January 12, 2017

Atlantic Council
Global Energy Forum

Oil Market Trajectories: Long-Term Investment and Technology Risks

Special Introduction By:
Majid Hamid Jafar,
Chief Executive Officer,
Crescent Petroleum

Moderated By:
John Defterios,
Emerging Markets Editor,
CNNMoney

Framing Keynote Remarks By:
H.E. Jabbar al-Luaibi,
Minister of Oil,
Republic of Iraq

Participants:
H.E. Issam A. Almarzooq,
Minister of Oil, Electricity and Water,
State of Kuwait

H.E. Mohammad Sanusi Barkindo,
Secretary General,
Organization of the Petroleum Exporting Countries

Helima Croft,
Managing Director and Global Head, Commodity Strategy, Global Research,
RBC Capital Markets

Amos Hochstein,
Special Envoy and Coordinator, International Energy Affairs,
U.S. Department of State

Location:  Al Maryah Ballroom, Four Seasons, Al Maryah Island, Abu Dhabi, United Arab Emirates
Time:  11:45 a.m. Local
Date:  Thursday, January 12, 2017

Transcript By
Superior Transcriptions LLC
www.superiortranscriptions.com


JOHN DEFTORIOS:  OK, if I can have everybody go ahead and take a seat.  If you thought the last panel was excellent, and it was a really good mix, we’re very blessed to have kind of a star-studded cast here.

            If I could have those at the door go ahead and take a seat and those who want to participate in this session.

            This will be a very similar format, and I want to try to allow some questions at the end.  First, let me introduce our guests sitting here with us today.  His Excellency Issam Al Almarzooq is the minister of oil, electricity and water, from the state of Kuwait.  I mentioned him in our first panel because of the role he’s playing as chair of the monitoring committee between OPEC and non-OPEC.  His Excellency, the minister of oil for the Republic of Iraq, to his left, Jabbar al-Luaibi, nice to see you.  His Excellency Mohammad Barkindo is the secretary-general of OPEC.  Amos Hochstein is a special envoy and coordinator for international energy affairs at the U.S. State Department, nice to see you again.  And certainly not last, but not least, Dr. Helima Croft is a managing director and global head of commodity strategy for RBC Capital Markets, a name I see quoted very often on CNNMoney, so it’s good to see you.  It’s nice to have.

            And again, those, if you’re looking for a seat, let’s go ahead and take one.

            I’d like to introduce both somebody who is a leading light when it comes to energy in the Middle East and had a chance to actually visit his fields in northern Iraq on the gas front and someone that we’ve often called upon during more tumultuous times, either geopolitically or when it comes to energy.  He always kind of lends a wise ear to use that are, I’m going to say, relatively new to the region, but have been covering it for 20 years, but actually living here for six.  Let’s give a warm welcome to Majid Jafar.  He is the chief executive officer of Crescent Petroleum and a board managing director for Dana Gas.  He’s going to give a kind introduction to our keynote speaker this morning, the minister of Iraq.  Let’s give him a warm welcome.  (Applause.)

            MAJID HAMID JAFAR:  Thanks, John.  Bismillah al-rahman al-rahim.

Your excellencies, distinguished guests, salam aleykum.  On behalf of Crescent Petroleum, as a UAE private energy company now in our fifth decade, it gives us great pleasure to be supporting this inaugural Global Energy Forum by the Atlantic Council here in Abu Dhabi, the capital of the UAE and now very much also the capital of global energy policy and innovation.

            It is appropriate that such an event with such distinguished speakers should take place at the beginning of Abu Dhabi’s Sustainability Week which brings together world experts, policymakers and practitioners from across the energy spectrum.  Only with such a holistic approach can we adequately tackle the twin challenges of energy affordability and sustainability that face our planet today.

            Despite all the progress made in recent years in developing alternative energy sources, it is right also that we should commence our deep dive into the conference topics with a focus on the oil market, which is still a vital part of the energy mix, particularly in the transportation sector, and will be for years to come.  And with over 60 percent of the world’s oil reserves, it is also fitting that this discussion should take place here in our region.

            That oil prices today are twice what they were a year ago, but half what they were two years ago, is a testament to the continued potential volatility of this fundamental global commodity whose price is watched more than any other on earth.  Indeed, when I started in this industry close to 20 years ago, the oil price was as low as $9 a barrel, and I recall we were screening projects at $6 a barrel, whereas natural gas prices were rapidly rising and there was a gas shortage in the United States.  Today, it seems the complete opposite is true.

            The panel of speakers invited to address the topic are unparalleled in their seniority and expertise and moderated ably by John, who not only knows the UAE and the region very well, but has a keen interest in energy, from OPEC meetings in Vienna to following me, as he said, to the gas fields in northern Iraq.  He looks better than me in a hardhat, by the way.  (Laughter.)

            I’d just like to say a few words about the first speaker.  Iraq, as you know, is where OPEC was born in 1960 and is currently the second-largest and the fastest-growing oil producer in OPEC, despite the major economic, security and political challenges facing the country, which you call observe on the news.

