Secretary General: OPEC seeks ‘long-term commitment’
In an interview with Africa Oil & Power, H.E. Mohammed Barkindo, Secretary General of the Organization of the Petroleum Exporting countries, talks about the long-term commitment planned between OPEC and the non-OPEC member countries behind the Declaration of Cooperation. This interview is the first article in a three-part series.
Since OPEC extended its production adjustments in December 2017, oil prices have increased significantly. At this stage can OPEC still justify these production levels?
Now that the oil industry is in a better, more positive place than it was a few years ago, there is the risk that the lessons from the last downturn are forgotten. We should never underestimate how severe and potentially ruinous that last downturn was: by July 2016, OECD commercial stock levels reached a record high of about 403 million barrels (mb) over the five-year average. The OPEC Reference Basket price fell by an extraordinary 80% between June 2014 and January 2016. Investments were choked-off, with exploration and production spending falling by an enormous 27% in both 2015 and 2016, with nearly one trillion dollars in investments frozen or discontinued. Many hundreds of thousands of jobs were lost and a record number of companies in our industry filed for bankruptcy. It was one of the most calamitous downturns in the long history of oil.
This was the context behind the historic ‘Declaration of Cooperation,’ that was put together on 10th December 2016. OPEC Member Countries and our non-OPEC partners sought to build consensus about the strategic urgency to rebalance the global oil market in a collective manner. Twenty-four oil producing nations agreed on a concerted effort to accelerate the stabilization of the global oil market through voluntary production adjustments of around 1.8 million barrels per day (mb/d).
The core aim of this cooperation can be summarized in just four words: sustainable oil market stability. Therefore, it is very clear that these nations are not seeking a quick-fix to temporary alleviate the oil industry’s woes. This is why the “sustainable” aspect of our core aim is so important. It is a long-term commitment.
So while the oil industry is enjoying better health than it did two or three years ago, we have to ensure this is set on surer footing; that it can endure, and that consumers and producers can enjoy a period of sustained oil market stability.
Walking away from our cooperation could potentially undo the good work achieved so far. Rather than opt for this course, OPEC and its non-OPEC partners are exploring possibilities for further institutionalizing our cooperation. As we seek to strengthen the framework for our cooperation, we hope this can mitigate potential market volatility in the future.
Given the decline in capital expenditures in oil exploration in recent years, what is the likelihood of another oil price shock before 2020?
As I mentioned earlier, OPEC and its non-OPEC partners are focused on contributing to sustainable oil market stability and this inherent logic underpins the ‘Declaration of Cooperation.’ One of the advantages of oil market stability is that it provides investors and companies with a degree of predictability in order to make informed decisions.
Currently, investment levels are lagging behind the improved conditions for market fundamentals. However, we are hopeful that with sustained stability in the oil market, this situation will improve. Investments are the lifeblood of our industry. It is vital, for both producers and consumers, that the necessary investments are made.
To put the requirements in a monetary context, in the period to 2040, OPEC’s World Oil Outlook (WOO) 2018 sees the required global oil sector investment at a huge $10.5 trillion.
Does OPEC view the mass production of electric vehicles (EVs) as a long-term threat to oil demand?
The OPEC Secretariat acknowledges that significant progress has been made in the development and promotion of EVs in recent years. However, one should bear in mind that in 2017, EVs accounted for only 0.2 percent of the global passenger fleet. It is coming from a low base. In OPEC’s World Oil Outlook (WOO) 2017 it was underscored that EVs will witness a further penetration of the passenger fleet market in the decades ahead. It is expected to account for around 12 percent of the market by 2040.
It is important to note, however, that many uncertainties and constraints for EVs remain. The cost competitiveness of EVs is still questioned, particularly if generous subsidies are eliminated. In this regard, the cases of Estonia and Denmark where EV sales plunged significantly after governmental subsidies were slashed provide an interesting insight. Moreover, the investment required to develop a reliable infrastructure for charging, as well as electricity generation, could also be seen as a constraint to further growth.
Moreover, a broad range of industry authorities recognize that oil demand is going to increase in the foreseeable future. According to the WOO, long-term oil demand is expected to increase by 14 million barrels per day by 2040, rising to 111.1 million barrels per day in 2040 from levels observed in 2017. Another important consideration is that by 2040, oil and gas combined are still expected to provide more than half of the world’s energy needs. Critically, there is no expectation for peak oil demand over the forecast period to 2040.
H.E. Mohammed Barkindo will be bestowed with the “Africa Oil Man of the Year” award at the Africa Oil & Power conference, to be hosted September 5-7, 2018 in Cape Town. He will also present the keynote address during the annual event. Register and learn more about the event here.