A discussion with:

Helima Croft
Managing Director and Global Head of Commodity Strategy at RBC Capital Markets

David L. Goldwyn
Chair, Atlantic Council Energy Advisory Group

Jean-Francois Seznec
Senior Fellow, Atlantic Council Global Energy Center

Anders Aslund
Senior Fellow, Atlantic Council Eurasia Center

Moderated by:

Randolph Bell
Director, Atlantic Council Global Energy Center and Richard Morningstar Chair for Global Energy Security

Last week’s breakdown of OPEC+ meetings in Vienna has turned a demand-side driven decline in oil prices caused by the impacts of Coronavirus into an oil price war between two oil-producing giants, with US shale production the ostensible target. If the standoff continues, however, the price war might ultimately do more harm to the Saudi and Russian economies. With increasing uncertainty about the depth of Coronavirus’ impact on global growth, the price war might also contribute to a sharp decline in the global economy.

Helima Croft, David L. Goldwyn, Jean-Francois Seznec, Anders Aslund, and Randolph Bell discuss ongoing market volatility, the origins of the crisis, what’s next for US shale, and the implications of it all for energy and geopolitics

Related reading

Transcript

Note, this is an automated transcript

Operator: Ladies and gentleman, welcome to the Atlantic Council members and press call (oil) market meltdown price wars, coronavirus and energy geopolitics.  Please be aware that each of you lines is now in listen-only mode.  We will open the lines for questions following the speakers’ opening remarks. 

Please press “star” followed by the number “1” key on your telephone to ask a question.  Questions will be taken in the order in which they are received.  Please be sure to introduce yourself when asking a question  I will turn over the call to Atlantic Council who will introduce the call and begin our discussion.  Mr. Bell, please go ahead.

Randy Bell: Good morning, everyone.  My name is Randy Bell, I am the Director of the Atlantic Council Global Energy Center.  We are so glad that you’ve joined us this morning for our call on the oil market meltdown, price wars, coronavirus and energy geopolitics. 

We are very pleased to have with us today on the line Helima Croft, the Managing Director and Global Head of Commodities Strategy at RBC Capital Markets and also she’s an Atlantic Council Board Member.  We have David Goldwyn, the Chair of the Atlantic Council Energy Advisory Group on the line. 

And then sitting with us here in the Atlantic Council offices we have Jean-Francois Seznec, Senior Fellow in the Atlantic Council Global Energy Center.  And Anders Aslund a Senior Fellow in the Atlantic Council Eurasia Center.

I want to get started with our first question to Helima, who happened to have been in Vienna for the OPEC meeting last week and then went on from Vienna to Riad, (fortuitive) timing on that. 

Helima, what happened at the OPEC Plus meeting to precipitate what has been a major route of the oil market.  Did Saudi miscalculate going in with the demand of 1.5 million barrels a day, did Russia miscalculate in walking out of the deal?  There’s a lot of blame going around, whose fault is this?

Helima Croft:  Well let me just back it up a little bit. I mean for the past six weeks you’ve had his Royal Highness Prince (Abdulaziz) bin Salman really advocating aggressive action on the part of OPEC Plus to address the coronavirus demand destruction concern. He had pushed for an early meeting in February and those efforts to have an early meeting with an early deep cut were blocked by the Russians.

And so we get to the OPEC meeting that just took place and the Saudi (position) remained that aggressive action was required to deal with the virus.  I had actually been in Saudi a couple weeks before and Prince (Abdulaziz) really laid out (this sort of doctrine of) if your house is on fire, you call the fire department, you bring the big hose, you don’t use a garden hose to put out the fire.  You may lose your furniture but you save your house. 

But some people might call that panicking he called it prudent.  And so he took that position into OPEC, he got the OPEC members to endorse a 1.5 million barrel a day production cut on top of the 2.1 million a day production that was already agreed upon in December.  And OPEC suppose to take a million of it, OPEC Plus was suppose to take 500,000. 

Now what I was told was that OPEC Plus countries had, except for Russia, agreed to the deal.  So you had 23 countries essentially agreeing to the 1.5 million barrel a day production cut.  And you had OPEC Plus countries, ex Russia, willing to kick in about 200,000 additional barrels, but they were 300,000 barrels that were remaining out of the deal and those were the Russian barrels.

And the Russian position remains steadfast throughout the week.  That they were prepared to extend the 2.1 million a day production cut to the (June meeting) but they would not do deeper cuts.  And with the Russians essentially saying, no, the Saudis fell back on their initial position was we’re not going to cut alone. 

And so I think that is really the catalyst for where we are now.  Also I think that this statement by the Russian Oil Minister, when the meeting had broken up, that essentially as of April 1 is was going to be every producer for themselves because the 2.1 million a day production would expire, that was another catalyst for the Saudi action.

And so when we landed in Riad on Saturday, the Saudi had dramatically slashed their official selling prices to all customers globally.  And that was the real signal that we in for a price war situation. 

And then since that decision on Saturday we’ve had a series of escalatory steps, whether it be Saudi’s announcement yesterday, that they would be ramping up to 12.3 million barrels a day of output, essentially going to their maximum (square) capacity. We’ve never seen Saudi Arabia approach those levels of production.  I think their peak was in November 2018 when they were doing just over 11.

