His Excellency Mohammad Sanusi Barkindo, Secretary General of the Organization of the Petroleum Exporting Countries (OPEC), recently spoke with Julian Walker of Pipeline Magazine about OPEC’s ongoing efforts to bring lasting stability to the global oil market
How is OPEC helping drive growth within the industry?
First of all, let me point out that healthy industry growth can only be pursued in the context of a stable oil market. And stability goes to the core of what OPEC’s mission has been since it was founded in 1960.
Today, more than ever, OPEC is dedicated to helping re-establish a balanced and stable global oil market. Since the beginning of 2017, we have embarked on an unprecedented, historic cooperation with non-OPEC countries in an effort to rescue the oil market, which had experienced one of the worst downturns in the history of the industry due to an oversupplied market that sent the OPEC Reference Basket price plummeting by nearly 80 per cent to US$22 per barrel by January of 2016. This event had a severe impact on the industry, resulting in hundreds of thousands of lost jobs, deferred or cancelled investments and discontinued research and development projects.
In the wake of this crisis, OPEC realised it had to respond. And it did, by conducting extensive consultations during the second half of 2016, not only among OPEC Member Countries, but also between OPEC and non-OPEC producing nations, as well as with consumers and the wider international community. These discussions, both formal and informal, and across various global capitals, were unprecedented in scope and scale in the history of OPEC. They centered on the urgency of restoring a lasting stability to global oil market and getting investment back on track.
These efforts have been effective in helping to get the oil industry back on its feet again. I am certain that without the determined efforts of OPEC and its non-OPEC partners, the oil market would be in worse shape today than if no action had been taken.
Do you feel that OPEC’s decision to extend the production adjustments for a further nine months is contributing to the market rebalancing?
Yes, the decision made at the 2nd Joint OPEC-Non-OPEC Producing Countries’ Ministerial Meeting in May of this year to extend the voluntary production adjustments set out in the Declaration of Cooperation by an additional nine months has proven to be successful thus far in the process, and we are witnessing positive developments in the market.
Global stocks are down, world oil demand is increasing and the global economic outlook is positive going forward. Though this process may be taking longer than originally anticipated, rebalancing a global oil market, with all of its inherent complexity, simply cannot happen overnight — it was bound to taketime, along with a lot of hard work and perseverance.
But, the steadfast commitment of the 24 OPEC and non-OPEC producing countries participating in Declaration of Cooperation is evident in conformity levels that have surpassed 100 per cent recently.
What has been the impact on global crude inventory levels?
We continue to see commercial stocks, both onshore and offshore, come down at an accelerated pace in the OECD.
At the beginning of 2017, the OECD stock overhang was at 338 million barrels (mb) above the five-year average. This level steadily decreased in the first four months of this year to just below 300 mb. Then, from May to September, it fell by over 140mb to stand at 159 mb above the fi ve-year average in September.
Of the total, crude oil accounts for 132 mb while products make up 27 mb. This means that product inventories are close to converging with the five-year average.
Crude in floating storage is also lower by an estimated 50 mb since June, with support from a narrowing contango and Brent flipping into backwardation for the first time since the second half of 2014. So, clearly, the market is heading in the right direction, but there is still work to be done to eliminate the stock overhang.
What more can be done to combat volatility in the market, either by nations or the oil companies themselves?
To keep volatility at bay, we will need to see the combined efforts of all stakeholders in the global oil and gas industry —producers, consumers, international oil companies and investors. They all have a part to play to ensure the necessary transparency to help reinstate a lasting stability in the market.
Some analysts maintain that the current price cycle is one of the worst in history. Itis also interesting to note that the recent cycle has seen oil suffer worse declines than other commodities. It was a different story during oil price crash of 1985-1986 when virtually all commodity groups experience deep declines.
One thing we have learned from this cycle and all previous price cycle challenges is that extreme prices lead to boom and bust market conditions. These, in turn, having introduced high levels of volatility to the market. And this is simply bad news for producers and it is bad news for consumers.
I should point out that there are also non fundamental factors that have come into play in recent times, including the influential role of financial activities that have had an impact on oil prices, at times increasing the level of volatility in the oil market. Thus, we must seek the middle ground and stay away from extremities — this is the only way to ensure a stable and sustainable future for the global oil market.
Through dialogue and cooperation, we can hinder boom and bust cycles brought on by high volatility. This volatility not only contributes to instability in the market, it can jeopardise future investment.
How is your cooperation framework between producers and consumers going?
