Opec urged to form common funding plan

The Organisation of the Petroleum Exporting Countries (Opec) should develop a common investment strategy to ensure enough capital will be pumped by its members into projects to lift their production capacity, according to an official Arab oil group.

The 13-nation body needs to embark on such projects to meet a steady growth in demand for its crude as its market share is projected to jump from around 40 per cent to 50 per cent in 2030, the Arab Petroleum Investment Corporation (Apicorp) said in a study.

It gave no investment figures but Opec said more than 100 projects are being undertaken by its members at a cost of $120 billion (Dh440bn). They include capacity expansions and infrastructure projects such as pipelines and export terminals.

In its study, obtained by Business 24|7, Saudi-based Apicorp said that despite significant uncertainties over long-term demand and prices, oil is to remain a major source of energy over the next 25 to 30 years.

It said Opec would be shouldering much of the burden of the investments requirements as demand for the Cartel is forecast to soar to nearly 50 million bpd of crude and 10 million bpd of condensates in 2030. But it stressed investments in expansion projects would depend on the level of prices in the long term, adding that while Opec has managed to co-ordinate production policies, it has not applied the rule on investment.

“The argument put to the test is that a change in interest rates [discount factor] affects the fiscal value of petroleum assets. Higher interest rates might discourage producers from investing their net savings in production capacity, preferring higher returns from interest-baring instruments, which reduces the fiscal value of their petroleum assets. Conversely, we should expect lower interest rates to have the opposite effect,” said Apicorp, an affiliate of the 10-nation Organisation of Arab Petroleum Exporting Countries (Oapec).

Assuming governments take a long-term perspective and adopt, implicitly, lower discount factors, then under current economic conditions a constant price near $60 a barrel [not a nominal price as assumed by the Opec Secretariat] should be the appropriate signal to stimulate investment, it noted. “For that reason, working out a price signal based on long-term price expectations should be seen as the first in a two-step process to reach a common investment policy.

“The second corollary step should be directed towards the convergence of petroleum fiscal policy,” the study said.

The report stressed that ultimately, the key challenge was whether the oil market would accept Opec’s policy of setting oil prices in the long term.

“To what extent could market participants be influenced by the eventual announcement by Opec of a proactive and price-band driven policy? The idea of conveying such a band to the market has already been tried within a short-term market framework. Extending it within a long-term investment framework can similarly only be achievable if Opec demonstrates a genuine and firm commitment to a shared policy.”

According to Apicorp, Opec is still playing the role of a residual producer. “The problems involved by transposing this short-term analytical market framework to a long-term investment one are twofold.

“Firstly, while Opec needs to co-ordinate production to meet the ‘residual’ demand, there is no such collective practice when it comes to investment. The second is that in the short-term market framework oil price changes are expected to reflect the shift in balance between supply and demand, while in the long-term investment approach oil prices are assumed exogenous and taken as given,” the report said.