Then their announcement that were preparing their budget to basically deal with a $20 or $12 oil price environment.  And then we had the announcement today from the (Emirates) that ADNOC, Abu Dhabi National Oil Company, would also be ramping up their output to 4 million barrels a day in April.  Now I think that the whole purpose of this is to try to get the Russians back to the table as quickly as possible. 

We’ve had some indications, Alexander Novack the Russian Oil Minister has made some statements saying they’re still working on this.  There were some meetings taking place with Russian Oil Companies today.  But I am not as optimistic that we can get a quick off ramp.

There’s suppose to be a technical committee of the OPEC governors, a joint technical committee on March 18th, that would be an interesting place where you could potentially have dialogue.  But I’m not hearing a lot of great things about that meeting right now.  So June will be the next official OPEC Plus meeting so I would look to June as potentially where you could see an off ramp.  I’m not optimistic right now that we’re going to see this resolved. 

Randy Bell: Helima, with everyone on board except for the Russians what were the Russian’s motivation for not participating in this cut and really for essentially blowing up the deal as it stood prior to Friday?

Helima Croft:  It’s great that we have a wonderful Russia expert on the call.  I can certainly just tell you how it was viewed, how it was described to me was that this was a decision that was driven by the CO of (inaudible).  He has long been opposed to the OPEC Plus arrangement.

For the way the Russian tax structure works, Russian oil companies benefit by increasing volume because the upside gains over a certain level are taken by the state.  He never liked this arrangement and I was told that certain catalyst for him taking a more aggressive position were the U.S. use of sanctions on (Ross net trading).

He essentially made the argument that why should shell companies not participate in the rebalance and why should it be Russia that has to take a bigger burden on to basically rebalance the market, why shouldn’t shell producers do it. 

And I also heard some speculation this is also tied to the whole idea of undermining American energy abundance and the foreign policy that it’s enabled.  Essentially a cost free sanctions policy where you can sanction countries oil exports and not see a price impact because  of this abundant resource. 

That’s how it was explained to me and that was the view, that again, (inaudible) had been able to sort of triumph over others who would say we benefit economically from side deals with the OPEC Plus countries.  But he was the loudest voice in the room.

Randy Bell: Thank you.  And we’re going to come back to that question about how this impacts the U.S. both from a shell producer perspective and a geopolitical perspective.  But I want to go to Anders right now to get a deeper dive on Russian motivations?  What’s been happening with U.S. Russian relations particularly related to the sanction?  And the way (sanction) operates within the Russian system and how he was able to finally get the outcome that he’s been pushing for for a number of years?

Anders Aslund: Yes, let me focus on the (inaudible) (section).  Helima is completely right and pointed out the (section) as the main factor here. He did decide Russian oil (inaudible).  Alexander Novak, again (inaudible) attended in Vienna it’s essentially just (inaudible).  He doesn’t make the decisions (inaudible). 

From (inaudible) diplomat (inaudible) (section) is (inaudible) one of the people who consider to be closest to Putin who Putin allows to do virtually anything.  And the (second) is a maximum risk taker just like (inaudible).  He is (inaudible) for ($150 million), he’s now building a minor house outside (inaudible) $350 million. 

This is his lifestyle, he found because his latest wife abandoned him for a  much younger man, rightly so.  And he has caused major crisis in Russia.  Before in December 2014, he caused a currency crisis with refinancing a big loan in an inappropriate fashion for Rosneft, and he did the same at the end of 2016.  He has gobbled up one private company after the other, so Rosneft is now the second biggest oil company in the world after Aramco with a production of more than five million barrels a day.

And (section) has been sanctioned by the U.S. Treasury since July 2014 because of Russian military aggression in the Ukraine, and recently the U.S. Treasury, to many surprise, sanctioned Rosneft’s trading company based in (inaudible). 

So I think (that section) has three objectives.  One is tactical change for price and that is not very important.  The second is to break U.S. shale.  I think that’s very important (the factor objective), but I think that (inaudible) is the (hit the) U.S. on the nose over his sanctions, and at the same time aggression with Saudi Arabia over the Middle East.  (Section is the Russian point man) in Venezuela.  It’s Rosneft that has provided most of the financing or handled most of the financing for Venezuela, which is about $10 billion that Russia has provided.

So (section) is simply a hard hitter, and usually I’m thinking of these two big financial crises that (it) caused in 2014 and 2016.  He goes on till Putin tells him now you have gone too far (inaudible).  Now you have to stop.

So we should see that (section) will be allowed to go ahead as long as he can, and then all of a sudden we can’t know when the damage is too big, and it can be quite big.  Putin will say stop it.

Also, the Russians clearly don’t understand how weak their economy is.  They are talking all the time of the balances.  Russia $570 billion in international reserves.  Saudi Arabia has just over $500 billion.  And therefore, Russia thinks were are stronger than Saudi Arabia.  This is how they are thinking, but – and they are balancing their budget on $42.4 per barrel.  Saudi Arabian (inaudible) (match). 

Therefore, I think we can beat Saudi Arabia not (thinking of the fact that) Saudi oil is much cheaper in production than Russian oil and they don’t think of how much will this cost in economic growth.  They think (it’s also) macroeconomic balances and not in dynamic growth standard (related). 

And I guess that Russia will see its GDP falling by a few percent because of this price decline.  And this is (inaudible) calculated, and I think this is the fact that would really disturb Putin eventually, but it will take time.

