VZCZCXRO2158
RR RUEHDE RUEHDH
DE RUEHVI #0363/01 0861147
ZNR UUUUU ZZH
R 271147Z MAR 09
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 2206
INFO RUEHHH/OPEC COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAEPA/EPA WASHDC

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