective strategic policymaking that the Iraqi sector needs.

Finally, in terms of bringing outsiders in, there’s an uncertain operating environment. Put very simply, you’re not going to get IOCs moving into this environment.

So what is this going to look like over the next one or two years at least? What is going to change this?

Fundamentally what you have to do first and foremost is deal with Iraq’s political and security question. That’s about achieving two things. One is, and it’s the one I think we forget most looking from the outside in, is having an effective government. One of the things that has dogged the transition and certainly along the way has hurt support for the transition among Iraqis, has generated a new breed of Iraqis that certainly often in government circles are called POIs — pissed-off Iraqis — Iraqis who are disengaging from the process. A funny name but one that ultimately will underpin whether this is a success or not. As governments have failed to deliver on security, on services, on creating jobs and boosting the economy, the sense that you have anything to back, you have anything to support in this process has been undermined. That has added to a sense of disenfranchisement that really early policies of the Coalition introduced in Iraq. This really simplistic mindset that the Coalition has brought into Iraq in terms of seeing it as three monolithic entities and believing that if you can just bind the leadership of each of these entities and balance out their positions in government you have a solution to Iraq. Those two things have done more to create popular opposition and more to create an environment in which violence is certainly possible, if not necessarily supported, as anything else.

So how do you escape this circle of instability? That’s the key issue, I think, in terms of the Iraqi oil sector and Iraqi stability more broadly. It’s going to be about political maturity between the opposition parties, the insurgents and indeed the Iraqi political elite, and at the same time having administrative efficiency. Thus far neither of those things appear to be a priority. Zero-sum, narrow-based politics between parties looking to emphasize their own gains, looking to consolidate their own gains, and looking to push themselves certainly with a view to a permanent government after December, has been more important than national reconciliation in Iraq. Similarly, administrative efficiency just hasn’t been on anybody’s checklist apart from an important part of rhetoric when you’re giving speeches.

There is a danger in terms of this moving forward and it relates to the rhetoric and it relates to this issue of quotas and the sectarian-ization and ethnicity of politics in Iraq. That is an argument that we may be at a point where the politics of the Green Zone has less and less to do with the politics of Iraq more generally. So when talking about a security environment, we talk about political deals being made in the Green Zone; about bringing in Sunni representatives, whoever they may be; about having the right quotas in parliament, making sure that the right people are seen in the right places and doing deals. Quite frankly, a lot of that doesn’t matter or matters less and less outside the Green Zone, where you’re seeing polarization not just on a sectarian level but polarization that’s happening within local districts. What you’re seeing is not the beginnings potentially of a civil war that will pit three units against each other but rather very local battles, internecine struggles that are taking place that are going to pit different villages against each other. That’s very difficult to control. It’s leading to rising sectarian violence.

Quite frankly, Saddam Hussein sowed the seeds of sectarianism in Iraq. There was no doubt about that. But we have watered them very well in terms of the policies we’ve pursued so far. We have created a self-fulfilling prophecy that says to a lot of Iraqi political groups that you must organize in sectarian terms because that is how we judge you and that is how we organize you, and moving away from that thinking and moving away from that process is going to be crucial. It matters that we do it with Iraqi institutions. Institution-building has been lacking and we need to build Iraqi institutions that have security forces that don’t represent the interests of narrow groups but have a national allegiance. That matters. Because otherwise you are moving towards the steps of civil war, in which case quite frankly what happens in the oil industry won’t matter.

Assuming we can avoid civil war, and I still think we can — it will be tough and it will need some thinking out of the box, but it can happen — you also, as oil companies looking inside, they’re going to have to deal with some new realities.

One is that there is a battle for resource ownership that’s taking place in what is this political vacuum outside of the Green Zone. It’s a battle between different units who no longer have faith in the central government — who often didn’t have faith in the central government — and are looking to secure their resources for their own needs.