Randy Bell: It will take time.  So you think Helima’s right on that timeline that we won’t see anything right away and at the soonest will be – will be the OPEC meeting in June?

Anders Aslund: Yes, I think that there’s no reason to believe that Russia will change its stance.  (And thus) I completely agree with Helima on this.

Randy Bell: Now Jean-Francois, Anders thinks that Russia will be hurt harder than (Saudi on this).  Do you agree with that?

Jean-Francois Seznec: I may agree personally with Anders, but I don’t think the Saudis agree with Anders.  I think we’re in a situation now where there’s – the crown prince is under a great deal of pressure, and he’s the one who makes the decisions on the issues now that (Hada Dalfari) is gone at least – at least gone from the oil side (right)?

I think that decision was not done by his brother, the minister, but directly my Mohammed bin Salman.  They are – they are – I think the view of Riyadh is that, yes, they have $520 billion cash reserves or something like this.  They can see – they probably computed that their budget deficit will increase by probably $60 billion, $70 billion.  All together, it’s about $120 billion total deficit this year, so that’ll keep them – they can last for five years, but Mohammed bin Salman is under an enormous amount of political pressure within the country as we have seen from the arrests last week, this weekend, last weekend.

Even – and I’d also been travelling to Saudi Arabia twice in the past six weeks, and I have a feeling that there’s a fair amount of tension within the population, even among the main supporters of Mohammed bin Salman on the political evolution in Saudi Arabia.

I think we are beginning to see that the vision 2030 is not going well.  The foreign investments are not happening for various reasons, including (inaudible) and all that.  But he needs to make a big impact.  Now, his big impact is to force the Russians to give up and agree to the cuts, and if at the same time it destroys the U.S. shale industry so much the better.  So he wants to force and impose on the world an increase in prices.

Now, MBS is not Putin, and if we’re getting to a situation where it’s Putin (inception) against the 32-year-old Mohammed bin Salman known for being not necessarily deep thinking and less thinking of the long-term, I think – I’m not sure I’m very positive about the (ask) whether Saudi Arabia will make it (on us) to push the Russians.  The Russians (have the wear results) to do things as well, and mostly they’re more mature in terms of their policy making.

So I think the Saudis very much think they can win this battle, but the First World War was going to last 30 days.  Everybody was sure to win, and we’re having this issue right here now.

Randy Bell: What about the feeling in the general populous given that so many invested in ARAMCO and now ARAMCO shares are below – at least where last I checked below the IPO price?  How does that impact this feeling in the country?

Jean-Francois Seznec: Oh, I’m sure that’s creating a problem because the fact that their shares are down is going to be a problem, one, for Saudi ARAMCO but also for the banks because most of the shares that were purchases were purchased with loans from the banks, basically imposed by PIS who owns the banks.  So I think there might be some issues there.  That is one of the reasons probably why the crown prince has decided to really force the price up if he can do it.

Randy Bell: So turning to the – a sensible target of this price war, U.S. shale producers, David, what is your take on how this will impact U.S. shale producers?  We saw on Monday a number of stock prices drop dramatically.  Occidental dropped by more than 50 percent.  What is this future outlook for U.S. shale over the rest of the year?

David Goldwyn: Well, if the policy were not to change and if we had sustained prices that were $30 and below over an extended period of time, you would see a significant restructuring in U.S. shale.  The reality is that even before coronavirus and before this (catering) of the OPEC+ deal you were already seeing (over productions) in capital expenditures by U.S. independents.

You were seeing more focus on the areas which had high initial production and faster cycle times more in the Permian, less in Woodford, and struggling financial positions by a lot of the independents who were highly leveraged.  So that was already happening.

Now you’re seeing these big cuts in capital expenditures by Oxy and by Marathon and others, and frankly all of the independents who were borrowing significant amounts of money, assuming a $50 oil price, are going to be having a lot of trouble, but there is a – there’s a miscalculation I think on the part of the Russians and the Saudis if they think that causing three months or even six months of extreme pain in the U.S. shale sector is going to break shale because now you have the IOCs, you have Exxon and Chevron who are significant players in the unconventionals.  In the event that these independents are forced into bankruptcy, their assets, the leases will be up for sale, and those are likely to be bought by others players.

And you can knock shale down but not out.  What we saw in 2016 is the ability for the shale sector to revive because it’s a short cycle style of production very rapidly is pretty fast, even within a year.  So this is not an effective long-term strategy on their part.  So value over volume, that’s going to be the name of the game.  Shakeouts, consolidation, that will absolutely happen.  That’s probably going to happen anyway, but now it’s going to happen a little bit faster. 

But even today EIA is projecting that rather than more growth you’re going to see U.S. oil production drop by about 300,000 barrels a day from its 13 million barrel a day high in 2020.  That’s not a – that’s a significant drop, but it’s not the bottom falling out of the shale market.  I think you’ll see in the end a stronger and more resilient shale sector on the other side of this crisis just as you did from the 2014-2016 period.

Randy Bell: So David, the conversation had been not just about impacting the producers themselves but even more broadly the geopolitical freedom that the U.S. has had because of this energy abundance.  Some people frame it as attacking the so-called energy dominance agency, though I think that this geopolitical freedom grew before the term energy dominance was coined.

And just in February, for instance, U.S. was (a net-X quarter over below) 900,000 barrels a day, so it’s a real dramatic change which has allowed a lot more freedom of action.  Does the impact on the shale producers affect the U.S.’s geopolitical freedom at all?

