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OPEC: Restoration of oil market stability

OPEC: Restoration of oil market stability

Nov 30, 2016
12 min read
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Pipeline Magazine spoke exclusively to His Excellency Mohammad Sanusi Barkindo, Secretary General, Organization of the Petroleum Exporting Countries (OPEC) about his new role as head of OPEC and plans to restore market stability

OPEC’s new Secretary General sat down with Pipeline Magazine to discuss a wide range of issues facing the Organization.

As the new OPEC Secretary General, can you tell us what do you hope to achieve in the next 12 months? Do you plan any radical step changes to address the supply glut?

When I took up my position as OPEC Secretary General at the beginning of August, I was under no illusions of the scope of the tasks and challenges in front of me. Oil market instability and volatility, crude prices struggling to maintain levels deemed fair and reasonable and posing a real threat to future investment, crude oil production outstripping demand, coupled with excessively high stocks - all of which has resulted in dwindling revenues and huge manpower layoffs throughout the entire industry chain. It is quite a list.

But I think that out of all these prevailing conditions, which have combined to put the oil and gas sector under extreme pressure, I feel it is the restoration of oil market stability that I would most want to achieve in the period you specify. That is because without stability none of the other market distortions can be rectified.

Stability is necessary in order for us to plan for the future with relative certainty. We need stability for investments and for future petroleum output expansion to flourish. We also need stability for economies around the world to grow and especially to provide access to modern energy services for those currently without them. And most importantly for us in OPEC, we need stability to give producers a fair return from the exploitation of their exhaustible natural resources. Without question, stability is the key to a sustainable global energy future for us all.

In saying that, I have indeed been very fortunate in just my first few weeks in office to have been part of the historic agreement reached by OPEC in Algiers in September. The landmark decision taken at the 170th (Extraordinary) Meeting of the OPEC Conference came after many rounds of consultative meetings and intensive talks. Not only did this breakthrough highlight the unity of the Organization, it also underlined the commitment of OPEC’s 14 Member Countries to establishing lasting ‘sustainable stability’ in the oil markets, for the mutual interests of producing nations, consumers, and the industry at large.

And in answer to your question on inventories, the Conference decision to opt for an OPEC-14 production target ranging between 32.5 and 33 million barrels a day is actually focused on the need to accelerate the ongoing drawdown of the crude stock overhang and bring the rebalancing of the market forward.

Can you share your opinion of where the oil price is heading in the next 2-3 years?

I always think it would be nice to have a crystal ball to see which direction prices will take in the future. Unfortunately, technological advancement has not got us that far yet and we are left to our own devices, namely our research, forecasts and projections, which are based on many years of sound experience and knowledge of working with crude oil, which is most probably the most complex of all commodities traded globally today.

But as the past has shown us time and again, predicting price levels is a precarious and often quite impossible task. There are just so many variables to consider and so many elements that can influence price direction. Of course, there are ways we can support prices, for example through production, supply and stocks’ management, but even that is usually not enough.

One of the big problems we face daily and one we have little control over is market speculation, which can drive prices higher or lower in a heartbeat. That is because the oil complex on the various trading houses operating worldwide is sensitive to all manner of market conditions and eventualities.

We are aware that speculators will continue to operate on the oil exchanges and that price volatility will always be present. We continue to learn to our cost that excessive volatility is harmful not only to the market, but for all industry stakeholders and the global economy in general. All we hope for in the future is for prices to be fair and reasonable.

Without specifying actual figures, they should be at a level that gives producers adequate returns to support their socio-economic development, and conducive to the world economy, as well as at a level that provides sufficient revenues for the producers to make the necessary investments in future capacity expansions.

Our projections in the new World Oil Outlook 2016 show that global energy demand will increase by 40 per cent by 2040 from today’s levels with oil accounting for a substantial share of this rise. So it is essential for us to continue to work towards securing orderly and stable markets with prices at levels that are conducive to a healthy and prosperous future for all concerned in the industry.

Has the cyclical nature of the oil price changed?

Is a low oil price the new norm? Yes it would be fair to say that the cyclical nature of the oil price has changed in recent years. But that is because the fundamentals of the market that are greatly influencing today’s market have also been different from previous cycles. In the past, markets suffered during a cycle that was influenced by supplies being precariously close to matching demand, with little spare capacity as a cushion.

That caused prices to spike, which was also not good for the industry as a whole. But the downturn in prices we have witnessed since July 2014 has been primarily driven by oversupply at a time of generally weakening demand. Actually, the extent of the excess production, mostly coming from non-OPEC countries, has without question contributed greatly to the situation we find ourselves in today.

