MEES – Thank you for speaking to MEES and congratulations on the 60th anniversary. Nobody expected this year to unfold in this way, has OPEC ever had to handle a crisis approaching this scale before?
OPEC SG – The COVID-19 pandemic is first and foremost a human tragedy, in terms of the suffering and the loss of life. The pandemic has also pervaded almost every aspect of our daily lives. Every economic sector has been impacted by this fast moving, but silent invader.
In terms of OPEC, the global economic impact, and the decline in oil demand, is unprecedented in its history. To broaden it out, every producer has been impacted; no-one has been impervious, with oil demand witnessing daily drops of more than 20mn b/d in April, and for the whole of 2020 we expect to see a demand decline of around 9mn b/d.
It took great courage and commitment from participants in the Declaration of Cooperation (DoC) to develop the voluntary production adjustments back in April 2020 – and supplemented in June 2020. These adjustments are the largest and longest in the history of OPEC, the DoC and the oil industry. It is clear that these adjustments have helped the industry turn a corner; we are seeing some green shoots in the recovery.
However, we also appreciate that we cannot rest on our success so far. The green shoots need to bloom; they need to be nurtured. With this in mind, we remain fully focused on helping bring supply and demand back into balance and providing a more stable market for the remainder of 2020 and into 2021, in the interests of both producers and consumers.
MEES - When the market was approaching meltdown in April and the new OPEC+ deal was brokered the discussions also involved other G20 producers. Have the events of 2020 brought about a renewed international acknowledgement that OPEC plays a valuable role in reducing market volatility?
OPEC SG-With OPEC Member Country Saudi Arabia, chairing the G20 this year, it was extremely beneficial to have a G20 Extraordinary Energy Ministers Meeting on April 10. This sandwiched the two landmark OPEC and non-OPEC Ministerial Meetings on April 9 and 12. With both producers and consumers participating in the G20 gathering, momentum and support were garnered for the actions of the DoC.
This was forthcoming in the statement from the G20 meeting with a commitment to work together “in the spirit of solidarity.” It also recognized the commitment of the producers in the DoC group to stabilize energy markets and acknowledged the importance of international cooperation in ensuring the resilience of energy systems.
Since the historic April ministerial meetings, OPEC has also further evolved relations with producers such as Canada (Alberta), Norway, Colombia, Brazil and Argentina, including bilateral meetings with the respective energy ministers; benefitted from the relationships that have evolved with US tight oil producers over the last four years, particularly at the annual CERAWeek conference; and held briefings with major consumers, China, India and the European Union.
There is recognition across the board that there is no short-term fix for the 2020 crisis, but in our talks and dialogues we hear acknowledgement of the role OPEC and the DoC are playing in helping reduce volatility, and providing a platform for recovery and future growth.
MEES – The global demand picture remains unclear, but how do you see the path towards the market rebalancing? Is returning to the 5-year average of global inventories still the key measurement?
OPEC SG– Our focus, and that of the DoC, remains on rebalancing the market, and achieving a sustainable stability that is in the interests of both producers and consumers. We currently see oil demand dropping by around 9mn b/d in 2020, but then rebounding to expand by 7mn b/d in 2021. While the near-term challenge of market balancing is foremost in our minds, we also need to be cognizant of the longer term need to enable the necessary future investments and ensure future demand is met.
Global stock levels are an important barometer of market conditions, and have been a key metric for the DoC since it was initiated at the end of 2016. Global stock levels surged in April, and continued to rise in May and June, but in recent months we believe the trend has been reversed. It should also be noted that the levels in recent months could have hit tank tops if there had not been any DoC production adjustments – they have been vital for the ongoing rebalancing process, and improving market sentiment.
Looking forward, the DoC is focused on bringing down inventory levels. We see OECD inventory levels at around the five-year average by 4Q20. This is vital to the rebalancing process, and vital to helping return a sustainable stability to the market. However, we also recognize that uncertainties remain, and OPEC and the DoC stand ready to act, if and when required.
MEES – This crisis has forced a lot of change, whether it be the use of videoconferencing for ministerial meetings or the development of the compensation mechanism to counter low conformity. Will any of these new measures stick after the crisis passes? And will there be more changes to the way OPEC operates in the coming months?
OPEC SG – In terms of how we interact with each other, it is certainly a changed world. Since early March, videoconferencing has become the de facto means of communicating for people, businesses and institutions across the world. There have been positives in this, with OPEC and the DoC continuing to function seamlessly, meetings being held at short notice, and the enabling of homeworking for staff at the OPEC Secretariat.
It is clear that videoconferencing will remain a key part of the future, but the need for direct human contact and face-to-face meetings remains important. We hope to see these return once the COVID-19 pandemic subsides. It is central to how we function as people, families, companies and organizations.
Yes, the compensation mechanism has been initiated, as a complementary element to the DoC. It has been supported by all participants. We continue to monitor the production adjustments on a regular basis, through the monthly meetings of the Joint Ministerial Monitoring Committee and the Joint Technical Committee. DoC participants stand ready to discuss any necessary further changes as we move forward.
MEES – As Secretary General, you were highly influential in bringing the various OPEC+ partners together ahead of the 2016 Declaration of Cooperation in your first term. How has your role changed throughout your tenure as Secretary General?
OPEC SG – It is not for me to acknowledge influence or personal achievements, but on a broader basis it was a great personal honor to work with so many impressive people and distinguished ministers and diplomats to bring the DoC into existence at the end of 2016. Bringing together so many sovereign producing nations is unparalleled in the history of the oil industry and the Organization has ably demonstrated its credentials as a body committed to international cooperation, working with other producers, honoring its commitments and promoting mutual respect among all nations.