David Goldwyn: I think that it doesn’t, and that’s because I think there was a fundamental misconception in the nature of how U.S. oil production affected U.S. geopolitical power.  There’s no question that significant U.S. production which drove down prices and reduce U.S. dependence gave U.S. more freedom of action, but that was because the impact of an increased production (with) relatively low prices.  And therefore, the cost of imposing sanctions on Iran or on Venezuela or of suffering an outage in a place like Libya was relatively modest. 

That’s about the price and about spare capacity.  That’s not about the quantity of U.S. exports in the global market.  And so, the Russian miscalculation now I think is that if they think that pain in the shale sector is going to make is harder for the U.S. to impose sanctions on Venezuela or Russia for that matter, I think that they’re mistaken because as prices drop, the U.S. freedom of action, which is not to have U.S. consumers pay a price at the pump for U.S. geopolitical actions is actually increased, not decreased.  So I think that’s one misapprehension.

And the other is that cheerleading for U.S. exports does not necessarily result in market share.  And so, there you could just look at the LNG sector where the trade agenda has pretty much eviscerated the LNG export market by taking China off the table. 

So I think this does expose the fallacy and the energy dominance narrative, but it doesn’t decrease the U.S. freedom of action and foreign policy.  And I think if the Russians are doing this because they want to punish the U.S. for their exclusive right to trade Venezuelan crude they’re much more likely to face more pressure rather than less.

Randy Bell: Got it.  So expanding the lens a little bit, how does this impact other producers?  And Helima, maybe you have some thoughts on this.  We’ve already seen the UEA as we talked about earlier, but what about Iraq?  What about Nigeria?

Helima Croft:  I mean, I think this is catastrophic for the producers that – we do this thing called the OPEC Watch List, and we’ve identified countries that were really, really facing severe economic and political crises in a low oil price environment, and we’ve had four Middle Eastern producers see their governments fall over the course of the last 12 months because of protests over poor economic conditions, poor governance. 

So this is a really urgent crisis in the making for the most economically fragile and politically turbulent producer states.  So the countries I think that everyone should be most concerned about in terms of like real instability on the back of this are the Iraqs.  I mean, you think about what’s going in Iran right now.  I mean, a combination of sanctions, coronavirus, price collapse.  I mean, that is a really difficult combination for that government, and Nigeria. 

It’s all the sort of usual suspects that we talk about as most vulnerable and most exposed by low oil prices, so least diversified countries.  Those are the ones I think that will be really feeling the severe (act of shock at what’s happened).

Randy Bell: Do you see this potentially as a preview of a peak in oil – of a long-term peak in oil demand, the so-called peak oil demand?  Is this what happens over the long-term?

Helima Croft:  Well, I think the interesting question is I think we have to see how this in the near-term what is the trajectory for the coronavirus, what is the impact on demand, and what type of recovery are we looking at?  Is it a situation like SARS where we had a pretty big V-shape recovery in terms of demand or are we looking at and extended downturn in demand? 

I think that is part of the reason why Abdullah’s even advocating for a very aggressive, early response is because it’s so uncertain in terms of what the true impact is going to be of the coronavirus on demand.  There’s some indication of some (green chute) of activity in China again, but again, the overall picture in terms of global demand, everyone is peaking down their demand numbers right now.  The question is when do we get a recover?

Randy Bell: Now, does this impact investability of future oil projects?  There’s been a debate online about whether or not this is actually a good thing for renewables or a bad thing for renewables.  In a traditional situation if the price of oil goes down, you see more people buying more oil, demand goes up, et cetera, but with renewables as an option there’s some analysts who argue that this will actually help the renewables market by making oil seem less desirable over the short and medium-term.

David, you alluded to this in a blog post you posted earlier this week.  I wondered if you have any thoughts on that?

David Goldwyn: Well, a couple.  I mean, I think certainly for countries who are concerned about oil price volatility it’s a caution.  I think it’s a mix really on renewables.  Cheap gas does make it harder to sell – to sell renewable energy, but if you have a significant falloff in oil production, U.S. domestic gas prices are likely to go up.

           
I think on a worldwide basis it’s a little harder to sell electric vehicles when oil prices are low.  So I think from a pure market point of view it doesn’t help, but where it does help is low prices can sometimes spur wise governments to take policies that will help clean energy transition.  It’s a time when you can eliminate fossil fuel subsidies because the cost of doing so is nearly invisible.  Iran did this in (spades) in 2014 of all countries.

And so, you can see – you can see countries try and make that transition, and here in the U.S. you could even have regulators step in as they have failed to do so far and stop giving flaring permits to anybody who wants to produce oil before they have takeaway capacity for the associated gas.  And you could rationalize the production and help the environment.

So I think there are smart energy transition strategies, but I think per se it doesn’t really help renewables on a worldwide basis.  You have to worry about – you have to worry about the impact of low prices once you get on the other side of coronavirus, but I think there is a lid on how much that demand is going to recover because of the commitment of countries to the Paris agreement and because of the decarbonization agenda.  So whether that’s Europe or China or other places, you’ll – you’re going to have a recovery, but it’s going to be different than it was after ’97 and after ’86 and even after 2014.

The ceiling is lowering.  And where that peak demand takes place, I’m not sure if that’s in the mid-20s but the ceiling, regardless, is lower than it was the last time we had one of these crises.

