Oil deficit will hit in 2017 – ex-Saudi Aramco VP

SS: Hopes of OPEC rest on November's meeting in Vienna, do you expect a breakthrough to be achieved there - and is it even needed, if you say that the market situation is going to resolve itself eventually? So far, OPEC meetings have brought little progress to the oil situation…

SH: I think it's very important for OPEC to constantly stay in communication internally and also with the rest of the industry, I  think there are many very important players in the industry, beyond OPEC - Russia, for example, is talking about going to 11 million  barrels, and that’s quite a large volume. The U.S. would like to restore its shale oil, the deep offshore Brazil and West Africa - they all would like to come back into the markets. So it’s important that there’s a dialogue and it is very constructive.

SS: What about other players who don’t want to freeze anything or cut anything - Libya’s at war, Venezuela has an economic collapse on its hands and Nigeria has both. What’s in cutting production for them? They need the money now  - why should they agree to a freeze?

SH: No, I think the whole problem, really, has been put into OPEC’s lap, and it’s not an OPEC problem. The problem of the excess supply came from the North American production, it came from Brazil offshore, came even from Russia. All of these contributed almost 6.5 mn barrels in the last 3 years. OPEC has been at 32-33 mn throughout this timeframe. So I think the concern about excess production is not really an OPEC problem, it’s a global problem. OPEC is only 33 mn out of 96 mn barrels produced annually, so hopefully, I think, all the other producers will also join in trying to regulate their excess production.

SS: OPEC is talking about bringing back individual production quotas for its members. Will that help? What’s the point if, like you’ve said, oil giants like Russia and the U.S.  won’t be affected by them?

SH: I think you raise an important point about quotas. Are quotas effective? Not hardly. You cannot regulate a market which has almost 40-50 major producers. OPEC is only a small fraction, maybe 14 countries. So, to try to impose quotas within OPEC and then try to regulate a market that includes many-many more important producers - I think that period may have worked in the past, but it’s probably not a very effective mechanism in the future. I think a combination of dialogue and tracking the markets and work transparency on supply - I think those would be more effective ways. And of course, you have to have a good will on both sides, between all the producers, not just OPEC.

SS: Now the OPEC-Russia meeting in Doha didn’t result in an agreement - with the Saudi-Iran rivalry overshadowing the oil-specific interests of all involved. You should know this well, you were the VP for production at Saudi Aramco - Does Saudi Arabia really care that much about a freeze, a cut or even the oil price - its resources are so abundant and its production costs so cheap?…

SH: I think Saudi Arabia is trying to maintain a stable level of production outlook as are the other GCC countries. Iran had a problem - they had an embargo, but if you look at the numbers, maybe in 2012, Iran was producing 3.4-3.5 mn barrels, and global production was 88-89 mn. Today, Iran is producing 3.6 mn and the global production is 95 mn. So, if Iran needs to increase its production, why not? Let it increase its production taking a share from the global markets. It’s not an internal OPEC problem, it’s really an international problem. Iran is free to exercise its own policies. I think the focus in Doha may have been a bit too soon since Iran had not yet achieved the numbers that it wanted to achieve.

SS: Is the whole situation on the oil market a result of political factors? Is it all because Tehran and Riyadh are in confrontation with each other?

SH: We’re in a complex world, there are technical issues, there are economic issues, there are political issues, and the oil industry is only one expression of all of these complexities.The simple reality is that the excess production which was generated primarily out of the deep offshore expensive oil, the heavy oils of Canada, the shale oils of the U.S., and some other production, including, of course, Russia’s. That brought about an excess supply - about 2 million barrels, three or four years ago which undermined the markets. Now we are coming back to a more steady production across the world, I think the expensive crudes have pretty much backed out, the capital investments are down almost 37-39% in the last three years continuously. So, the market is rebalancing as many have pointed out already, and I don’t think it was a political problem, I think it was a commercial, technical problem.

SS: Even if that’s the case, the problem is still there. So, the Russian diplomats have been trying to work something out with Saudi Arabia, and Moscow’s relations with Iran are also quite close - could Russia broker something between these two countries?

SH: Of course, any friend that wants to work with other countries is welcome. I think it’s always a good thing to have support of dialogue from all parties concerned. I wonder myself if in fact Russia itself has a problem, because, after all, although the Saudi Arabia has one national oil company, there are many companies that operate in Russia and I understand that many of them are very determined to increase their supply. So, is brokering role for Russia effective? Of course, it would be welcome, but is it effective even inside of Russia? That’s a different and a very important question.