As for today’s low-price environment, yes it may take some time before this changes to what we consider would be a more acceptable level, but I do not feel that low oil prices are here to stay. The staggering future oil demand requirements, especially in the non-OECD area and developing countries, would suggest otherwise.

We are aware of the challenges and uncertainties we will face going forward, but there are also tremendous opportunities – and they all equate to growing demand. Looking at our projections, it is easy to appreciate why. In the period to 2040, the global economy is estimated to more than double in size, while the population of the planet is set to reach over 9 billion, a rise of over 1.7 billion from today’s level. And we should not forget that around 2.7 billion people still rely on biomass for their basic needs, while some 1.3 billion have no access to electricity.

All these people will be seeking modern energy services to fuel their socioeconomic development. The future potential for energy providers is huge. Little wonder then that we, like many analysts, believe that the world will require all forms of energy in the future to meet the burgeoning demand levels – that is oil, gas, renewables, coal and nuclear.

What do you see as the biggest issues facing the oil industry?

The issues facing the oil industry in the future are quite considerable but perhaps the one that concerns us the most right now, which comes part and parcel with restoring market stability, is investment – making sure that there are sufficient supplies to meet the expected rise in demand. And right now this issue is worrying.

The fall in crude oil prices over the past two years has led to a significant decline in investments and capacity expansion projects, which are being cancelled or at best put on hold. For example, our calculations show that global exploration and production spending fell by around 26 per cent in 2015, and a further 22 per cent drop is anticipated in 2016.

Combined, this amounts to more than $300 billion. Moreover, according to industry sources, in 2015 explorers discovered only about one-tenth as much oil as they have annually on average since 1960. Just 2.7 billion barrels of new supply was discovered last year, the smallest amount since 1947.

This is a major concern for an industry that needs to comply with timely and adequate level of investments to provide the necessary supply in the medium- and longer terms. Fast forward to 2040 when OPEC sees demand for oil increasing by around 17 million barrels a day from today’s levels, and one can appreciate the extent of the problem.

Naturally, to meet the forecast expansion in demand will require huge investments. And we also need to appreciate that new oil barrels are not only needed to boost output capacity, but to supplement the decline rates from existing fields. Oil related investment requirements up to 2040 are estimated at around $10 trillion.

The solution lies in oil prices which will have to go up from today’s levels if adequate investment in the extra capacity required is to make a return to the market. Another major issue that will have an important bearing on OPEC and its activities in the years ahead is the threat posed by climate change to our environment. OPEC is concerned about the state of the planet and was the first to welcome last year’s COP 21 agreement in Paris.

In fact, our Member Countries played a role in drafting the landmark agreement. More importantly, they will also play a role in helping to implement it. OPEC is fully cognisant of the fact that just as the world will need more of its energy resources, the Organization needs to use these resources more efficiently.

That is why it is committed to continually look to develop, evolve and adopt cleaner energy technologies. For OPEC it is a double-sided coin - ensuring there is enough supply to meet expected future demand growth and achieving this growth in a sustainable way, balancing the needs of people in relation to their social welfare, the economy and the environment.

I cannot emphasise enough that OPEC recognises the importance of continually looking to advance the environmental credentials of oil, both in production and use. For this reason, it not only takes part in all the important environmental debates that take place, but also welcomes coordinated action with the industry and through various research and development platforms.

 With changing markets, can you share with us your opinion on what the future holds for OPEC? Despite the changing face of the international energy markets, I have no doubt that OPEC in the future will continue to apply itself in the same manner as it has since its inception in 1960. That is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilisation of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers; a steady income to producers; and a fair return on capital for those investing in the petroleum industry.

This is something that is enshrined in the Organization’s Statute which is as relevant to Member Countries today as it was when it was first penned. It is just that in the ever-demanding 21st century the landscape in which we operate is forever changing and the challenges and uncertainties we face are becoming perhaps more acute and different in nature.

We remain optimistic, however, that, just as in the past, OPEC will overcome all the challenges it faces with the oil industry in general emerging as a stronger force in the process. As OPEC’s Member Countries showed with their unified stance at the Algiers Meeting, they are committed to doing all in their power to restore oil market stability and bring about conditions that will serve the interests of all stakeholders, producers, consumers and investors alike. Through its policy initiatives and coordinated actions, the Organization will continue to pursue its ultimate goals of stability of oil supply and demand and prosperity for its Member Countries.

But OPEC also needs the help of others outside the Organization to support its initiatives. Non-OPEC producers and the consumers also have their part to play. That is why OPEC continues to call for cooperation among the main parties involved in the industry. Such a concerted joint approach remains vital going forward if the orderly, stable and sustainable oil markets we all seek and can benefit from are to be realised.

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