One thing that is clear in terms of Iraq is you are having a decentralization of politics. It can happen in two ways. It can happen in an organized fashion or it can happen in a case of anarchy where different administrative units just emerge and start running themselves. Ideally you want the first, but as part of the first certainly to attract foreign investment in Iraq. As was said earlier, that is what is going to be required to boost this industry. You’re going to have to have certain things that oil companies want. Clarity in terms of regulations, in terms of legislation, in terms of who they are dealing with, is going to be important to oil companies. So as you move forward the constitution as it stands potentially is going to be an impediment to that because it is very uncertain.

I think the bottom line is that at the end of the day, some element of local taxation or some element of local management is inevitable. The question is what the balance between the central government and the regions looks like, and ultimately who defines that balance is going to be important.

Two final points in terms of certainly any people in the audience who have an interest in investing in Iraq. One is, when can you do it? The reality is that if you take the fact that the constitution still needs to be worked on post-elections, the fact that you’re going to have to take time to form a new government, you need a new petroleum law — companies don’t like investing billions of dollars or even hundreds of millions of dollars if they don’t know under what circumstances they are investing — and ultimately have negotiations, you could see it by September, or by the third or fourth quarter of next year. But what you also need to have there at the same time is effective Iraqi security control and functioning national institutions that can apply the rule of law. Actually the big question in terms of Iraq right now is not whether you can have a petroleum law in place that’s agreed, even within the Green Zone, it’s whether you’re going to have those two other factors that are going to allow that to have any credibility on the ground.

Finally, the Iraqis need a lot. They need a whole host of different things. This is an industry that has been run on chewing gum and string for a long time, and very effectively I might add. Iraqi technocrats take great pride in what they’ve done over the last 35 years but particularly over the last 12 or 13 years. They deserve it. They’ve kept an industry going that’s been run on nothing. But they are going to need a great deal of help and it’s help that they recognize that they need.

The question is whether the politicians who are running this industry actually are on the same mindset as the technocrats who would like to run the industry. Arguably the conditions that the politicians are looking at, certainly in the short term, may actually work against Western IOCs in terms of the practices that they are looking at and the practices that they pursue and the environment that they pursue.

So will the Iraqi oil industry get money? Maybe. Will it get money from Western IOCs? Possibly not under the present circumstances, given the politics. Thank you.

Herman Franssen: Thank you very much, Raad — an excellent discussion of the Iraqi oil scene.

What we have before us really is a situation where we know that we have a world hungry for oil — that 5.5 billion people haven’t really fully participated in the modern world of conveniences and private automobiles and want to have the same advantages that we have. So demand is going to rise whatever happens. There is no alternative for oil in the transportation sector, at least for the next 20-30 years. We’re shifting away even within the non-OPEC world from very secure sources of supply, like Alaska and the North Sea, to less secure sources of supply like Russia and the Caspian. And we are shifting increasingly, in this world so hungry for oil, from the world of non-OPEC to the world of OPEC, and since 80 percent of that world of OPEC is the Middle East, to the Middle East.

Within the Middle East, there are two countries that really count for future growth in supply. Saudi Arabia, which already has done it and is doing it and is really the key over the next ten years to what’s going to happen to this world of oil. We better get along with them. We’d better have good relations with them. We’d better make sure that they are secure, because if something goes wrong in Saudi, I can only tell you, then the world will really tremble.

The other one, as Raad indicated, Iraq, with enormous potential but we may have to go through a prolonged period of adjustment before we see that potential turned into reality.

Then of course you have a lot of other small actors like Libya — very promising but not of the same size of order of magnitude as Saudi.

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About This Transcript:

Attributions:

Question & Answer:

Question: We’ll start with you, David. Given the future inability to meet oil demand, what do you think of exploration and development of the African oil market?

David Goldwyn: Africa is going to be important to incremental oil supply. There is great potential in Nigeria, Angola, Equatorial Guinea and now some frontier areas. But I would say analogous to the Middle East it’s a relatively unstable place to rely on for incremental oil demand over the next 20 years. You have primarily rentier states. You have people isolated from their own government. You have a major insurgency, at least conflict, in the Delta. You have Equatorial Guinea, which has been the target of, I would say, bank heists. You can call them coups but basically it’s a small country without defenses that’s easy to knock over as well as having internal problems. Angola is more stable but also very much subject to that slow erosion of rising expectations that can create long-term problems for producers, not another civil war.

