Oil Markets: As the World Turns

In a CERAWeek interview, Dr. Daniel Yergin speaks with HE Mohammad Sanusi Barkindo, Secretary General of OPEC and Fatih Birol, Executive Director of the International Energy Agency about the redefinition of the global oil industry. Here’s an excerpt of their conversation:

Dr. Daniel Yergin: It's really a pleasure to welcome back His Excellency Secretary General Mohammed Barkindo from OPEC and Fatih Birol who is the Executive Director of the International Energy Agency. This is something I look forward very much to see their outlooks—how & where they coincide and where they differ. And so gentlemen, I guess I should just begin with a very simple question, where do you each see the oil market now?

Mohammad Barkindo: Thank you very much, it's great pleasure to return to CERAWeek, number 37, I'm told. And to participate with my brother and colleague. I recall last year same time we met here on this platform and took stock of the extraordinary events of 2015, 2016, including the landmark decisions that OPEC and non-OPEC reached culminate into the historic declaration of cooperation. And we were just in the process of putting together the framework of the implementation of this historic decision when we met here. One year later, fast-tracking, I'm pleased to report to fellow industry colleagues that we have not only fulfilled our obligations by implementing the terms and conditions of the declaration of cooperation fully and in timely manner, but we have almost surpassed our own expectations in terms of the high conformity levels of the supply adjustment assisting the market to address that one variable that we have been battling with since 2015, rising stock levels to unsustainable level and sending the oil market into disequilibrium with all the consequences that we have been battling with.

The full implementation in a timely manner has enabled us to reverse, to address the decline and also to bring back some level of optimism in that market and in the industry, including here in CERAWeek. Last year, compared to this year, you can see a very remarkable difference, not only in the content and participation, but including the exotic lunch that we had, I think it's much richer than what you supplied last year. So it confounds that everybody benefited from what this 24 participating countries in the declaration of cooperation have been able to do voluntarily to assist the market and the industry to restore balance in order to bring back this industry of ours to the path of sustainable growth, continue to foil what we know as the current stabilization and continuing to be the foil of choice for the foreseeable future. I think Fatih will not disagree with that. Will you?

Fatih Birol: Never.

Mohammad Barkindo: Thank you.

Dr. Daniel Yergin: No small disagreements?

Fatih Birol: Thanks Dan. It's also great pleasure to be back to Houston at this CERAWeek. And always a great honor to be together with you, Mohammad. Now when we look at the next five years, we see three distinct futures, I think, important to highlight. And it's a bit, I think, strong trends. Number one, oil demand, strong robust growth, no sign of peak oil at all, driven my China and India, more than 50% of the global oil demand could come in from these countries, but others contribute. So, strong oil demand quote, number one. Number two, in terms of supply we think this demand will put a stamp on the global oil supply growth in the next five years. About 60% of the demand quote will be met alone with the US, but some other non-OPEC countries also do contribute.

What are those? Brazil, about 1 million barrels expected in the next five years, followed by Canada and also Norway. So these four countries who are, by the way, those countries, those governments are the members of the International Agency family, do contribute a big chunk of the supply growth. This is the second important trend, I would say. Third, investments. Mohammad mentioned the investment issue, 2015 and 2016 have seen each year, 25% decline in the global oil investments and 2017 was flat, and 2018 this year, very many hope to see a strong rebound, we only see small increase about 6%. So we are far, far lower than what we have seen before we have the crisis. And this is of course, something that the oil markets need to take note of because if you put the strong oil demand growth together with one of the issues we have highlighted in our report we published this morning, is the decline in the existing fields.

Our report says that we lose each year, one North Sea, about 3 million barrels per day. So, we have to invest to meet the growth in the demand, more than 1 million barrels per day. Plus the compounds yet to decline in the existing fields. But the investment mood, investment trends, are not sufficient enough to make us feel comfortable that upstream investments and upstream projects are going to meet that very challenge, coming from the demand growth and the decline. So these are the three trends Dan. Strong demand growth, strong non-OPEC supply led by United States, and also investment appetite is still weak.

Dr. Daniel Yergin: All right, so in your report you released this morning, did you also have your short-term oil outlook in that?

Fatih Birol: It is a short-term, five years is a short-term outlook. This is that we see this happening in the next five years, and also when we look at this year, 2018, it doesn't change in the picture up to 2020, it doesn't change. If I want tell you a bit shorter, not five but three years of time, all the global oil demand growth will be met by the production growth coming from US plus Brazil plus Canada plus Norway. So, the growth coming from these three countries exceeds the global oil demand growth, which is something to consider within this short period of time and in the next three years.