            We as the Crescent Group have invested close to $2 1/2 billion in the country over the last decade with more than half of that in the oil and gas sector where we have been operating and producing gas and liquids continuously since 2008. 

            His Excellency Jabbar al-Luaibi has recently taken over Iraq’s oil ministry in the government of Iraq and is actually the first industry professional to do so in over a decade, having been the CEO of the South Oil Company in Basra, which is responsible for over 80 percent of Iraq’s oil production.

            He is a proud son of Basra and also a good friend of the UAE, having been resident here before answering the call of duty to return to Baghdad and serve again in government last summer.

            It gives me great pleasure to invite His Excellency Jabbar al-Luaibi to give some introductory remarks about the goals and challenges facing the industry in Iraq and his gives on the global oil market as a whole.  (Applause.)

            MR. DEFTORIOS:  Good to see you, sir. 

            MINISTER JABBAR AL-LUAIBI:  Hello.  How are you?

            MR. DEFTORIOS:  I’m not chasing you down the hallway trying to get a sound bite.  That’s a good sign.  (Laughter.)

            MIN. AL-LUAIBI:  Thank you. 

            MR. DEFTORIOS:  We have 10 minutes for you.

            MIN. AL-LUAIBI:  All right, thank you.

            MR. DEFTORIOS:  Thank you.

            MIN. AL-LUAIBI:  Bismillah al-rahman al-rahim, salam aleykum.

Your highnesses, excellencies, ladies and gentlemen, fellow colleagues, many thanks to the government of UAE and Abu Dhabi for their warm welcome, hospitality.  The leadership and the brotherly people of the UAE have stood by Iraq through the difficult times for many decades and this we deeply appreciate.  It is a privilege for me to be here with you today in Abu Dhabi to share a few of my thoughts on what is bound to be an important year for the crude market and the crude and OPEC and non-OPEC.

            We have had to deal with difficulties and challenging years after the collapse of the crude oil prices.  From the peak of $115 per barrel in June 2014 to under $30 per barrel at end of February 2016, this has been one of the most important global macroeconomical developments of the past two years.

            In Iraq, the situation for us was further experienced by terrorism and our fight to liberate our land from the brutality of Daesh and the supporters of Daesh. 

            The latest agreement between OPEC and members to produce a certain cut in their respective shares of crude oil markets is a positive step in order to balance the market and stabilize the oil prices.

            Other important non-OPEC producers supported this move from inception.  Iraq definitely committed to it, ensuring a positive outcome to the discussions, played a major role in this agreement and accepted to its share of decrease even though Iraq should have been exempted from the production out ‒ cuts, sorry, due to the extraordinary circumstances of the country it is now going through.  From fighting terrorism and Daesh to rebuilding the infrastructure and desperately needed infrastructure, hospitals and other services, we are in desperate need for revenue to alleviate the pain of the Iraqi people who are suffering on a daily basis. 

Furthermore, the determination of Iraqi production cut was not based on country official production level, which includes the production from Iraq, KKRG, that is Kurdistan region, but was based on other statistical and compiled production figures.  This resulted in longer production cut for Iraq, effectively reducing the revenue further for the country.

However, across all of these hurdles, Iraq participated positively in the agreement, meanwhile sustaining and targeting to build up production capabilities.  For example, both of Iraq light and heavy oil streams continue to perform well to satisfy the country marketing commencements.  Iraq has also made good progress in reduction of gas flaring and has successfully met its first-ever shipment of LPG condensate, paving the way for further growth in the gas industry.

With regard to the future investment in the petroleum sector, our aim is to improve and increase the country of oil production capacity to compensate for opportunities the country lost during the past three decades, from sanctions to wars, mismanagements and other phenomena.  Production facilities and the licensing around contracts are being rehabilitated and expanded in a fair manner, but there are so many other oil and gas fields that need to be developed.

The minister of oil currently considers that a new oil field development tender may only be feasible after a thorough reassessment has been completed and that, I hope, that will come by the end of 2017.

Regarding the oil markets, during 2016 there was a major economical slowdown and positive rising economies, heavier investments, a reduction of carbon footprint as well as marked global geopolitical instability.  All these factors highlight OPEC’s production agreement as an acceptable step taken at right time.

We are already seeing that the crude oil prices forecast for 2017 are showing some stability, which is a positive step.  A fair and well-collaborated future, balancing between supply and demand, will lead to a new, more favorable global energy security environment.  These new norms require the introduction of revised legal and contractual frameworks, as well as the design and adoption of effective, but not crippling cost-cutting measures. 

Furthermore, both resource owners and operators need to set better business model strategies.  Currently of importance, advancement of market stability could very well bring us back to where we started before the downturn. 

As mentioned earlier, the Iraqi Ministry of Oil is currently addressing these requirements.  We hope that all stockholders, whether oil producers, international oil companies and traders, will work together in this respect to achieve the mentioned balance.

As for Iraqi Ministry of Oil, we aim to achieve our prime goals as quickly and efficiently as possible.  In addition to strong will to improve the oil production and upgrade the overall petroleum infrastructure, the ministry intends to make market advances in gas ‒ make advances in gas utilization and set ‒ and to get the South Oil Seawater Project up to and running as fast as possible because of its importance to the upstream production through a strong cooperation and partnership between the ministry, a few state companies and private sector is of utmost importance to the policy of the ministry and its new structure.