So I think Africa has great resource potential but unless our policy changes to try and promote stability in those countries, which is looking at political reconciliation, trying to force some transparency, trying to force some redistribution of the income from the governments to the people there, then it will be a lucrative but unstable place to rely on over the next few years. I don’t think our policy in terms of promoting stability in Africa is quite where it needs to be. Promising steps by Nigeria in terms of transparency and even some movement by the US in support of anti-corruption in the extractive industries transparency initiative. But the real leverage is with the IMF and the World Bank. Until we all sort of get on the same page in terms of how to promote development and transparency there, I think it will be an important but by no means a replacement for Middle East oil.

Question: A question for Raad. How do you see the question of the division of oil revenues playing out in the future of Iraq? Another one for you. Please address the degree of success or failure of US companies in restoring essential oil infrastructure in Iraq. Another. Will Iraqi Kurdistan get investment from China to get their feet on the ground? Another one here is related to a previous 1990s conference on the future of Iraq, where Minister Issam Chalabi spoke about the damage and the degradation of the oil fields and infrastructure due to UN sanctions and bad practices under Saddam. Were the assessments like these ever factored into the estimates of what Iraq could produce after Saddam? What is the state of disrepair of oil fields and infrastructure that Iraq inherited after Saddam?

Raad Alkadiri: How long have we got? Okay, I’ll go through all this.

Division of oil revenue is effectively the big battle that has been fought, probably along with sectarian identity, in terms of writing the constitution. I don’t think it’s clear yet but you certainly have a variety of different groups out there. For the Kurds, division of revenue is the vital issue. For the Islamist Shia in Iraq it has become a vital issue for a variety of issues. One, because the Kurds have made it a vital issue. But two, because there’s a recognition I think that the southern autonomy movement based around Basra is founded on really a desire to control local resources, which belies the notion that there is a monolithic Shia majority in Iraq. It starts to sort of make a mockery of the notion that SCIRI necessarily represents all Iraqis or the majority of Iraqi Shia. So I think that will be an issue there.

Let me twist it around and answer it this way, very quickly. In one sense, it doesn’t matter what division of revenue is achieved. If you can’t get that oil to market, you can have any formula you want there. One of the things that the various parties in the negotiations of the constitution, the political leadership of Iraq and its regional leaders, don’t understand is having oil in the ground means nothing if you can’t get it across your borders. That realization will start to have an influence on the concessions they’re willing to make.

The success or failure of Project RIO, effectively. Project RIO, remember, was there to repair Iraqi oil. It wasn’t there to rehabilitate it. It was there to restore what was there beforehand. If you look at what was achieved, it was not a great success. That said, it wasn’t just US oil companies or other oil companies’ fault that were participating in RIO. I think there was also an element where the Iraqi ministry, the problems due to some of the politics, but also key issues that are forgotten. The incapacity of the Iraqi oil ministry to prioritize at this moment in time, its lack of project management skills as senior technocrats were moved out. All of those issues started to undermine RIO.

Kurdistan and China. I think the Kurds will take investment from wherever they can get it and sooner rather than later because they want to establish a precedent and believe they have the right to establish a precedent. I think China is increasingly looking at Iraq but is not quite there yet in terms of making a big step. Is it something you could see in the future? I think under the circumstances I described, the Chinese may well be big winners in the short term in Iraq. They will take more risks and they potentially will operate under different criteria than Western oil companies. The Iraqis need money and the Chinese will be willing to work with that.

Issam Chalabi is a man I have huge respect for. He knows more about the Iraqi industry than just about anyone else. There was huge damage and degradation. What is the assessment of facilities now? Go back to what I said about RIO. It was there to repair. It wasn’t there to rehabilitate the Iraqi oil sector. The Iraqi oil sector is facing many of the problems that it faced prewar. It is being operated on many of the same bases. The degradation and the problems that you’re having with reservoirs that you had identified prewar are there.

