As the price of oil hit a two-year high, industry giants are meeting in Vienna on November 30 to talk about keeping production low and prices high. Will sustaining close ties keep the good times rolling? Are we in for a crash if any deal falls through? We ask Secretary-General of OPEC Mohammad Barkindo.
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Sophie Shevardnadze: Mohammad Barkindo, OPEC Secretary General, thank you very much for being our guest on this program, it’s great to have you with us, Your Excellency. The oil market actually looks likes it’s getting back on its feet - reaching a record-high price since 2015 at over 60 dollars per barrel, and global oil demand is growing as well. You’ve just presented The 2017 OPEC World Oil Outlook, congratulations. So, is the oil market heading towards a full recovery?
Mohammad Bakindo: There is no doubt that the fundamentals of the oil market have changed significantly, particularly since the beginning of the year since we have started implementing the OPEC – non-OPEC Declaration of Cooperation. We have seen the higher level of conformity, averaging to100 % by the participating countries, and we also have demand continuing to grow significantly between the first half of 2017, going into fall and winter months we see a hefty 2 million barrels per day growth. So, all in all we remain on cause. Finally, we can see a balanced market in sight.
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SS: We’re going to go through all of that into detail. Before that, you have said Russia and Saudi Arabia’s readiness to extend the supply cut agreement for another 9 months, ‘clears fog’ for the November 30th meeting here in Vienna. A final decision on the deal should be taken here. Is the agreement between these two nations as good as an actual OPEC deal, would you say?
MB: If you consider that the two participating countries, the Kingdom of Saudi Arabia and the Russian Federation, are the two biggest producers within this group. In addition to that, both Saudi Arabia under the able leadership of His Excellency Khalid Al-Falih, Minister of Energy, and his Russian counterpart, His Excellency Alexander Novak, have played a pivotal role in getting this group together last year and in getting the group to agree the first time in history in such a supply arrangement, including the creation of new organs, that are not known to us, to monitor the implementation of the issue fully. Therefore, they occupy a very special position within the group.
SS: I think that back to the days, when oil prices were very low, OPEC then looked weak, irrelevant as an organization, it couldn’t do much about U.S. shale, oil or Russian oil, and now look at your organization, you’re taking decisions, you’re brokering deals, they work, they last – would you say, OPEC is back, are you back in control over the world’s oil trade? Or is it just down to brokering a deal between Russia and Saudi Arabia?
MB: In the past 57 years of so of the existence of OPEC, the organization has undergone through several cycles. In some of the cycles, its relevance has been questioned. To put in bluntly, we have seen several funerals, if you like, of OPEC in the past, depending on the cycle. But OPEC not did only survive, but emerged strong, and this is what you are seeing. Starting from last year, it’s ‘vintage’ OPEC. When it is least expected OPEC can rebuild confidence, regain consensus, take decisions and implement these decisions effectively.
SS: Will all due respect, Excellency, there are still questions like how can the lasting production cut deal be made when OPEC members are bickering with each other? I mean, OPEC members - Saudi Arabia and other Gulf states - are economically blockading another OPEC member, Qatar, which is trying to cultivate close ties with another OPEC member Iran, which is irritating other OPEC members... It’s hard, don’t you think?
MB: We have been able to insulate the organization from geopolitics and the impact of geopolitics on oil. In fact, OPEC has done, probably, more than any other group, in trying to depoliticize oil. In the past, we have had very challenging situations, when some member countries were at war and yet we searched together [for solution] and insulated ourselves from the vagaries of the outside world. We looked at the fundamentals of this commodity and took very conjunct decisions, which we implemented. I don’t expect anything different this time around. All our member counties are more than committed to implement the Declaration of Cooperation, we have received endorsement and commendation from the highest quarters of governments of member countries, including the Russian Federation, when president Vladimir Putin himself endorsed the continued implementation of the Declaration of Cooperation in order not only to restore the stability but to sustain going forward, to avoid the consequences of what’ we’ve been going through in the last couple of years.
SS: We touched upon Iran in the previous question. It’s interesting that countries like Algeria and Iran, they haven’t reduced oil production to the required level so far, but are now vocal supporters of the deal extension. What makes you think they will actually cut their oil production within another nine months if they haven’t done that already?
