Ladies and gentlemen!
It is a great honour and a pleasure for me to address you today at the 25th Oil & Money conference.

2004 has been a particularly eventful year in the oil market with crude oil prices at historical high levels. Developments in the market could be summarized in one word: China. Oil demand in China has surged, fuelled by strong growth in industrial production and car sales. Oil demand in China has grown by almost 20 % this year or nearly 1 mbd. China has now become the second largest importer and consumer of oil after the USA.

But oil consumption in China is still in many respects very small. The Chinese use less than 2 barrels of oil per capita annually; in USA consumption is more than 15 times as high.

India is in a situation not very different from China. These two countries make up about 40 % of the world's population but so far only accounts for 10% of the world's oil consumption. In my view the strong economic growth in countries like China and India, is one of the most important and promising developments of our time. First and foremost it creates better living conditions for a substantial part of the world's population and secondly new markets and market opportunities are developed.

Oil is needed to fuel economic growth, but oil is also needed for mobility. No energy form can provide mobility as efficient and cheap as oil. In fact no competitive alternatives to oil in transportation are in sight for the next 10 – 20 years.

The potential for further growth in oil demand is substantial. For 2004, demand could increase by as much as 2,5 mbd, the highest increase in 30 years. Estimates of demand growth for the next 5 – 10 years vary between 1,5 and 2 mbd annually.

Strong oil demand growth, and the subsequent need to increase production capacity, raises many questions and challenges for governments and the oil industry. About resource availability and capital requirements. About future oil price levels and security of supply.

Let me elaborate on these issues.
To expand oil production capacity investment and oil reserves are needed. This year, the question of whether the world are running out of oil, has once again made headlines.

Some consultants argue that annual production has surpassed new discoveries for years and major producing regions such as USA and North Sea are in decline. A lot of significant discoveries have been made around the world, but no major new oil provinces have been discovered since the North Sea in the 1970ies.

On the other hand US Geological Survey's assessment of world oil resources gives no cause of immediate concern. Resource estimates have continued to grow.

The key for the oil industry and governments in the years to come will be to mobilize sufficient, sustained and timely investment to convert oil resources into oil supplies.

The investments needed to expand oil production capacity will be huge. In addition - but often forgotten - investments are also needed to sustain current capacity, because of natural decline rates. According to the IEA, about ¾ of upstream oil investment will be needed to counter a natural decline in production.

At a global level sufficient capital should be available. Returns upstream are high and in general funding should not be a problem.

However, different regions might to a varying degree be able to attract capital depending on a number of risk factors. In some countries energy investment compete with other needs.

This is particularly true in many OPEC countries, which will have to deliver a major part of the growth in supply. This is an important change compared to the 80s and 90s, when Non-OPEC seized most of the demand growth.

OPEC countries undoubtedly have the reserves to meet demand. But will governments make sufficient funds available for petroleum investment or do they have more urgent needs to fulfil? And will international and private oil companies be offered attractive investment conditions, political and other risk factors taken into account? These are important questions which must be addressed by host governments.

I will not prescribe any solution for any country. It is my firm conviction that every country has to find its own way. But based on our own experience, it's my strong belief that the international oil companies can play an important and necessary role in developing national petroleum resources. This can be done without loosing national control and also without loss of income.

The international oil industry plays a key role in most oil producing regions. In almost all non-OPEC countries very little will be invested without oil companies willingness to do so.

The oil industry is now being criticised for not investing sufficiently in new oil production and refining capacity, causing oil prices to surge.

With oil and gas prices at a high level for several years and refining margins high, the international oil companies should have every incentive to increase their exploration and development activities. But there is no strong evidence this has happened. One indication of this is the modest increase in Non-OPEC supply in recent years. Only Russia and other countries in the Former Soviet Union have had substantial supply growth.

The question has been raised: why is oil companies not investing more and why is production growth outside OPEC not higher? The answers will have implications for future supply and prices.