Randy Bell: Got it.  I want to come back to Saudi-Russia for a moment because they seem to have different views on U.S. shale, with Russia seeming to think that they can attack U.S. shale where Saudi seems to be more open to – or more accepting of U.S. shale as just a permanent part of the oil environment.

Jean-Francois, do you have any thoughts on why Saudi seems to be more accepting now than, say, they were in 2014?

Jean-Francois Seznec: Well, I think they’re – at least pretended to be more open to shale because they felt they had no choice.  And I think they were going to make a great deal of effort to learn some of the technology to use the shale technology for themselves in the new reservoir that’s out in Saudi Arabia.

On the other hand, they also are worried that their shale is creating a very low price environment for them.  So I think that it’s a mixed bag from the Saudi standpoint.  I think the more positive approach of the Saudis on shale was more political, really, than reality, honestly.

One thing I could mention on what David just talked – one of the issues on the renewables and on the CO2 capture, there was a big conference in Riyadh about three weeks ago about that, where the Saudis were saying they were going to become CO2 neutral and it was a big ballyhoo.  I mean, they really pulled all the stops out on this.

But that requires an enormous amount of capital.  This capital, if there is a price (war continues), the capital will not be there for them to invest in that (then) and neither will the capital for the UAE and whatnot because all the reserves – cash reserves are going to be eaten up very quickly.  So in many ways, it will really slow down this whole environmental effort and (P.R., really), which the Saudis and the others in the region were trying to do.  But that’s, (yes).

Randy Bell: Helima, I wonder, do you have any thoughts on Saudis making peace with U.S. shale and what that – if that’s real or what that means?

Helima Croft:  Well, certainly, I think that – at least in my conversations with the technocrats and people in the ministry, they say that – they actually said some of the things that David has said, where you could see a situation where shale companies go bankrupt and the (majors) come and acquire them.

And so the idea is, with the entry of the IOCs into the shale play, this is not something that you can kill.  It can become stronger and more resilient.  And so I think that, at least from the technocratic level, there’s a view that you have to sort of make some room for shale. 

And so again, Jean-Francois maybe has more of a view of what the Mohammed bin Salman view of it is, but I certainly think there is a lot of sophistication in the ministry about the difficulty of eliminating the shale story. 

So I think that they have a very nuanced view of it.  And whether that affects the highest of the (top of the house), I’m not sure.  But I can tell you, at least at the ministry level, I think they’re very clear that this industry could become more resilient.

David Goldwyn: Randy, if I can jump in for a second, there’s also just a plain old political, not even geopolitical aspect of this which was probably highlighted by President Trump’s call to Mohammed bin Salman yesterday, which I imagine was something along the lines of, “What the heck?  How’d you screw this up?”

And the reality is the president has a very strong base in the U.S. independent sector.  They’re calling for relief, as they did in 1997.  They sort of launched an anti-dumping action against Saudi Arabia. 

And so the president has a lot of pressure on this.  And the Saudis don’t have a lot of friends – great friends in the West right now, and particularly after Khashoggi and Yemen and with the Democratic agenda – Democratic Party agenda looks like, they’re really not in a position to really alienate the president.

And so I think this was more about maybe Russia going to war with U.S. shale than Saudi going to war with U.S. shale.  But I am actually slightly more optimistic than Helima and my colleagues about the road back here because I think there will be some amount of pain that needs to be suffered before you can bring the parties back to the table. 

But I can certainly see the U.S. position on what the Saudi position should be as, why don’t you back off opening the taps, why don’t you go back to 2.1, those will be your concessions.  And if the Russians want to talk, why don’t you open that door and talk to them, because a race to the bottom is not going to help any of us.  And so I think …

Helima Croft:  Can I jump in?

David Goldwyn:… egos aside, I think that’s a possibility.

Randy Bell: Helima, and then Anders (wants to speak) …

Helima Croft:  Randy, can I just jump …

Randy Bell: … as well.  Helima, go ahead.

Helima Croft:  Yes, because I think one of the challenges with that position though is that President Trump has spent the last three years telling the Saudis to open up the tap, saying that OPEC is a horrible organization, threatening to sign the NOPEC legislation.  And so I think it’s kind of a challenge for President Trump.  I mean, his first tweet actually was this is great for the U.S. consumer.

And so, I think it is an interesting position he’s now taking (with) the Saudis, essentially saying, I spent three years saying I’d like you to max out production and not coordinate, and now basically saying, I’d like you to actually go back to go back to active market management.  So there is – I’m not saying that that doesn’t mean that you won’t have influence making that argument, but I think it’s a challenging argument for an administration that has literally spent three years saying that OPEC should be abolished and there shouldn’t be coordination on production.

Randy Bell: Yes, Donald Trump and the NOPECers seem to have gotten what they’ve been asking for …

Helima Croft:  They wished for.

Randy Bell: And it may not be as rosy as they thought.  Anders?

Anders Aslund: Yes, on the (former one) – what Jean-Francois and David said, that it’s all political with regard to Saudi Arabia, with Russia also.  The relationship between the U.S. and Russia is awful, and in particular with regard to the oil industry which has been heavily sanctioned by the U.S.  So (the evil section) want to do as much damage to the U.S. as possible and I think that the shale is sort of an afterthought in this regard.