Did the US government know about it? Those parts of the US government that chose to think about it, knew about it. I will just throw out one anecdote. I think this is indicative of the Administration’s planning for this venture. That was going to speak to the State Department oil guys after the war and suggesting in terms of the degradation of Iraq that you really had a problem. When they asked me where I got my information from, I said it was from a Sabot report. They said they hadn’t bothered to read the Sabot report because they assumed it was biased. That information was out there for people who chose to read it, who chose to find it. I think the politics of this whole venture got in the way of some very sensible planning.

Question: A couple of questions on reserves. In September it was announced that oil reserves previously estimated for the Saudis, changes in these reserve estimates — are they valid? A question about Matt Simmons’ book and what he said about Saudi reserves and produce-ability.

Herman Franssen: I think first of all we should learn not to stare blind on this whole issue of reserves, because we don’t have solid information or independent information on reserves; they are not SEC verified, so we’ll have to just make assumptions about them. I think what is really more important is what I call produce-ability, what a country can produce, and then see how it will perform. I myself am convinced, if only because they have provided a lot of details, the Saudis, on what they’re going to do to bring their production up to 12 million barrels a day — field by field, it’s all indicated how they’re going to do it. I believe they’re going to be able to succeed in doing this. Whether they pull it together in 2009 or a little bit later — my guess would be a little bit later because there are enormous constraints at the moment in the oil services sector — but they will get there.

Beyond that, who knows? It is just a big question mark. The whole reserves issue is something that will be debated for a long time to come. We would not have debated it if we hadn’t had $60 oil. When we had $20 oil nobody paid attention to it. Now we pay attention to it because of the high price of oil. I think the very good service that Matt Simmons’ book did — it did provide a reaction from Aramco, which provided a great deal more information than was ever made available before. So in that sense, in that spirit, if that spirit continues, more information over time becomes available, I think the world will benefit greatly from it.

Question: A question here about the China-Saudi relationship.

Herman Franssen: Obviously the relationship between China and Saudi, the relationship of the Asian countries and Saudi, is becoming increasingly important. Where is the growth already indicated in oil consumption? It’s in Asia. Asia on the demand side is the big giant, Middle East on the supply side the big giant. Those two will have to meet. That’s happening. China is participating already on one of the gas projects in Saudi Arabia. China is buying increasing volumes of Saudi Arabian oil. Saudi Aramco will not allow any company to take an active part in the upstream oil path but there is a growing relationship in the downstream, with the Saudis looking into building refineries in China. So that relationship will strengthen and obviously ultimately may have some political benefits for Saudi.

David Goldwyn: Can I comment on the reserves issue? The question of whether we can verify our suppliers’ reserves is really more than just a question of price. It really has to do with the structure of demand over the next 20 and 30 years. If we are looking at far smaller reserves than we think that we have, then the urgency of changing the transportation paradigm, changing the way we operate our vehicles — since it pretty much is all about our cars, as you noted — becomes a much more urgent economic and a much more urgent national security issue.

There’s been a lot of talk about oil sector transparency over the last 8 years or so but very little progress. I think within OPEC you’re seeing countries like Venezuela go to places like Ryder Scott for audits because they want to bargain for more quota in OPEC and they’ve got to prove it. But I think it is fair as a foreign policy matter for us to take our friends the Saudis to task and the rest of OPEC, to say if you’re going to be the central banker of oil we want to know how much money is in the bank.

Question: What is the present status of the oil exploration contracts held in prewar Iraq by France, Russia and China?

Raad Alkadiri: If I knew that, I’d be a very rich man. That is the key question that most companies are asking right now. The reality is that those contracts have — well, the reality is to understand that the French never had a contract. Total, and ELF as it was and now obviously Total, signed memorandums of understanding. There was never a contract signed. Therefore you look at the two big ones are the Chinese and the Russian one. Obviously the Lukoil contract is the one that everybody tends to focus on.

The reality is politics will decide how those contracts come out. I don’t think this is an issue that’s going to go to arbitration. I don’t think it’s going to go to any sort of international legal issue. It will be effectively about how much the Iraqi government can bargain those contracts for and if the oil companies are willing to pay the price of doing so. It will become part of a slightly more stable post-election environment, at least stable in terms of you know who you’re dealing with for the next four years. It will be an issue that will come on the table. Lukoil obviously asserts that its contract is valid and has to be seen through. Successive Iraqi postwar governments have taken slightly different views on that from time to time. I’m waffling because there is no clear answer. But I think it will come down to politics.