Dr. Daniel Yergin: Mohammad, how does OPEC react to that?

Mohammad Barkindo: We have an annual comparative analysis between our outlooks. OPEC and the IEA under the umbrella of the IEF, we just had the 2018 session last month in Riyadh where for the first time the IEA also joined us to undertake this annual comparative analysis. And, I must say that looking at our medium term that we released in November and the IEA just released this morning. Looking at it going into the long term, the reference is basically the same, the numbers may differ. But in terms of the trend going forward, we are also on the same page. Demand is very robust. Demand has not been this solid and positive in a long while—probably since before the last global financial crisis. And we are seeing this demand coming not only from just developing countries, but also in places like OECD, Europe. Of course, non-OPEC supply continues to grow responding to the positive market conditions, especially since the landmark declaration of cooperation, coupled with the full and the timely implementation with very high level of conformity by all the participating countries.

But talking about investment, I think both producers and consumers, equally concerned. To echo what Fatih has just said, we have seen a very sharp contraction in investments, particularly in long-cycle projects, both onshore and offshore, for almost two consecutive, almost three consecutive years. And, as Fatih has said, 2018 is not looking very positive at the moment. So, the global community, the global industry needs to focus on this imagined threat, because we are so in deceit for a possible, god forbid, future energy crisis that is not in the interest of this global economy. And there's no better place to discuss this issue than CERAWeek, where we have all the key actors here, we have one of the largest delegation from OPEC this year, led by his excellency Suhail Al Mazroui, the president of the conference from the UEA and many other ministers here. So, we look forward to engaging with the industry on this very burning issue.

But I must add one thing. Now, going through our member countries, particularly those at the gulf, the OPEC member countries in the gulf, I think the industry needs to salute them for their courage because they stayed faithful despite the global contraction in investment dollars. Despite the contraction in revenue, our OPEC member countries decided to weather the storm by continue in a very healthy level of investment across the supply chain.

Dr. Daniel Yergin: All right.

Mohammad Barkindo: Yeah.

Dr. Daniel Yergin: So, Fatih, what's your diagnosis, just because ... of this low investment level that you have put such emphasis on? The why.

Fatih Birol: Yeah, in fact to be honest with you, the overall number is not impressive, but if you dive into the numbers, you see that it is growing interest in the short-cycle projects.

Dr. Daniel Yergin: Yeah.

Fatih Birol: And, it is the reason that we see two speed investments. One is the US light tight oil, significant investments are coming here. Whereas the other part of the world, especially commercial crude rather weak. In fact the investment does not only go into the shale oil but also shale gas. This is ... both of them are growing very strongly. And our numbers then, points out for me an important strategic direction, namely, when we look at the shale oil and the shale gas, in the time of shale revolution, no country is an island, everybody will be effected by it. Everybody will be effected from the impacts of shale revolution bought, in terms of oil and gas as a producer, as a consumer, as a company and as a citizen. It will have overarching impacts throughout the time and many player.

Dr. Daniel Yergin: Right. So, it was interesting- I don't know if you heard Patrick Pouyanné a little earlier say that short-cycle oil is not limited to the United States, but in terms of how a company can manage its portfolio globally.

Fatih Birol: Yeah, definitely. But the bulk of it goes Unites States.

Dr. Daniel Yergin: Yeah.

Fatih Birol: ... the numbers are there. And, there must be reasons behind that. But, the numbers, again, show that the shale revolution's effecting everything. And many of the projects today, I don't want to name, from pipelines project is gas to some of the deepwater projects and others are delayed because of the changing dynamics of economic profitability of those projects in the context of shale oil and shale gas revolution.

Dr. Daniel Yergin: So, in your report this morning, what number did you have for the growth of US shale? Or rather US output?

Fatih Birol: So, US ... let's put it this way. More important I believe. We expect global oil demand will increase about 7 million barrels per day in the next five years. 60% of oil demand growth about 4 million barrels per day growth will come from United States.

Dr. Daniel Yergin: So that get the US up to about 13.5.

Fatih Birol: Close to, yes, close to. So, this is about everything put together, not shale, but everything put together. And once again we see around 2021, 2022 a slowing down of the growth and our expectations are made on the basis of a 60$ oil price.

Dr. Daniel Yergin: Six, six-

Fatih Birol: $60, six zero, not six of course. $60 oil price. So if it goes beyond, above $60 we may well need to revise out numbers.

Dr. Daniel Yergin: Right.

Fatih Birol: Because the fundamentals are there.

Dr. Daniel Yergin: So what does it mean for the US to be the world's largest oil producer?