So the U.S. in July 2014 introduced sanctions, three kinds of sanctions against all technology, (deep, offshore, Atlantic) oil and Arctic oil.  And this is what (Exxon) is …

Jean-Francois Seznec: And the pipeline.

Anders Aslund: Yes, (on the length) of Nord Stream 2 pipeline (at the end of last year).  And last month) the (the tanks and the gas – and also NAFTA trading).  So I think (they might) (inaudible) says I’ve had it, I’m going to beat them. 

And the shale gas is less important than I want to beat – our (evil section) want to beat the United States.  They are sanctioning me personally, my company and the technology, (I want).  So this is how we should look upon it, I think.

Randy Bell: Anders, we’ve seen a growing relationship until last week between the Russians and the Saudis, and more generally the Russians in the Gulf (states).  What do you think this does to that relationship?

Anders Aslund: I think that it has been quite complicated and increasingly so when Russia is getting involved in more countries in the Middle East.  And it has (got) too close to Iran.  People have (marveled) that Russia is the only country that can pull close to both, to the Iranians and the Saudis.  Well, perhaps not so well any longer.  So this was – so here was a way overplayed hand.  They got too deep with the Iranians in Syria and the Saudis don’t like it.

Randy Bell: Yes, in many ways, one of the only – one of the negative outcomes of U.S.’s energy growth was driving the Russians and the Saudis together to cooperate on OPEC+, so we might have seen that undone.

Jean-Francois had one comment and then we want to go to questions on the line.  So Jean-Francois?

Jean-Francois Seznec: Well, I don’t want to make it sound like personalities are so important but, to a certain extent, they are.  Remember, we’re going to back to Khalid al-Falih being fired as minister of oil.  He was able to handle the Russians.  He had the right touch with them and he knew what promises to make and so on. 

He’s been fired, he’s been replaced by the brother of MBS and they don’t have the capacity which Khalid al-Falih had in the past.  Now, Khalid al-Falih is sort of coming back slowly into government but not in a position where he can really defend the interests of Saudi Arabia in the long term as he views it. 

And so, those decisions have been taken by, really, people who do not have the knowledge which he does and the understanding of Russia which he did.  So maybe we’ll see a comeback of Khalid al-Falih.  Who knows?  But at this point, personalities do count for a little bit.

Anders Aslund: I think they count a lot.  And as Helima pointed out in the beginning, Sechin has now taken over the OPEC policy.  I don’t know why he was not in charge before, but now he’s clearly in charge.

Randy Bell: OK.  Let’s go to questions.  We’ll get some instructions on how to ask them.

Operator: At this time, I would like to remind everyone, if you would like to ask a question, press “star” then the number “1” on your telephone.  Again, “star,” “1” on your telephone if you would like to ask a question.

Randy Bell: Great.  So we have three so far …

Operator: You have a question …

Randy Bell: Let’s take the first from (Josh) at the Washington Examiner.

(Josh): Hi, guys. Thanks for doing this.  I just wanted to add on to the discussion here at the end around diplomacy and Trump’s role in all this in his relationship with Saudi Arabia.  And we know he’s also rhetorically friendly with Putin, as much as this administration has really sanctioned Russia on the energy front in different ways – but, yes.

I mean, do you see – David, you mentioned you’re somewhat optimistic that Trump and the Saudis can be on the same page here.  But I mean, are there certain things the U.S. could – from the Russian’s perspective, could they give an all-on sanctions or do something to incentivize Russia to get back to the table?  I mean, how do you see Trump potentially leverage his relationship with Putin here?

David Goldwyn: Sure.  Well, I think the Russians needed to worry that congressional support for sanctions bills was rising anyway, not just PESA but DASKA as well.  One of these bills was reported out of a committee and it was really only headed off by Republican leadership from coming to a vote. 

So if you get a strong groundswell of – from the U.S. Independents, and, therefore, from the Republican base that the Russians are targeting the U.S. oil sector and (do something to) the Russians, I think the risk of that bill passing is higher rather than lower.  And the firewall had always been would McConnell let the bill come to the floor and would the president veto it.

But in this atmosphere, if a Russia sanctions bill gets a vote in the Congress, it will be by veto-proof majorities.  And that’s a real risk, so I think the (bear) ought to worry about poking the U.S. in this case.  I think that’s a real risk.

Randy Bell: Anders had a thought about that as well.

Anders Aslund: Yes, the fundamental thing here is that Russians are very disappointed with President Trump.  They have excellent relations with him and President Trump seems completely impotent in getting anything done.  And (formally), the course of the adoption of CAATSA, (Combating) American Adversaries Through Sanctions Act of August 2017, the president can no longer can no longer abolish these sanctions.  It’s up to the Congress. 

And then, strangely, with Nord Stream 2, the president has actually been a driving force in favor of these sanctions, seemingly preferring U.S. LNG producers to his friends in the Kremlin.  So the Russians are very disappointed.

(Josh): Yes, just real quick on Nord Stream 2.  Do you see – I know that it looks like that – it’s going to be finished anyway.  But you potentially see Trump saying, OK, we’re going to back off a little bit on our opposition to that?  I don’t know – something to – my understanding is that Putin was very upset about the U.S. position on Nord Stream 2.  Is that maybe a way out, from the Trump side?

Anders Aslund: I don’t think so.  And what I hear – and you probably also heard – is that Steven Mnuchin was threatening to veto the defense bill because of Nord Stream 2, and Trump just overrode him. 