Question: I have a question here about oil reserves. Very large oil reserves exist in tar sands in oil fields. What use are those reserves, do you anticipate?

Herman Franssen: First of all, we cannot compare it with what we call conventional oil that you find in the Middle East and elsewhere. People try to do it. It’s like comparing apples and oranges, they’re two entirely different things. Oil sands in Canada are huge, there’s a huge potential, but most of it are not reserves because they’re not currently economically produced. I was in Alberta just a couple weeks ago and the estimates are that over the next 15 to 20 years they may add 2 million barrels a day of oil from tar sands. But mind you, over the same period – the same volume, 2 million barrels a day, Saudi is going to add in five years at considerably lower cost.

So yes, it will add but it is not a replacement of the Middle East. It will just add at the margin to global supplies. Nothing really compares with the Middle East.

Oil shale — I used to work for the Congress in the 1970s, during the first and second oil shock. We were looking at oil shale and it was always more expensive than the actual oil price. It’s something that is mine-able and ultimately we’ll have to see whether the net energy gain is higher than the net energy input to produce it. It still has not been conclusively solved. But there is obviously a potential but it is very longer-term.

What I’m talking about is the next 20 years. The next 20 years, no substitute for oil, no substitute for the Middle East.

Question: You cited the importance of Saudi Arabia in the future of the Western nations so we need to maintain good relations with them. However, internal instability has plagued the Kingdom. Does this internal instability threaten the oil security partnership as much as bad diplomacy?

Herman Franssen: I think first of all, I remember reading, when I worked for the Congress in the 1970s, the imminent fall of the House of Saud. Since then the House of Saud has flourished for the past quarter of a century and it’s still there, it’s very strong. It’s not comparable to the Shah’s regime in Iran because the House of Saud is a very large tribe with intertribal connections with other tribes. It has a much larger legitimate rule. That doesn’t mean there are no problems in Saudi. There are problems of demography, there are problems of education, there are problems of unemployment, there are problems of participation in government, there are problems of wealth distribution. Yes, there are a lot of problems. Hopefully the new king is a reformer. Hopefully these reforms will come. We in the West cannot push it on them. They have to make these decisions. We can gently, privately tell them that it may be a good idea to do this or that. But not push them, because if we push them we’ll get the adverse reaction. We may get a reaction that may be very disconcerting to us both politically as well as in the area of the availability of oil.

I think one area I want to mention where we will see whether this reform is really succeeding, maybe it was actually put up as a trial balloon a couple weeks ago in the Financial Times. There was an article that — I won’t mention his name, but a very senior person was negotiating with the Brits for a $70 billion fighter contract. To fight al Qaeda and terrorism, you don’t need $70 billion of fighters. So perhaps this came from the reform, to indicate that if you’re going to go ahead with these contracts, is there really reform around the corner? So these are the kinds of issues that will give us some idea about what is really going to happen.

But for the moment, I think there are problems but the imminent decline of Saudi Arabia and the House of Saud has been forecasted for the past 30 years and it’s still there and it’s still going strong.

Question: Do you think that the US government will encourage the use of flexible fuel cars, which are already available and rather cheap, to decrease dependence on Middle Eastern oil?

David Goldwyn: Not any more than they are right now. There are dual-use vehicles that have been on the market now but there isn’t the infrastructure to provide them. I think the only way — I think it is unlikely that this administration will promote in the next two years any change of any significance on transportation. I think that includes flex fuel, CAFE standards, anything else.