SS: Since the oil price collapse, OPEC has failed to bounce it back - so how relevant is the cartel now? Are internal differences killing OPEC's influence?

SH:I think the oil price collapse, as you say, was triggered outside of OPEC and OPEC is not a large enough organisation in terms of the total market to be able to regulate it, to be able to impose a moderation on production. So, is OPEC relevant? Yes, it’s an important communication platform, there are many important producers in it, they have always invited non-OPEC countries to also join in a dialogue or a discussion. Pretend that there was no OPEC for a minute. Where would people go to discuss these important issues? I think it’s serving a very important, fundamental communication purpose.

SS: Saudi Arabia is raising its prices on oil sold to the Asian markets. Does this mean that the demand in that region is growing, and fears of the Asian slowdown are unfounded?

SH: Of course, prices in different regions reflect a local demand and the latest information is that the Chinese market is actually stronger than had been expected. They are modernising a lot of their independent refiners, their independent refiners make up almost one third of the Chinese consumption and they are looking for crude oil that is harder to place, heavier oil, so there may be a stronger price for that kind of crude. Overall, I think the Far East has maintained a steady a growth. Not a strong growth as in the past, but a steady growth, so perhaps we were over-cautious when we were talking about a slowdown in demand in the Far East. It’s a sustained growth.

SS: Aren’t Saudi authorities afraid to lose market share in the region by hiking their prices up?

SH: No, the market is quite complex, and the refiners who have more or less modernised the bulk of their refineries now want heavier oils, so for example, the East Siberian crude that comes to the Pacific is a bit too light, it is more of 35 API, whereas refiners are looking for 26-27 API, so different crudes have different price in the seas. I don’t  think market share is an issue, because as I said, China continues to consume significant amounts - 50 million barrels a day - they have large inventory built up as well, Korea’s strong, the other countries, Thailand, Japan - Japan may be a bit weaker than the others, but overall the Far East is still resilient.

SS: Saudi Arabia has been fighting for the market with U.S. shale production; And oversupply led to oil hitting a massive low. Have the Saudis won this battle? Or are the Americans back in business now oil prices have somewhat steadied?

SH: It’s an interesting situation in the U.S., because although there’s a significant production now, almost 9 million barrels, maybe 8.8 mn barrels, compared to where they were before - total consumption in the U.S. is much higher, it’s 17 mn barrels a day. So they are importing a respective of their domestic production. Also the domestic crude that’s produced within the U.S. is, at least on-shore, in association with the shale oil, is quite light, it’s not what the refiners in the U.S. and the Gulf of Mexico like to have; whereas the imported crude from the Middle East is a much more effective type for the refiners. So, we are still a very strong exporter as I read in the journals to the U.S. and the U.S. will continue to be a major importer of crude oil for the indefinite future. They just can’t produce enough to take care of their requirements.

SS: Shale oil can be removed or brought back on the market much faster than crude oil, so can shale be curtailed in the long run?

SH: Shale is a very exciting technological breakthrough - the combination of horizontal drilling, multi-stage fracking and stimulation - all of these are very important contributions. Shale oil itself requires a lot more infrastructure, it requires a lot of equipment. In the U.S. they were drilling tens of thousands of wells a year just to maintain 3.5-4 million barrels of production. So you can imagine the scale of the operation. Yes, they have done well, but the oil rig count in the U.S. went down from 1,640 to now 420 or so, recently. So, that’s one quarter of the original rig count. To remobilise that scale of operation is very-very difficult for the U.S., it’s not a small process.

SS: Will we see a repeat scenario of high prices, everyone selling - then prices dropping and supply shrinking? Prices have been climbing since hitting a recent low point, so will there be another dip soon?

SH: They have, definitely, recovered - we’re looking at Brent just under $50. As I said, the supply and demand is balanced out. In the last few months as far as production and consumption, they’re pretty much in balance. If this continues into the next year, there will иу drawdowns from inventory, but then, gradually, prices will recover and get much stronger. So, yes, we will not get to the very high prices of over $100, but $75-80 barrels are not unrealistic by the time we get into 2018. It’s very-very possible.