In an increasingly globalised, complex and interdependent industry, dialogue is essential for any stakeholder to accomplish its goals. In today’s market, no one can go the distance and reach the fi nish line alone. OPEC has been at the forefront of international dialogue since the early 1990s, when it joined forces with the International Energy Agency to begin a platform for producer-consumer dialogue through the establishment of the International Energy Forum (IEF).
Since it was founded in 1991, the IEF has gone on to become the world’s preeminent venue for dialogue between global oil and gas producing and consuming countries.
Today, its 72 Member Countries, representing all six continents, encompass nearly 90 per cent of global supply and demand for oil and gas. OPEC continues to play a leading role in the IEF’s biennial Ministerial Meetings, which host the world’s largest gathering of energy ministers, and participates in other joint activities.
Over the years, OPEC has steadily expanded its portfolio of dialogue activities to include platforms with the European Union, the Russian Federation, and more recently, Japan, India, China and the United States.
Additionally, since 2016, enhanced dialogue between OPEC and non-OPEC producing countries culminated in the landmark Declaration of Cooperation, in which 24 oil producers joined together in a concerted effort to help restore the oil market from one of the worst downturns in history.
These programmes underpin OPEC’s ongoing efforts to reinstate a sustainable stability to the global oil market and will be instrumental in the years ahead for it to achieve its goals.
What will be the major issues highlighted at the forthcoming OPEC meeting in November?
The 173rd Meeting of the OPEC Conference will take place on 30 November in Vienna. The Heads of Delegation will discuss the current global oil market outlook and review the report of the Joint OPEC-Non-OPEC Ministerial Monitoring Committee (JMMC), which is overseeing the implementation process of the ongoing Declaration of Cooperation.
Later that day, the 3rd OPEC-Non-OPEC Producing Countries Ministerial Meeting will convene to assess the progress being made with the Declaration of Cooperation. These key deliberations will, among others, be focused on optimising the path to a lasting stability in the global oil market.
Which nations are growing markets for the oil industry and what predictions can be made as to demand levels?
We expect to see developing countries lead demand growth in the long term. According to our latest World Oil Outlook 2017, these countries will see significant growth of 24 million barrels per day (bpd) to reach an estimated 67 million bpd by 2040. This growth will come mainly from the transportation, petrochemical and aviation sectors and is a reflection of the higher economic growth forecast for these countries, in addition to rapid population growth, an expanding middle class and rising urbanisation.
A remarkable 70 per cent of the overall demand growth is forecast to come from emerging and developing economies in Asia.
The two major population growth centres in Asia will be India, which is expected to reach 1.6 billion people by 2040 and China, which will be at 1.4 billion. This amounts to18 per cent and 16 per cent, respectively, of the entire world population.
Expansion at these levels will require supplies from all producing regions, and OPEC Member Countries will continue to play an important part in helping meet these increasing needs.
Has the oil industry the infrastructure in place to meet large-scale increased demand?
Yes, I believe, overall, the industry is well equipped to meet the rising demand forecast for the years ahead, however we need to ensure that robust, longer term investment in the industry returns to adequate levels that were in place before the oil market crisis hit in 2014.
While investments are expected to pick up slightly both this year and next, the levels are far below previous levels, and we are seeing more evidence of investment in short-cycle, rather than long-cycle projects. We need to see more long-term investment to ensure the future development of the industry and tohelp avoid supply gaps in the medium term.
The issue of potential shortfalls in investment continues to be at the top of the industry agenda and is a thematic element at most industry events I have attended of late.
With future world oil demand expected to surpass 111 million barrels a day by 2040,an increase of 16 million barrels a day, every effort should be made to avoid a potential supply gap that could present a serious challenge to the industry.
Thus, it is paramount that we clearly understand the critical relationship between long-term security of supply and short-term conditions — in other words, the need for timely and adequate levels of investments in the face of larger uncertainties stemming from a multitude of economic, technological, and policy-driven factors.
How important are the joint research efforts in which you engage?
These efforts are very important for OPEC.
Most of our joint research efforts are conducted within the framework of our ongoing international dialogue efforts, but also increasingly through synergies and networks among our Member Countries and other oil producing nations.
These initiatives have proven to be very effective in providing a common platform for increased understanding and collaboration through the sharing of our respective energy outlooks and viewpoints on the industry.
Joint studies typically cover pertinent themes of mutual interest. Some of these include the impacts of energy policies, the role of technology both on the supply and demand sides, environmental and sustainable development concerns, as well as speculation and the role of financial markets. The findings are often presented and discussed in various forums, including roundtable discussions.
These efforts have proven to be both informative and insightful, creating a win win for all involved stakeholders. We look forward to further enhancing these efforts in the years ahead.