However, we aim to continue production and development and effective working relations with international oil companies for the best interest of Iraq and better align the contractual environment and to smooth in and approve work procedure.

The ministry, again, is also targeting to reach a final account with neighboring countries regarding the issue of cross-border oil and gas fields, a model that has been set aside for decades.  The ministry is also moving at a fast pace to bring up the credibility and work performance to qualify quickly to an excellent ISO certification level.  This is expected to result in the ‒ for better work (field ?) process.

As final note, I extend my thanks to all international oil companies that have participated effectively in developing the oil industry in Iraq, who were working in a rather difficult and challenging environment.  We assure you that we are working hard to overcome these difficulties and to find better solutions.

Finally, I would like also to thank the Atlantic Council for inviting me to speak at this auspicious event and I look forward to a panel discussion with my esteemed colleagues.

Thank you all for all your attention.  Thank you.  (Applause.)

MR. DEFTORIOS:  Thank you, Minister. 

If I can get my microphone up, that would be great.  Thank you, gents.

We have about 35, 40 minutes for a pretty healthy debate.  You framed a number of different issues that I can follow up for the next half hour.  This is kind of a core audience of oil and gas players.  And we had quite a mix in the first panel, so let’s stick to our knitting, as they say in the American English.  We can get a pretty interesting idea of where we’re going today.

I think it’s a good place to start with the person I called as the oil police chief of 2017, that’s the minister of energy and power and water for Kuwait.

You heard Patrick Pouyanné suggesting in our opening debate that we’d like to see a 12-month plan, maybe a 24-month plan.  How do you get ‒ it’s almost like herding cats.  I saw at least six countries say they want to trim back their production.  They’ve already put up some numbers here, but you’ve got to get 18.

Now, this market, this group wants to hear that it’s going to be rock solid, Minister.  What can you tell us at this stage that you’ll get all 18 on, and when can they get the 1.8 completed in terms of cuts? 

I’d just invite you to bring that microphone closer to you, all for the panel, bring your microphones very close to you.  Thank you very much.

MINISTER ISSAM A. ALMARZOOQ:  Thank you, John.

First of all, this is the ‒ I think we should call it the question of the year, huh?  How are you going to commit the 24 countries that have signed the Vienna agreement to the cuts that have been promised during that time?

I’ve been told since I assumed my position as minister of oil in Kuwait that people were saying that I have no pictures showing me smiling.  (Laughter.)  And I think I will keep that look for the next six months, huh?

MR. DEFTORIOS:  I was going to ask, did his excellency, the secretary-general, twist your arm to take this job or was it Khalid Al-Falih, his excellency from Saudi Arabia?  How did you ‒ why were you so blessed with this one?  I was going to figure that out.

MIN. ALMARZOOQ:  So I will just keep on going that I think the commitment needs the cooperation of all the 24 countries.  We have already started in December to develop a mechanism that we can suggest to the monitoring committee to find out the percentage of commitment of these countries. 

We were blessed with the visit of Mr. Khalid Al-Falih, Mr. Al-Sada in Kuwait, and Mr. Jabbar as well.  And we have explained to them what we intend to propose as a mechanism.  And later on, we were also blessed with the visit of Mr. Barkindo, the secretary-general of OPEC.  And they explained also their view of a mechanism that they will suggest to the monitoring committee.

I don’t want to divulge right now what we intend to do because we have a meeting on the 21st and 22nd of this month in Vienna, grouping the five countries that form the monitoring committee, Kuwait being the president of the committee, Algiers, Oman, Russia from outside OPEC and Venezuela from OPEC as well.  We will discuss these options during the monitoring committee meeting in Vienna and I think at that time we will come up with a statement that how we will monitor the commitment.

But I can say the following, that since the start of January, beginning of January, we have been in contact with many countries that we see no reaction to the cuts.  Because at the end of December Kuwait had announced that they will start cutting their exports, Saudi Arabia did that, Emirates did that, Qatar did that, Iraq as well when his excellency the minister visited Kuwait.  And Russia has also announced that they will do some cuts during the first six months to an average of what they have promised to cut.

We intend, as Kuwait, to lead by example.  We have already cut our production to more than what we have committed so that everybody else will see that we are committed to the cuts and hopefully follow us as well.  Thank you.

MR. DEFTORIOS:  OK.  Let me follow up with Dr. Barkindo then, if I may.  I don’t want to use the American term, but I think I will.  You were working like a dog, I mean, you were flying here, there and everywhere when you took the job back in July and August.  You were going from Venezuela to the other side of the world to Indonesia in the same week to try to make this stitch together.

We understand the mechanisms are still being shaped within OPEC.  Is there any reason to believe, well, after two months, people have fatigue and say, you know, it was a good idea, I put it on the table, but I don’t think I can sustain it for six months?  What is the guarantee of this?