So, in this case it was Mnuchin who was (inaudible) more against the sanctions on Russia than Trump, who just accepted it. 

Randy Bell: OK, next question from (Tim McDonald) and (Quartz).

(Tim McDonald): Thank you.  Thanks everybody, this is really interesting.  David, I just wanted to follow-up quickly about this idea of consolidation in the U.S. shale sector and whether we might see some independents go under and I – I don’t know if this is going too far out on a limb, but I wonder if you had any thoughts about what that might mean for sort of overall emissions profile from that – from that sector if that kind of consolidation might be an opportunity for – if Chevron or other companies – other majors are kind of scooping more of those independents, could that provide new revenue that they could put into their decarbonization efforts or – I don’t know.  I’m just wondering if there’s any impact on emissions that might come from that kind of – that trend.  Thank you. 

David Goldwyn: Thanks, a great question.  It – I think there would be a positive impact on emissions, though not exactly for the reasons that you – that you state.  I mean, the reality is that the independents that are more thinly capitalized have been the strongest source of political resistance to methane regulation at the state level and the federal level, and a big part of the push for the president’s deregulatory agenda. 

The president, to some extent, has pushed beyond what a lot of the majors are comfortable with, because they have both a global profile and shareholder pressure and all these other reasons, so you see Exxon Mobile coming out with its methane framework and you see Chevron supporting, even in a national petroleum council study, they want deeper regulation but they want to deal with emissions also. 

So, I think you’re much likely to see more responsible oil field practices and reduced emissions and more monitoring detection and mitigation from the larger better capitalized companies that you are seeing from the independents.  So, in that respect, I think that consolidation would be helpful. 

And I think you’ll see a little bit less pressure on the Texas Railroad Commission and others to get everybody who walks in the door an air permit, regardless of how much that they’re flaring, because those reputational impacts are impacting the larger companies in a number of ways.  So, long answer, but I think basically the answer is, yes, consolidation would probably have a – have a positive impact on emissions control. 

(Tim McDonald): Thank you. 

Randy Bell: Jean-Francois wanted to add a comment as well. 

Jean-Francois Seznec: Yes, in fact I’m going to go exactly against what David just mentioned, because what David said is, of course, true for the United States, but in terms of the Gulf, in particular, who are huge emitters of CO2 and what not, they might – this whole situation will hurt, because the amount of capital, as I mentioned earlier, the amount of capital needed to limit these emissions is huge and if they go on a price war, that’s going to really stop them from incrementing those emissions policies they have on hand. 

And I might add that, in the case of Iraq, which is one of the worse emitters since the flare about two-third – or at least 60 percent of their gas, that is going to make it even worse.  They just cannot come up with a proper investments to do this.  So, from the Gulf standpoint, it will not go along with what David has just mentioned, which is likely to happen in the U.S. 

Randy Bell: Right.  The Emirates and the Saudi’s are pretty good on venting flaring, much better than the U.S., but it’s the – but it will undermine some of their carbon capture plans.  But the Iraqis are some of the worst in the world, perhaps only behind Venezuela on methane, both venting and flaring.  And it – that – this will not help them.  Yes, got it. 

OK, moving on to Bridget DiCosmo from Energy Intelligence.  Hi Bridget how are you today? 

Bridget DiCosmo: (Inaudible).  What you see as the implications for the U.S. national pressure …

Randy Bell: Bridget, sorry to interrupt.  We lost – we didn’t hear the beginning of your question.  So, can you – can you start from the beginning?  Sorry about that.

Bridget DiCosmo: Sure.  Thanks for the call.  I was wondering if you could address the – what you see as the implications for the U.S. maximum pressure sanctions campaign against Iran?

Randy Bell: David, why don’t you take that first if you want, and we can go around and ask anybody else if they have any opinions.

David Goldwyn: Sure.  Well, I think the maximum pressure campaign becomes more effective with no further action by the United States, as prices drop and revenue goes even – what little is coming out of Iran, brings less revenue, and as Helima said earlier, puts greater pressure on there.

I think the same is actually true of the maximum pressure campaign on Venezuela, as revenues decrease, the U.S. doesn’t need to d anymore for the policies it has in place to cause more internal pain in both those countries. 

So, it may be – it may be that it eases the need for the U.S. to do more or – to put it differently, for the Administration to be seen as doing more to pressure on those countries for political reasons in the next six months, because the market impacts are doing it for them.

Randy Bell: Helima, any additional thoughts? 

Helima Croft:  Yes, the only thing I would add is that I think it’s really hard to overstate the impact the coronavirus is having on a region and how challenging this going to be for these governments.  I mean, Iran is the center of the outbreak in the region.

I think every day we get more reports of high level officials that are coming out, inspect (you) with this virus, and so I do think that it’s a combination of low oil prices and the impact of this virus that is going to be enormously challenging for the government going forward, and there is no real need for the U.S. to do anything additional to increase the pressure on the government.  They’re already facing such a crisis.

Randy Bell: Got it.  Jean-Francois?

Jean-Francois Seznec: Well, and I agree with everything that has been said, but I’d like to put a word of caution here, is that with the – Iran is under enormous pressure, the income is declining to almost nothing and what can they do. 

There might be some elements in the Iranian leadership who might want to say, look, the only time we had a nice spike in oil prices is when we (attack) (inaudible).  So, why don’t we do the same thing in a different format, but do the same thing.