Several answers have been offered to these questions.

Some argue that oil companies still test profitability of projects against conservative oil prices assumptions of 15 – 20 USD. Oil companies were quick to cut price forecasts when the prices fell in 1998/99. They seem to have been slow to adjust to the higher price level we have experienced during the past 4 - 5 years.

There maybe other explanations why companies do not invest more as a response to higher prices. Some argue that a larger part of companies' cash flows are now being returned to shareholders in the form of dividends and share buy back programs. The amount of money available to capital spending is thereby less. I will certainly not criticise oil companies for doing so. But we should reflect on the consequences of their strategy as it affects future supply of oil and prices.

A different explanation for the slow growth in production capacity relates to increasing finding and development costs. There is some evidence, that after a long period of decline in costs from the early 1980's to mid-1990, finding and development costs have begun to climb. Cost increases imply that higher oil prices will be needed to maintain profitability.

The investment strategy of the international oil companies is of great importance to how fast production capacity will expand. The seemingly conservative approach taken by companies in recent years could be one reason out of many for the current very high oil prices.

I hope oil companies will share their views with us on these issues during the conference.

Let me move on and talk about the oil market and oil price developments. After all, no single factor is more important for investments and supply than the level of oil prices.

With prices at 40 – 50 USD the relevant questions are: Are current prices a bubble that will burst? Or is the surge in spot prices a signal that also future oil prices will be significantly higher than what we have seen in the past?

As a starting point it is interesting to notice that currently the price is not set by OPEC, but by unregulated supply and demand. This has happened only a few times in the last 2 - 3 decades and might be an indication of the degree to which the recent price increase is sustainable.

I believe there are important reasons to expect that high prices will persist.

I have already mentioned the seemingly low response of Non-OPEC supply to oil prices, whether it was caused by a trend towards higher costs, depletion or possible oil companies' conservative investment behaviour. Higher prices than what prevailed in the 1990'ies now seem to be necessary to stimulate investments in exploration and development.

Secondly, the dependency on OPEC for oil supplies will inevitably grow, meaning OPECs market power will increase. It also means that the dependence on supplies from regions which historically has been politically unstable will increase. This might add a risk premium to price.

However, I will like to add that despite the Middle East being a political unstable area, OPEC as such has been an incredible reliable supplier of oil during the past 25 years through their willingness to hold spare capacity.

Third, oil demand has remained strong despite prices averaging above 30 USD the last 5 years. Demand appears to be more resilient against high oil prices than was expected. Economies on average are less oil dependent today compared to 20 years ago.

However, despite this rather bullish assessment, a price level of 50 USD is difficult to see being sustained for very long. We haven't seen the full effect of higher prices on demand and economic growth. In countries like China and India product prices are subsidized and higher crude prices have not yet been fully reflected in end user prices.

Thus, a reduction in prices from the 50 USD level seems likely. On the other hand, a return of prices to 20 USD or lower seems highly unlikely.

OPEC today has a price target of 22 – 28 USD per barrel and is considering raising its target somewhat. Whether OPEC raises the price band or not, I expect they will be able to sustain the price at or above the price band, the same way they have done so effectively for the last 4 – 5 years. I don't consider it likely that crude prices will fall below OPEC price target for a prolonged period of time.

A price at this level will give oil producers a reasonable income from their resources. It will also be sufficiently high to support investment in high cost production areas outside the Middle East. In this way supply diversity will be stimulated, a key ingredient to energy security. This is important to oil importing countries and for the stability of the market.

Let me conclude;
Strong growth in oil demand will continue, primarily because of unsaturated need for oil in Non-OECD countries and because there are no alternatives to oil in transportation.

Growth in oil demand and OPECs effectiveness in managing the oil market will continue to support oil prices at a relatively high level.

In such an environment, I hope national and international oil companies will face the challenge of implementing viable investment programs to meet future growth in demand.

The challenge for host governments is to make attractive investment opportunities for companies.