MOHAMMAD SANUSI BARKINDO:  Thank you very much, John.  And let me join other speakers in extending our condolences to the leadership, the government of the UAE for this tragedy that we had yesterday in Afghanistan.

Yes, we had a landmark and historic agreement in the form of a declaration of cooperation between 24 producing countries, 13 from our side, OPEC, 11 from non-OPEC, the first time in history where we have got a broad platform of producing countries coming together voluntarily to join action in restoring balance to this market that has been out of balance for over two years, in the interest of not only producers, but the consuming nations and particularly the industry that has been battered by this severe cycle. 

So you have heard from the chief police officer, as you name him, Issam Almarzooq, who has a very heavy responsibility on his shoulders, together with his other colleagues.  I can see Mr. Nourredine Bouterfa from Algiers sitting there also, a policeman in the group of five.

I remain very confident with what I have seen in the last several months since I came onboard.  The level of commitment from both sides, to me, I think, is unparalleled.  There was a convergence of views, a consensus that had been reached across industry, not only between us, OPEC and non-OPEC, but also IOCs and other stakeholders, that there was now an urgent need to assist the market in bringing forward this rebalancing process because of the severe consequences of this cycle.

And in entering into this landmark and historic agreement or declaration, if I may call it, the innovation of setting up this joint ministerial monitoring committee is also historic for both OPEC and non-OPEC to agree to policy and ensuring the compliance of this decision, and even for the non-OPEC to accept that, yes, OPEC should chair this committee.  Kuwait in this case, I think also demonstrates the level of commitment.

            Now, we’re just less than two weeks into January.

            MR. DEFTORIOS:  Yeah, I just need you to be brief, to wrap up your thoughts, please.  Thanks.

            MR. BARKINDO:  OK.  So I can confidently tell you that this level of commitment we have seen from the beginning of the process to now, including what we just had from Minister Jabbar al-Luaibi.  This high level of compliance has been expected from both sides.

            MR. DEFTORIOS:  OK, let me bring in perhaps a counterargument, Amos Hochstein.  I had a chance to hear his comments yesterday at the Gulf Intelligence Conference, representing the U.S. Department of State.  Is the OPEC, non-OPEC effort here run counter to the spirit of U.S. policy?  Shouldn’t we just the markets decide where we’re going?  Isn’t it nice that all these countries came together and nudged it in the right direction for a rebalance?  What’s the counterargument?

            AMOS HOCHSTEIN:  Well, first, I would say I think I find myself in an unusual position where I think for the first time in a very long time I have the United States is sitting next to the secretary-general of OPEC in a formal gathering.  So I think that’s already a sign of changes.

            MR. DEFTORIOS:  You’re not joining the OPEC?

            MR. HOCHSTEIN:  No, no, no.  (Laughter.)  Look, the U.S. longstanding position has always been that the market should manage itself and that within ‒ outside of the extremes.  And after all, the United States, we ourselves have the Strategic Petroleum Reserve as a mechanism for response in extremes, which was deployed for the first time in a long time just a few years ago during the Libya crisis.

            But outside of that, what we’ve always wanted to see is the market adjust to itself, understanding that the concept of stability in the oil markets is contradictory, self-contradictory.  The oil market has been volatile since its inception and will likely continue to be.

            When you come to the decision that was made over a few months ago, the last couple of months by OPEC, and I completely understand the anxiety that led to this agreement that OPEC reached, but you have to look at it, I think, a little bit in a longer-term perspective, both backwards and forwards.

            So backwards, you know, as Majid said in his opening comments, we are double the price where we were at the low, but half of where we were just a couple of years ago.  That’s a pretty remarkable band to be in a period of only 24 months, so let’s not look at this from a period of what is from today to tomorrow to next month, six months, but rather look at this as the oil markets.

            We were, you know, the United States, we were at 5 1/2 million barrels per day production just under 10 years ago.  We peaked at 9.6 million barrels a day in 2015.  The delta of increase in production in the United States would have been the second-largest producer in OPEC, so it’s a significant change.

            The crash in oil prices affected the United States, to some degree, more as an industry than almost any other place on the planet.  We saw a reduction of about 1.2 million barrels a day of production out of the United States, down to 8.4 (million).  But the U.S., due to the technological advancements of shale oil, is in a different position than almost any other producer in the world.  And the reason for that is because we’re market-driven and, therefore, price has an impact on the market both for negative and positive.  So as prices come back, we’ve seen the ability of and the resilience of the industry to look at where you cut costs and to bring some of the costs down and production back up.

            Since October, which were the numbers that were the basis for the OPEC decision, the United States has gone from 8.4 million barrels a day to 8.7 million barrels per day, so that’s already a 300,000-barrel-a-day increase.  Libya has seen an increase due to the political developments that have allowed it to increase by a couple of hundred thousand barrels itself.  And Nigeria, due to some of the security improvements, has seen a return to closer to their original numbers as well.  Meaning that the market is going to continue to shift regardless of international agreements.