So I would – I would image that the leadership in Saudi Arabia and in the United States is fully aware of the risk and they’re probably going take some preventative action for that.  But, on the other hand we never know what the Iranians and their republican guards can do.  So, I would – I would caution that this could be reversed very quickly by an Iranian action.

Now, that could degenerate very quickly.  I mean, could degenerate very quickly, but we are really entering an era where we don’t know what’s going to happen this afternoon.

Randy Bell: On – it – the timing is probably coincidental, but just on Monday the U.S. announced that they were going after Iran’s floating oil storage.  And so, you do see the low oil prices, as others have said, letting the U.S. do more in this market.  But Jean-Francois, I think you’re right, that in general, the – these low oil prices have a destabilizing effect on the entire region.

We have one more question from Mike Lee at E&E News. 

Mike Lee: I’d like to re-ask the question about peak demand.  I believe David sort of answered about the – that the answer is unclear in the short-term.  What do you guys think about the long – the long-term view?  BP is predicting that the peak demand hits in the mid-20, 30s, does this bend the curve at all and bring peak demand forward?

Randy Bell: Who wants to take that first?  He – David, he said you name.  So, in the style of the U.S. presidential debates, you are – you have the right of first refusal. 

David Goldwyn: Because (inaudible) name check.  I don’t have really too much more to add.  I think the – Helima really hit on the key point, which is we have to get on the other side of coronavirus.  As long as we don’t know when this is going to end, we have no visibility on medium-term demand. 

But, I do think that we when we do get on the other side of it, and we come back, that you’re going to see demand recover, but I think we’re going to go to the status quo ante.  I don’t think the push for electric vehicles changes in China.  I don’t think it changes in Europe, depends on the outcome of the election here in the United States. 

Countries in Latin America are really still strongly committed to the energy transition and this huge oil price volatility probably provides a short-term buying opportunity because gasoline is cheap.  But long-term uncertainty because it will be followed by a price rise and people will wonder, as we did in ’97 and in 2014, how high does it go and how fast.  So I guess that’s a long way of saying, no, I actually don’t think it changes the peak demand outlook (at all).

Randy Bell: Helima, any thoughts on that?

Helima Croft:  I mean, well, I don’t have (very) much more to add but the one thing I would say is that there has already been a lot of investor – a lack of enthusiasm of investors, to put it mildly, about the energy space. 

And they kind of sensed that with the ESG agenda that it was becoming more and more un-investible.  And I just don’t think that this latest action between the Saudis and the Russians and all the talk of this price war and where’s it end, I don’t think it increases any enthusiasm for investing in the oil space.

Randy Bell: OK, thanks so much.  That was the final question.  So with a couple minutes left, I want to do a final round robin.  Everybody has 30 seconds.  Answer – if you want, answer this question or say something, any other final thoughts.  But how and when does this end? 

And we’ll start with – and you’ve sort of answered this before but, David – we’ll go David, Helima, Anders and Jean-Francois.  So David, 30 seconds.

David Goldwyn: I think it ends by June.  I think there’s a deal to go back to 2.1 by June, if not before, for political reasons.  But the long-term demand doesn’t end until we get on the other side of coronavirus.  And I do – if I can slip in a question, maybe, for Helima, everybody goes to 12.5 in the (UAE, so) who’s buying this oil?  I would just – I don’t – I don’t see where it goes.

Randy Bell: Well, Helima, what are your thoughts?

Helima Croft:  I mean, my thought is I think June is the earliest this could end.  I don’t think it ends with a 2.1.  I think it ends when they at least get to 1.5, whether it be the Russians saying they won’t kick in (300,000) and not actually comply.  But I don’t think it ends with the Gulf states basically saying you’re right Russia, we’re going to basically accept your 2.1 level.

The other thought I would say is there’s all this talk that Khalid al-Falih could have prevented this.  I don’t think that’s the case.  Khalid al-Falih had a good relationship with Alexander Novak.  Now that Sechin is calling the shots, I don’t think there’s anything that – we – Khalid al-Falih could have done if Igor Sechin was intent on pushing this policy forward.

Randy Bell: Anders?

Anders Aslund: I can – I want to say on the Russian side, I think that what will be decided is when the Russians sees that the economy is really tanking, that Russia in a deep recession and that logically will take at least half a year before they realize that they’re in deep trouble.  And the Putin will tell Sechin the game is up, guys.

Randy Bell: And to close it out, Jean-Francois.

Jean-Francois Seznec: Well, I agree with what Anders just said.  We may have a similar scenario in Saudi Arabia where they might realize that it’s going to take – or a few months to realize that this is really – it could be dreadful to their economy and their long-term (reserves).  And that various cooler heads may intervene to basically force a settlement. 

So I would agree with what Helima and Anders and David have mentioned, yes.

Randy Bell:     Fantastic.  Thank you all for being on the line today.  Thanks, all, for calling in.  This will be recorded and posted to The Atlantic Council website sometime in the next hour or so.  So you’ll be able to get those – any quotes directly from there.  And feel – please feel free to reach out to us if you have any additional questions. 

We’ll be covering this very closely it appears, over the next at least three months.  Let’s hope not longer than that.  Thanks, all, and hope you have a good day.

Operator: And this concludes today’s conference call.  Thank you all for participating.  You may now disconnect.

END