I think the larger question, which is underneath this, which is what could you do to actually change the transportation paradigm, has to involve the oil companies, has to involve how you’re going to change infrastructure. It has to involve a whole mix of things, there’s no one solution. Some of those might be bio-fuels. Some of those might be increased incentives for non-conventional oil. Some of it might be increased use of substitutes or promoting the infrastructure that could supply flex fuel cars. But I don’t see any of that happening over the next two years. It will take another crisis in this country of the magnitude of 9/11 or $100 oil to actually motivate people to face the very difficult politics of how do you transform the automobile industry without bankrupting it, how do you transform the infrastructure system for fuels without alienating the entire energy industry, and how do you persuade Americans that you’ll never see gasoline below $2 a gallon and it’s good for you, because we need to change the way we operate and the rest of the world.

But absent that sort of crisis, I don’t see any of this happening.

Question: There is supposed to be a basin that contains huge amounts of light sweet crude, rivaling the Saudis. What is your view on the validity of these claims?

Herman Franssen: I don’t know about this particular — I’m not aware of any basin that is so huge. Let me say that I remember in the 1970s, I was in an academic career, and I lost out on a big contract with the NSF because a major company that was supposed to have found huge deposits of oil off the coast of a certain West African country — they had the country wrong and the company wrong and so the funds never came. I started working for the government instead.

There have been these stories around all the time about all these new things. Let me tell you this way. There is a growing emergence — Raad’s company has done a study on it, on non-OPEC — increasingly the industry is becoming concerned. You see the two-page ads that Chevron puts out, very daring constructive advertisements for Chevron, where the chairman says, We are faced with really serious problems meeting the oil demand in the future for these 5.5 billion people that haven’t had access to it. Help me find solutions — because there are no simple solutions anymore. We no longer have access to cheap oil all around the world. We don’t have access to Russian oil, they’re reserving it for the Russian companies. We don’t have access to Saudi oil, the Saudis are producing it. There’s a lot of oil that our industry would like to have access to. Thank God for countries like Libya so that there is still access to countries like Libya, which is really opening up marvelously, and other countries like that.

But on balance, if you believe what Mike Rogers’ company is saying, what people in the industry are beginning to look at, the non-OPEC oil may be reaching a plateau in the next five years. If that is the case, then all the incremental oil from then on will have to come from OPEC. Since 80 percent of OPEC is Middle East, it has to come from the Middle East. Unfortunately for us, this is happening at a time when the region is probably going through the biggest changes — internal and external — since the end of the Ottoman Empire. That’s just our bad luck. We’ll just have to live with it. Perhaps Katrina followed by probably this winter of discontent with high heating oil and high natural gas prices — perhaps this will lead for the first time in years — I was at the Congress in the 1970s — maybe we’ll get another policy that will do something on the demand side of the equation. Perhaps we’re going to take it seriously this time.

I want to give each of the panelists perhaps a minute if you have any additional thoughts or ideas, before we wrap it up.

Raad Alkadiri: No, I’m fine.

David Goldwyn: Just one. We’ve talked about whether or not we can meet demand, whether we can get more oil out of the Middle East, but the biggest problem that this all raises for the United States is a national security problem. It doesn’t do the countries in the Middle East any more good than it does us to continue on the same path that they and we have been on the last 20 years. Real reform — diversifying from oil to other industries in the Middle East, distribution of income, creating long-term stability — all requires a very different paradigm than the one that we’re on. High oil prices are the single largest enemy of reform in all these countries.

So I think the prospects are poor for reform. I think the prospects are poor on supply. The political prospects for change on demand are poor as well. The problem isn’t technology, it’s leadership. So for these panels and the others, at some point I wish that things would be the way that you hoped they were, but I don’t see it happening. So we’ll be having these panels for some time to come.

Herman Franssen: I think we had a very good panel. I want to thank both my colleagues here. I think we get away from this that the Middle East and oil are inseparable. If we want to have reasonable oil prices in the longer term, we’d better have reasonable policies toward the region. No more adventures but policies that are led by the clever men in the State Department rather than by some others who will not be mentioned who have been less clever in the execution of those policies. We have the expertise, we have the experts — let’s use them. I think then our energy future will look a little bit better. Thank you very much.

About this Transcript:

"Where will the Energy Come From" was the second panel at MEI's 59th Annual Conference, which was held on November 7-9, 2005. Jennifer Mitchell, who is currently studying at Kings College in London transcribed this document. Laurie Kassman and Michael Jackson edited it.