            So it’s not a country position, but it is a focus that I worry sometimes that a too-aggressive an action by producers could actually result in a short term, the right movement, the desired outcome, and the opposite outcome.  If prices continue at the 55 (dollars) to $60 band for the next year, I would expect a much more aggressive increase in production in the United States than is currently being anticipated by the international agencies, such as the IEA or the EIA. 

And I think that if you see another million-barrel-a-day increase from the United States or back up to the 9.6 million, then that’s going to put a lot of strain on decisions that OPEC if those were the ones ‒ if the outcome was so price-driven.  In other words, if 55 (dollars) was supposed to be there, then the long-term outcome is perhaps a shortening once again of the boom-bust cycle.  And that concerns me.  And I think we would all be better served if the market adjusted to itself a little bit more.

MR. DEFTORIOS:  OK.  That’s a nice framework to bring in Dr. Helima Croft of RBC.  How do we rebalance the market then, because we have the elasticity of the U.S. shale producers?  So are you confident, first and foremost, a direct question, that a floor of 55 (dollars) or an average price, let’s do it an average price of $55 dollars a barrel, can be sustained for 2017, which RBC is suggesting?

HELIMA CROFT:  It is our suggestion.  I mean, we are probably more confident than my neighbor next to me about the ability of OPEC to implement the agreement.  We think that it was a very important agreement.

I think, you know, one of the things that I think OPEC did a tremendous job at the meeting, the last meeting, was actually defining the targets for each country.  There was so much skepticism about OPEC’s ability to get this deal done.  I mean, what we saw from the, I would argue, the historic Algiers agreements, which really should have changed market sentiment, almost, you know, weeks afterwards people were saying there is no way OPEC can get this done.  So I think it was very important that they get the agreement done.  I think it’s very important they defined individual country targets.  There was a view out there they would just go for a collective number with no individual responsibility, so I think they did a remarkable job putting forward the strongest statement possible to the market.

But I have some concerns that if we get any wavering in terms of compliance that there is so much (fairer ?) sentiment waiting to come back in.  So I think it will be very important that, you know, our distinguished keynote speaker, that Iraq’s commitment will be something we will be watching very, very closely because there had been so much concern about would Iraq agree to this deal if they were not exempted, if they were not given the Nigerian and Libyan terms.  So everyone will be watching very, very closely Iraqi compliance.

So I think that if we continue to have strong commitments from OPEC, I think we will see this price hold for the year.  But any breakdown and we could see a reversal.  And, of course, we will be watching what happens in Libya and Nigeria, but my view differs a little bit from Amos. 

And I think these countries are really facing huge structural challenges, Libya and Nigeria.  And while production may be up month to month, we have such deep political and economic challenges that I’m not sure Libya can sustain 1 million or even 700(,000) going forward.  It really could be subject to reversal.  So I think the big question will be the compliance

MR. DEFTORIOS:  OK.  I didn’t plan this with you, but I appreciate that as a journalist you gave me a nice transition.  The heat is on you, I think, Minister Luaibi.

I saw your export numbers out of Basra, 3.64 million barrels is the last reading.  That was a record.  Are you planning to really comply with the agreement?  What do you tell this audience?

MIN. AL-LUAIBI:  Well, thank you, John.  Really, Iraq is definitely and certainly committed to comply with the OPEC agreement.  And we have already taken measures to cut our exports by 170,000 barrels per day.  And we are moving very fast to complete other cuts by another 40,000 barrels per day to reach the level of 210,000 barrels per day.  That is the share of Iraq within OPEC agreement.

MR. DEFTORIOS:  By when?  Can I ask you to pin that down?  By when will you finish your cuts?  When will they be off the market?

MIN. AL-LUAIBI:  By the ‒ before the end of this month definitely.

MR. DEFTORIOS:  Wow.

MIN. AL-LUAIBI:  OK.  This really, this is not included in KRG.  KRG, we are in dialogue with them.  We talk to them every day.  And we will arrange a cut from KRG.  But as a country, you said about the production, you know, Iraq, we talked about it during the conference, the last conference in Algiers, and there was differences between our actual figure of production and that reflected by secondary sources.

We reflected our production by 4,700,000 barrels per day, plus 10 percent or something more.  And that was not really reflected, as you know, by secondary sources.  But our export hit a target during November month from the south that we released about 3.42 thousand barrels per day.

But all these figures, regardless of these figures, regardless of the production achievement, Iraq is committed to cut the exports by 210,000 barrels per day on the baseline of OPEC figures we agreed upon.  That was October production levels, so we are in full cooperation and collaboration with OPEC in this. 

And I can assure you and I stress as a minister of oil in Iraq that Ministry of Oil as well as the government of Iraq is committed to this and we want this to be successful.  This would be a benefit to all, not only Iraq, so there is no here and there, there is no game, there is nothing on our side.  And the government is in full agreement with the policy of Ministry of Oil.

I am in continuous contact with my brother and colleagues, his excellency, the minister of oil in Kuwait, to monitor this.  And if there is ‒ if something appears on our side, say if there is some deviation here and there or something or dissatisfaction in figures, then we are ready to correct this straight away.  So Iraq is committed, and I really, you know, I announce it here and everywhere, Iraq is definitely committed with no doubt.  Thank you very much, John.