Moreover, this has also now evolved further into the Charter of Cooperation (CoC) that was endorsed at the Ministerial Meetings in July 2019. We fully believe that the evolving cooperation with participating non-OPEC countries, through both the DoC and the CoC, can be a cornerstone of the global oil market in the years and decades ahead.
To all intents and purposes, I do not believe the mantra I brought to OPEC as Secretary General has changed since day one. It is focused on hard work and bringing out the best of each and every one who works at the OPEC Secretariat, supporting its valuable research analysis and publications, and working in the interests of all Member Countries. This includes evolving broader cooperation, strengthening the Secretariat’s capabilities and having ever stronger structures in place to help better tackle the challenges ahead.
I remain committed to leaving the Organization in a much stronger position than when I began my tenure back in August 2016.
MEES – Oil companies across the globe have been cutting investment this year, are you concerned that this could be paving the way for a future supply crunch?
OPEC SG – To put the investment conundrum in some perspective, our projections show capital expenditure in non-OPEC countries plummeting by 23% in 2020, to about half the $741 billion record set in 2014. And as we all know from the oil market’s sharp downturn in 2014-2016, unpredictable investment flows can have severe long-term consequences for the industry. No-one wants to see a future where investments do not keep pace with demand growth, leading to a potential energy shortfall; this is not in the interests of either producers or consumers.
It is important to stress the basic foundation for investment and growth can only come through balance and stability in the market. In this regard, OPEC Member Countries remain fully committed to investments across the whole industry value chain, and the issue of returning global investments is a core focus of the DoC and CoC.
MEES – The cooperation of OPEC+ since 2016 is unprecedented and has exceeded expectations. How beneficial has it been to work in cooperation with the wider grouping?
OPEC SG - As mentioned in a response to an earlier question, bringing together so many sovereign producing nations is unparalleled in the history of the oil industry. The enhanced relations between participating countries now constitute a fundamental and essential feature of the ‘new world of energy.’ The relationships that have evolved at the ministerial level, at the technical level, through the key DoC mechanisms, the JMMC and the JTC, and with the OPEC Secretariat are strong, supportive and robust. There is great mutual respect and trust.
It is a transparent and fully accessible platform; it is open to all producers. It has evolved into a broader continuity partnership that can work for everyone, across all timeframes, to help deliver the market balance and stability we all desire. The financial markets, in general, and the financial oil market in particular, have also welcomed the forward guidance provided by the DoC.
The importance of the Declaration has also received backing from other producers, as well as from consumers, as was evidently witnessed in 2020, with a plethora of stakeholders working together to help return balance and stability to the market.
The impact of the historic cooperation has exceeded even the most optimistic of predictions. It underscores what can be accomplished through a constructive, continuous and fully committed approach to helping achieve a sustainable oil market stability.
MEES – There is growing momentum behind the energy transition, with BP in particular talking about the possibility of global oil demand peaking soon and planning to diversify away from oil. What is your view on this?
OPEC SG – It is not for OPEC to comment on the outlooks or plans of international oil companies (IOCs), except to say that we maintain positive relationships with them, and IOCs continue to invest and seek investments in our Member Countries, and around the world.
In terms of oil demand, in our World Oil Outlook (WOO) we see oil demand expanding over the coming decades, although annual demand growth is expected to slow over time. We fully believe that oil will remain a key part of the world’s energy future, alongside other available energies.
There are some who believe the oil and gas industries should not be part of our energy future and that the future is one that can be dominated by renewables. It is important to state clearly that the science does not tell us this; it tells us that we need to reduce emissions and use energy more efficiently. The stark statistics related to the blight of energy poverty, with almost one billion people worldwide currently lacking access to electricity and three billion without modern fuels for cooking – do not tell us this either.
Let me stress that OPEC welcomes the development of renewables. Many OPEC Member Countries have great sources of solar and wind, and we are seeing huge investments being made in this field, but we do not see any reputable outlook projecting that renewables will come anywhere close to overtaking oil and gas in the decades ahead.
To put it simply, the basic challenge of the energy transition we face today can be summed up in two questions. How can we ensure there is enough supply to meet expected future demand growth? And how can this growth be achieved in a sustainable way, balancing the needs of people in relation to their social welfare, the economy and the environment? It all points to not limiting ourselves by putting all our eggs in one basket. We need to look for cleaner and more efficient technological solutions everywhere, across all available energies.
MEES – How much of a role does the oil industry have to play in achieving the Paris Agreement and other sustainable development objectives? And within this what can OPEC do?
OPEC SG – It is important to stress that OPEC fully supports the science. There are no climate deniers in OPEC. Our Member Countries take climate change extremely seriously. As responsible citizens of the globe, we also believe there is ‘no planet B‘. OPEC remains fully engaged and supportive of the UNFCCC and the Paris Agreement, which remain the only viable global frameworks to address climate change. All 13 OPEC Member Countries have signed the Paris Agreement and ten have ratified it.
The scale of the climate challenge means that no single energy source is a panacea; nor can the contribution of an entire industry or group of countries be overlooked. Complex problems require comprehensive solutions. The oil industry has to be part of the solution; it possesses critical resources and expertise that can help unlock our carbon-free future.
It is our deeply held conviction that dialogue on this matter should be inclusive and broad to try and evolve the energy transition in the least disruptive manner. We need to think carefully about what an energy transition actually means; and we all need to follow the right paths to lead us to a sustainable energy future. We need to all work together, step-by-step, find issues of commonality and appreciate what is at stake.
We also need to transition to a more inclusive world in which every person has access to energy. A world where no one is left behind, which is something ably supported by OPEC’s sister organization the OPEC Fund, which provides public, private and trade sector financing, as well as grants to support sustainable social and economic development, including projects focused on alleviating energy poverty, to developing countries across the globe.
Interview conducted by MEES Senior Editor Jamie Ingram.