SS: I mean, obviously the era of $120 per barrel wasn't going to last forever, perhaps it’s just time to accept the new reality? With the price tag hovering around $50, that’s not such a bad deal, is it?

SH: No, the most important thing about oil prices is stability. The most destructive thing about oil prices is volatility. If you can have a stable outlook, say. $70 for example, then the industry can adjust all around, both the consumers and the producers. You can find efficiencies, you can find alternative supplies - the very high-cost marginal production would probably not survive, but there would be plenty of oil. It’s a volatility that is destructive, because if prices go from over a $100-110 down to $30 and back up - nobody can plan around that. We have to remember that oil is such a fundamental commodity for global commerce, it’s a fuel that runs the global economy, so when you have a very destructive, volatile market, it hurts global economy, whether you’re a producer or a consumer.

SS: Paolo Scaroni, the former head of ENI, told me that the only way to get out of this cycle - oversupply, price drop, over demand, price rise, repeat - is to take American shale oil off the market. How is that possible?

SH: We have to be realistic. The U.S., North America is an area of a free enterprise. When there’s a commercial opportunity, the funding will be available and the technology will be made available. Shale oil is an important contributor to the total requirement of energy in the world. There’s also shale gas that comes with the same technologies. If it wasn’t for that development, we would be looking at much-much more expensive oils, very deep off-shore, 2-3 thousand meters of offshore waters, as you saw what happened in Macondo. We would be producing oil sands and tars which are very polluting as you see in some areas of Canada. So, shale oil, in a way, is an important contributor. It has brought solutions to conventional oil, returned to brownfields with new technologies. I think we should welcome it, it’s just not the solution if the world is consuming 95 mn barrels, going to 97 in a couple of years. Shale oil is only 3.5 mn barrels, it’s not a solution for global requirement.

SS: I want to talk a bit about what’s going on in Saudi Arabia. Saudi Arabia is cutting ministers salaries by 20 percent, slashing bonuses for public sector workers. The low oil prices are taking a toll on Saudi Arabia’s economy, with a 100 billion dollar budget deficit last year - are difficult times in store?

SH: No, I think this is a part of an overall strategy to rationalise consumption, to moderate consumption. The electricity, the water, the gasoline, the diesel - these were so heavily subsidised, it was just encouraging wasteful use. I think these adjustments to salaries are a signal that the country’s leadership is very concerned at all levels and they are taking the lead. So, no, I think we’ll manage quite well, we’re still producing 10-10.5 mn barrels, and even at $50-60 that’s more than adequate. We have petrochemicals, we have metals, we have many other activities. The economy is quite solid.

SS:Saudi Arabia is already preparing for the end of the Oil Age, setting up a $2 trillion contingency fund… I’m just wondering, should everyone be doing the same?

SH: No, perhaps the 2030 is a bit too pessimistic, I think the oil reserves are such... and globally the consumption is high, but the reserves are much much higher. I think what the 2030 vision is about is diversification. It’s not about the end of oil, it’s never said there’s going to be no oil, it’s “we need to have a much broader footprint”, much more resilient economy that generates a lot more jobs for everybody. No, I would not worry about running out of oil, certainly we’ll have plenty of fossil fuels, including oil.

SS: With the investment in new oil fields and underwater reserves low at the time of the crisis, will we see an inevitable shortage of supply in the near future - once the current reserves run out?

SH: Yes. First of all, we have to define “reserves” - reserves are a function not only of oil on the ground but economics and technology, and as we have seen, if you have the right economic environment, right technology, you can produce a lot more oil out of the ground. This is the whole story of shale oil. The basins of the world are very widespread, there’s still many-many areas that are yet to be tapped - in Northern Siberia, for example, the Barents sea, the Kara sea, the Yamal area.There is still many-many opportunities to continue exploration and development, and the technology will make it more commercial, and that’s the secret of technology. The same with the deep offshore. But, it has to be done in a predictable manner. Prices have to be stable enough that the financial side of the enterprise can plan ahead and can raise the appropriate funding. I would not worry about running out of reserves, I think we will always have an energy supply, possibly with more efficiency as well on the consumption side.

SS: Dr. Husseini, thank you very much for this insight. We were talking to Dr. Sadad Al-Husseini, former vice-president for production of Aramco, Saudi Arabia’s national oil company, discussing the mix of politics and cheap oil and what will the oil market look like in the days ahead. That’s it for this edition of Sophie&Co, I will see you next time.