Fatih Birol: Enjoy it, first of all, and second, don't confuse it being the largest oil exporter of the world. They are two different things. US is a number one oil producer as we have forecasted almost ten years ago for today. But, there is a confusion I see in some parts of United States, that being number on oil producer and number one oil exporter is the same thing. It is not. Number one oil exporter here is today, Saudi Arabia and will remain so for many years to come. And, the Middle East is the most important oil exporting region, about 20 million barrels per day and will remain so for many years to come so that we can design our policies accordingly.

Dr. Daniel Yergin: Right. And how ... I mean, I know in your world outlook you looked at the changes in the gas market.

Fatih Birol: Yeah.

Dr. Daniel Yergin: As a result of shale gas, maybe you could elaborate on that?

Fatih Birol: Now, we of course look at the gas as well and the same story we see in the gas markets as what we see in oil markets. For years and years Russia, without any dispute, was the number one gas producer of the world. But, today the US produces 25- 30% more gas than Russia. And, it will be even bigger the difference, it is of course shale gas plus the commercial gas. Only today I think this is very impressive. Norway is perhaps one of the key countries for European gas markets, Norway. Today in such a short period of time, US shale gas production reached five times the Norway production. So it is seven, eight years, five times the total Norway gas production and it will increase in the future. LNG will come, big time, US plus Australia and later on maybe Canada and East Africa. As a result of that we will see natural gas markets, natural gas market trades moving from a pipeline-driven trade to an LNG-driven trade. Contracts would be shorter, more flexible and, I believe, this is good news for the gas security and, most importantly, for the gas importing countries.

Dr. Daniel Yergin: Right, so let me ask you both how you see oil demand. You, I think ... Fatih I think you said no signs of a peak oil demand at all. I remember last year you said, even if every other new car that's sold is an electric car, demand still goes up.

Fatih Birol: Yes.

Dr. Daniel Yergin: Any changes on your outlook on that?

Fatih Birol: Not at all. And I said last year, as of today I said last year if every second car sold was electric cars, global oil demand will grow. There is no change in what I said, but there is a change. The other thing, which is not every second car sold was electric car, it was one out of hundred electric cars were sold electric cars.

Dr. Daniel Yergin: Right, so.

Fatih Birol: I think this is the only change. Otherwise, we don't see a peak in oil demand for many years to come. But we see a slowdown of the oil demand growth as a result of, of course, electric cars growth, as a result of fuel efficiency and as a result of the natural gas in, especially for trucks, taking more and more ... or eating up from the oil part. So, one of the key findings of our study we published today is, don't look at only indexed oil demand discussion to electric cars. There's an important giant that we don't see, in terms of, oil demand driver, which is the petrochemical sector. It is a major driver in US, in China, in Russia, in many countries. It's an important driver which we have analyzed in our report.

Dr. Daniel Yergin: So, Mohammad when ... how do both OPEC and your member countries look at this question of the longer term demand?

Mohammad Barkindo: Our world oil outlook 2017, it's comparatively similar on this variable with the IEA. To year 2040, we continued to see robust demand year-on-year going forward based on continuous robust economic growth. Economic growth last year and this year had been one of the highest also since the global financial crisis. We have revised our numbers to 3.8% global GDP for both 2017 and 2018 and we're even looking more optimistic going forward. We have taken note of the IMF endeavors at the wall economy forum, where they revised their numbers to 3.9%. We are also taking into account the growth in population, particularly in the developing world depending on what agency but OPEC is looking at between now to 2040 additional 1.8 billion people coming into this world, mainly from developing countries. And currently the issue of energy poverty, which the world has been grappling with including IOCs, NOCs and other stakeholders. Over 1 billion people still have no access to electricity, have no access to heating. Over 2 billion people have no access to commercial energy for cooking.

Therefore, we also subscribe to the position of the IEA that we cannot see in this projected area. I want to make reference to what Fatih mentioned in Abu Dhabi, I believe, regarding the report of the Brundtland Report thirty years ago, where it was postulated then that the global energy basket was represented by forcing foils to the tune of about 81%. You remember that?

Fatih Birol: Of course.

Mohammad Barkindo: In Abu Dhabi. This was in 1987 I believe, I was not born then. Now ...

Dr. Daniel Yergin: Just a glimmer.

Mohammad Barkindo: Thirty years later, Fatih reminded us, in Abu Dhabi, that the numbers are still the same.

Fatih Birol: Exactly.

Mohammad Barkindo: Is there any change?

Fatih Birol: No, no. In 1987, what I said exactly, Mohammad.

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This is an excerpt from CERAWeek 2018 and has been professionally transcribed as accurately as possible. Please note, some words and phrases may have been unintentionally excluded.

Posted 7 March 2018

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.