MR. DEFTORIOS:  OK, thank you very much.  That’s pretty clear.  I guess as the policeman, you feel more relieved than Dr. Croft over there.

MIN. ALMARZOOQ:  Very much, yes.  (Laughter.)

MR. DEFTORIOS:  Sure.

MIN. ALMARZOOQ:  You know, and I think it will be difficult to assess the commitment from the first month because people tend to have ahead of programs for the loading and then it will be difficult for them to cut the loadings all of a sudden, so we are monitoring the average at the end of six months.  Hopefully every country will commit to that average at the end of the six months.  But we will keep on monitoring the monthly loading oil productions as we agree on in the monitoring committee.

MR. DEFTORIOS:  Good.  I had a conversation with His Excellency Ali Al-Naimi who is now retired.  He told me in December 2014 that the Kingdom of Saudi Arabia or the other Gulf states would never cut oil again and this was a fight to the bitter end.

Amos, does this actually benefit the United States that they’re cutting on your behalf to support the shale industry that creates so many jobs in America?

MR. HOCHSTEIN:  Well, let me just ‒

MR. DEFTORIOS:  You should send a thank you card to the gentleman right next to you on the right.

MR. HOCHSTEIN:  We’ve had our own conversations in Washington and elsewhere.  Look, I ‒ correcting what was said before, I don’t actually doubt OPEC’s compliance.  I think that, you know, OPEC has made a decision, I trust that ministers who have made those commitments that that will stand.  That’s not where my skepticism lies.

But I do think that where I differ from Helima is that the difference that the United States has here is that our national security interests in some of these countries differ from the ultimate outcome of the energy market because it is in our interest for the political solutions that have ‒ or the political progress, I should say, as delicate as they are in Libya, that they continue.  Because in order for it to succeed, we need to see increased oil production and oil exports and revenue because that revenue is the key to the success of the political stability in the country to be able to pay salaries, to be able to make economic investment and to show that progress is being made.  I think that’s why Libya was exempted.

I, therefore, completely understand the skepticism and the concern that the market has in looking at Libyan production.  But since October, it’s already increased.  We’ve seen the success of the battle against Daesh and, again, some of the other elements move where the battlefield has moved away from some of the critical fields and terminals, which could allow for oil exports to increase to 900,000 barrels a day during this next quarter or so.  The same in Nigeria.

It is in our interest, I think it’s in the global community’s interest, for Nigeria to be able to bring back their production.  I’m not speaking as a market mover, but rather as an international community.

MR. DEFTORIOS:  No, I think that’s been a given, though.  They’ve been given the exemption as well as Nigeria and Iran.

MR. HOCHSTEIN:  But if those barrels come back on the ‒ if you cut a million barrels and 500,000 of those barrels come back in the first month of the compliance, it’s not about the compliance of OPEC, it’s about the fact that half of that cut has already been added.  And at the end of the day, the price is impacted, not by geopolitics as much as by supply and demand.

And we were ‒ essentially, the cut was a freeze to the Algiers levels, right, because ramping up of production happened between the two, so that was because we had an oversupplied market.  If you have an oversupplied market and stocks have not fallen and you cut production, but half of that cut comes back, then at the end of the day the stocks have to come down for the prices to rise.  Whether they stay stable, that’s fine, but, again, that’s going to encourage more and more production out of the United States that is looking at break-even points of 32 (dollars) to $38.

MR. DEFTORIOS:  OK.  So this OPEC, non-OPEC agreement is doomed thanks to Amos.  (Laughter.)

Helima, I think you’re ready to serve as a bit of contrarian here.

MS. CROFT:  No, I mean, I actually ‒ I mean, it’s an interesting question about what is sort of in the U.S. interest in terms of energy price.  I mean, one of the things, I mean, Nigeria was the first country I worked on in the U.S. government when I joined out of graduate school.  And, you know, I think that the deal was important and I actually hope it sticks from the standpoint of revenue for the Nigerian treasury.  I mean, I look at a country like Venezuela and say, you know, it’s facing one of the world’s greatest humanitarian catastrophes in this type of price environment.  And so I think that, you know, these countries desperately need more revenue.

And I don’t think it was a choice at a certain point, because if we didn’t get that deal, it was ‒ I thought it was a buy-in there.  I mean, I literally think the question was, would you be stabilizing prices in the 50s or, if that deal did not occur, would you be moving sub-40 (dollars)?  And I think for a lot of these countries, they don’t have the ability to increase volume to make up for a sub-40 (dollars) price environment.  So maybe it’s a leap of faith, but I think if you are a highly-stressed oil producer, you are absolutely behind this agreement. 

And I think from the standpoint of U.S. national security, you know, some of these countries are assuming ‒ Nigeria is the most populous country in Africa.  We need that country to be more stable.  And more revenue is in the interests of a stability in that situation.  So I think the deal was actually important for stability in these key countries.

MR. DEFTORIOS:  Very interesting analysis.  Can we have the lights back on, please, and have the microphones near the front of the room as well.