MB: If you recall the Algiers Accords, that was introduced on September 28th last year in Algeria, it took into cognizance the special circumstances of three member countries: Islamic republic of Iran, Nigeria and Libya. And this has given them special consideration, if you like, not only in the Declaration of Cooperation that we agreed on December 10th, but also in the implementation. I can tell you that Iran has been fully implementing its own obligation under, the Declaration of Cooperation. Nigeria and Libya have met significant progress in recovering their lost capacity and we look forward for them to fully come back on board and participate with all the rest of the countries.
SS: Do you aim for the deal to be permanent? Because if it isn’t, oil producers start to pump again, then the price will fall again, and a new agreement will be needed, it will look like a never-ending circle.
MB: The Declaration of Cooperation has several facets. One is the supply adjustment. But we are also looking beyond the rebalancing of the market, which is in sight now, that beside that, we should keep this broad platform of producing countries together in order to ensure that we do not slip back into the downturn that benefited nobody in the last couple of years. And building this broad platform into a more permanent structure will serve as insurance against volatility and instability on oil markets and in the oil industry going forward.
SS: Let’s talk a bit about how American oil fits into the whole picture. With high oil prices, with more incentives to produce more shale, more U.S. oil will undoubtedly hit the market - does OPEC have enough production to offset the American supply?
MB: Through the shale basins, the US have played a significant role in the past couple of years by bringing in supplies at a time when we are facing supply deficits from several of our member countries within. OPEC who are facing a variety of challenges threatening supplies. Libya, for example, lost practically all of its production. And before the disturbances they were producing almost 1.6 to 1.7 mil. barrels a day. Nigeria had lost almost 1 million. Exports from Iran were frozen due to sanctions, and so on and so forth. People forget that without the additional supplies that the world got from the shale basins we could have faced a more severe energy crisis. They have used the combination of technology and sophisticated financial market as well as very aggressive management techniques to make the shale revolution possible. We now see a deceleration in the growth pattern in the US, particularly tight oil; we have seen the rig numbers beginning to fall, we have seen the rig and well productivity have also started coming down. And we have seen their shareholders, their investors questioning the continued use of the current business model of volume vs value. We have seen a very sharp reduction in the flow of funds from Wall Street that have been financing this ramp-up supply from about an average of 60 billion US dollars to just 6 billion.
SS: The International Energy Agency links higher oil prices with the recent storms and cataclysms in the Gulf of Mexico, which forced many oil producers to shut down temporarily. But once it all gets on its feet and the cataclysm subsides, I think it’s logical that production will continue even more eagerly. What if it happens? That’s compromising OPEC’s efforts to cut oil supply. Is there any way you can pressure America not to do that?
MB:We have for the first time in history opened up discussions with the United States through the’ companies. I personally, let an OPEC delegation meet the producers in Houston to start exploring areas of possible collaboration. And all I can tell you now is that it was a very successful exploratory meeting, where we began to understand ourselves not through reports, not through analysis, but face-to-face, sitting down with them. One important message that I took away from that meeting was the realization by all those participating in that inaugural historic meeting, that we, producers, whether OPEC or non-OPEC, whether conventional or non-conventional players, on-shore or off-shore – we all belong to the same market, same industry. Therefore, the history, the consequences, or the impact of this current cycle have left none of us insulated from the impact of the current cycle. And therefore, at that meeting we agreed that we all have shared responsibility to maintain stability, to minimize the impact of our industry’s cyclical nature.
SS: Did they agree to cut supply with you? Keep the production low?
MB: No, I wouldn’t say so. I mean, that was not the idea. You will appreciate that in such first meeting for the first time the US companies’ with all the encumbrances of their legislation and their laws, decided to sit with OPEC. You know that’s significant. Something must have really pushed them to the table to sit down with us. I am satisfied that we’re able to have very open and frank discussions. We shared our perspectives and experiences, we understood our differences better. And they requested that we continue the dialogue, that this dialogue is beneficial both for OPEC and to themselves. Some of the media even said “we broke the bread” or “we broke the ice”.