Any questions from the floor to kick us off?  I guess they liked the debate.  No questions from the floor?  This is a rare opportunity to pepper everybody.

The deal was essential, is what Helima was saying, to provide some stability to different countries, right?

MIN. ALMARZOOQ:  John, I think that ‒

MR. DEFTORIOS:  Venezuela is one that just comes to the top of the list, the strains on Venezuela, the strains on Nigeria ‒

MIN. ALMARZOOQ:  Yes.

MR. DEFTORIOS:  ‒ the strains on Angola.  Is that the inherent discipline that will provide the supply-and-demand balance?

MIN. ALMARZOOQ:  John, I think everybody is talking about prices and they neglected the effect of the lower prices since 2014.  Since the prices went down, the investments in the oil production and exploration have fell dramatically.  It fell to about, maybe, I think, 60 percent.  We’re talking about maybe 500 billion in total right now.  The yearly decline, I think, it went down from 100 billion in 2014 to a recent third quarter figure of maybe 40 billion.

MR. DEFTORIOS:  Right.  And we have projections now for 2017 of it going up 3 percent, right?

MIN. ALMARZOOQ:  Yes, yes.  So I think ‒

MR. DEFTORIOS:  Four hundred fifty billion?  So investment is coming back in, to the point of our panel.

MIN. ALMARZOOQ:  Yes.  So I think ‒ I think the price level that we are talking about right now is encouraging the investments to come back again.  And I think with the investments coming back again, the, let’s say, the livelihood of the people, whether in the European countries or in the USA, I think will encourage the stability of the price.

MR. DEFTORIOS:  OK.  Of the $450 billion, I think it’s 453 (billion dollars) from the number that I looked at, one-eighth of that is going into the shale market, to Amos’s point.  So 60 billion (dollars) of that 450 (billion dollars) is going to be going into shale production.  Do you believe that number?  Is that much money, Secretary-General, willing to go back into tight oil in the United States?

MR. BARKINDO:  For us, as you heard this morning, John, I think it was ‒ I think it was Jaber Sultan in his opening remarks who reeled out the numbers in the energy policy objectives of the United Arab Emirates.  I think there is a concurrence of views between almost all the agencies, the IEA, the EIA, OPEC and others, that demand will continue to grow robustly in the years to come.  And every single source of energy, including tight oil, has a role, a major role to play in meeting this growing demand.

We in OPEC, we do not see tight oil as a competitor, per se, but as another source of much-needed energy for the global economy.

MR. DEFTORIOS:  OK.  I don’t want to interrupt you.  Let’s bring up the screen if we can, gentlemen, Paul and the team at the back.  I just wanted to bring it up to compare some of the numbers here.

So this is a projection of supply.  World oil supply, 2017, OPEC averaging just under 32 (million), non-OPEC 52 1/2 (million) for a total of just under 97 million.  How much demand growth do you see, Secretary-General, over the next two, three, four years?  Is that going to be a sustained 1.3, 1.4, 1.5 demand growth?

MR. BARKINDO:  I think the projections of our oil outlook is similar to what we have seen with the IEA and the EIA.  Demand will continue to grow in the region of about 1.2 (million), 1.3 million, which is healthy enough going forward. 

And what we have done in December entering into this landmark historic declaration with non-OPEC has turned a historic page in oil in the interest of the global community as a whole, particularly ensuring the security of supply in the years to come. 

Issam Almarzooq just talked about investments.  We have seen the sharp contraction in investment in the last two years, which really threatens that security of supply going forward.  And the projections you just made reference to of at least another 3 percent rebound in 2017 is very much welcome.  We look forward to more investment across the board.  And this positive environment that we have seen now is, again, whetting the appetite for investors back into this industry, which we very much welcome.

MR. DEFTORIOS:  OK.  First joint deal since 2002.

We had a question in the back, if you can stand up again, and then a question here, so let’s get those two mics ready.  If you can put your hand up here in the third row, we’ll get a microphone to you.  Can get a mic in the meantime to the gentleman here in the third row?  Sean, please.

Q:  Yes, good morning again.  Sean Evers from Gulf Intelligence.

His excellency, the minister of energy from UAE, Al Mazrouei, indicated in the last session that the tackling of oil supply reduction was to bolster the price in order to get to a level where investment into new supply was supportive and CAPEX would continue.  And the same message seems to be echoed here.

So the question I have is, if indeed this one cut does not achieve moving the price into that zone that encourages new capital expenditure, are producers willing to cut further?  It’s rare that one OPEC cut would suffice.  In previous cycles of tackling these situations, OPEC have had to make a number of cuts over a two or three-year period.  So I’m curious, have you, on the outlook, if we don’t get price into the zone of encouraging future CAPEX, where is the appetite for further cuts?

MR. DEFTORIOS:  Thanks.  I’m going to present that to Minister Almarzooq.  It’s always a danger once you decide to cut that everybody gets a little ‒ it’s like a drug addict, you know, you get addicted to this thing and the market has the expectation.  Isn’t that the worry?

MIN. ALMARZOOQ:  John, I think previously OPEC had a leading role in determining the direction of the prices in the market.  So when they did a cut, the market would automatically react to that cut.