SS: Regarding the shale oil, Saudi Crown Prince Mohammad bin Salman said that shale oil era is finished. Do we really aim for the new era? Do you know what he meant?
MB: As I have told you, we have seen the numbers coming out of the US. The ramp-up of production in the last several years, particularly from November-December last year to this year, it is not likely to repeat itself in the short to medium term, within that timeframe. Why? Because this supply was funded heavily by public and private equity. Their focus was on how to produce higher volumes, not on profitability. Now all this is changing. The evidence is that you can see the numbers of rigs, particularly oil rigs, are continuously coming down. According to United States, to their own productivity report, the wells and the rigs are decelerating. Now, the projections going forward, whether it’s the EIA, whether it’s the IEA, the companies are begining to come out to question those projections for 2018 and beyond. I have met them in several fora, [they think] those projections are totally way out. Because they feel the pinch, they are the ones in the field, in the trenches, they don’t have the capacity for that incremental growth going forward.
SS: Your Excellency, as you know, the international deal on Iran’s nuclear program is in jeopardy, thanks to president Trump. That means that the future of Iran’s oil output is also uncertain. How can you plan ahead for production volumes when you don’t know whether Iranian oil is going to be on the market or not?
MB: To the best of my knowledge, I’m not sure whether the Iranian nuclear deal is in jeopardy. Even the US have not officially pulled out of this great effort of the P5+1 group. We remain hopeful that reason will prevail. I have not had any member of the P5+1 questioning or objecting to the continued application of this noble international effort. Therefore, in solidarity with our member countries, we hope normalcy will be allowed to prevail.
SS: I want to talk about another political aspect that somehow affects the oil prices. The Iraqi -Kurdistan referendum and the standoff it caused between the Kurds and the government in Baghdad. That, in turn, meant that quite a bit of Iraqi oil didn’t hit the market - do you expect this uncertainty to last, keeping oil prices higher? Is it fair to say that, in a way, it’s good for OPEC?
MB: It’s certainly, not. Iraq, as you know, is not only a founder member of OPEC, but is a birthplace of this organization. It’s a very strong OPEC member. Whatever affects Iraq, especially in these circumstances, is of a great concern for all of us in the organization. And I’m glad to note that the government of Iraq with the international goodwill that it has have been able to douse the situation and, hopefully, will restore full stability in that part of Iraq. Iraq is not only important for OPEC but is also key for stability in the region whether it’s on energy or on geopolitics. We remain confident that the government working with the international partners will continue to contain the situation through dialogue and also continue with the massive work of reconstruction in Iraq.
SS: It’s also interesting to see how the producing countries are reacting, during this stability in rising prices. Of course, high prices are appealing but they seem to get greedy. Look what happened to Indonesia, they refused to cooperate on supply cut and they’re not members anymore. Is it fair that the countries that actually agree to comply with that agreement are actually cutting supply, while all other countries are pumping and selling?
MB: It is a sovereign decision of every participating country, to decide to join this noble global effort or not. So far we only got 24 countries who have agreed voluntarily in their all-national interest to join to global effort. Indonesia has been a member of OPEC for many-many years. Unfortunately, they had some domestic challenges regarding their production. Therefore, last year they decided not to opt out but to suspend their membership until they are able to sort out their domestic challenges. We all look forward to Indonesia coming back fully to participate not only within OPEC, as a full member, but also in the Declaration of Cooperation. Secondly, we also look forward to other producing countries that might have been skeptical in the beginning, whether it was worthwhile, whether it was possible, whether we could implement what we had decided to. Now, I think, that skepticism has been addressed. Not only did we agree on this historic decision, we also implemented our obligations fully and in a timely manner, and everybody is witnessing the response of the market and the industry. Even confidence in the industry starts returning. Even the number of jobs, companies in the industry have started hiring. I don’t think any producer needs to be persuaded to come and join this noble effort. So we are looking forward to those that have not been able to join this train from the first train station to please join us. Because it’s open.
SS: Your Excellency, thank you very much for this interview, wish you all the best of luck ahead of the November 30th meeting and in everything else. Thank you.
MB: Thank you very much.