MR. DEFTORIOS:  As a traditional stream producer, right.

MIN. ALMARZOOQ:  Now as Mr. Amos just explained, the U.S. production have gone up from 4 1/2 million to 9 million, so I think OPEC right now is not the guardsmen of the oil prices, huh?  Whenever the prices go up, somebody steps in and fills that gap.  It’s in the interest of everybody that the price level stays at a certain level where everybody is comfortable.  So I think, as Mr. Amos just explained, I think we will come to a point where the supply and demand will determine the right price.

OK.  So, Helima, when does supply and demand come into balance?  Some are suggesting ‒ we heard Patrick Pouyanné in the first panel who it could be two years before it comes into balance if you don’t have this discipline.

MS. CROFT:  Well, I mean, I think we always talk about having a two-step process, the daily supply and demand overhang, which at one point was enormous, which has been actually shrunk, but really working off the global inventory levels.  And we think that is a protracted process.  And I think ‒

MR. DEFTORIOS:  How long of a process?

MS. CROFT:  I mean, could this go, you know, into, you know, Q4 of this year or into 2018?  You know, absolutely.  We think it is.  That’s why we don’t talk about prices being 60 or 70 in the, you know, in the next quarter because we have to work off these inventory levels.  So I think it is a slow grind higher.  The market’s not going to gallop higher.

And the one thing we are concerned about, not that I would ever dismiss Amos out of hand, is that if you do have something happen where you do get a supply shock, we do have a producer go offline and you do send prices back to 70, our concern would be then, is it a self-defeating recovery?  Do you bring back so much more of the U.S.?

I mean, right now there’s a view you’re bringing back the Permian.  But if you move into the 70s because of some geopolitical shock, do you bring back the Bakken and the Eagle Ford and then push us back significantly lower?  So we think that slow and steady recovery in the 50s wins the race eventually for the oil producers.

MR. DEFTORIOS:  Very good analysis.  We had another question from the floor and then we’ll come back to Majid.

Q:  Thank you very much.

            MR. DEFTORIOS:  If I could just ask you to be very prescient and direct.  Thank you.

            Q:  Yes.

            MR. DEFTORIOS:  And another microphone to the front row and that will be the final question.

            Q:  Sure.  Pietro De Martin, Energy and Climate Change Unit of the Italian Ministry of Foreign Affairs.

            Just a very quick question to Amos Hochstein.  When you refer to a breakeven or within 32 (dollars) and $38, do you actually mean a conventional or shale production or an average of both?  Thank you.

MR. HOCHSTEIN:  I was using that more as an example.  As a result of the price decline, you saw a lot of price efficiency and cost-cutting that happened across the board in the United States, specifically in the unconventional.  But that has impacts throughout the industry.  And different formations, different companies have different breakeven points.  I’m using that as we’ve seen even as low as that range, but it doesn’t mean that everybody is at ‒ that there’s one single breakeven point.  Different companies operate in different economic environments of their own.

MR. DEFTORIOS:  Majid, we have the mic behind you there, please.  Just ask you to be direct.  And I think we have five minutes, so the last question will be there.

MR. JAFAR:  Thank you.  Yeah, my question is on demand.  So we always talk ‒

MR. DEFTORIOS:  Just a second, just because of time, can I see the other microphone please for a second?  Where is the other mic?  OK.  Just that last question, if you could put your hand up, sir, we’ll get you the mic.  That will be the last question.

Please.

MR. JAFAR:  So I’d love to hear a bit more on demand, in particular the views of the panelists on where Chinese demand is heading, the changes in the economy there, because we always tend to focus more on supply obviously with OPEC and the history, but actually the demand side is probably just as important, if not more important going forward.  So I’d love to hear some views on that.

MR. DEFTORIOS:  Good. 

Helima, have you done any models on Chinese demand holding up at the level that it is now?  We heard from Adnan Amin in the first panel suggesting the investment into the renewable space by China being such a dominant player both on the equipment side, but also, I think, in the implementation.  What do you see in terms of Chinese demand?

MS. CROFT:  Yeah, first I just want to say the reason why we tend to focus more on supply is that oversupply got us into this situation, it wasn’t a demand-driven price crash.  And so part of the reason we always said as we focused on supply is supply got us into this and supply is going to get us out.  And so we, you know, we think that China will sort of hum along, not be spectacular growth, but a growth of around 300,000 barrels a day.  The demand has changed in terms of what part of the barrel as their economy has changed.

But where we see that bright spot for demand is actually India.  And looking at India and saying, is it potentially the new China?  And we look at the room that India potentially has to run in terms of growth and you look at something like, you know, gasoline demand in the U.S. is 9 million barrels or in China 3 million, and then you look at India and it’s 500,000.  You look at vehicle penetration rates in the U.S., you know, 78 percent.  In Brazil, you know, more in, like, the, you know, 30s or 40s.  In India it’s still in, like, the low digits.

And so the question is, do we have more room to run?  Is India potentially going to be the driver for emerging market demand?  So it’s the country that we’re looking to in terms of, like, who’s going to move the demand train forward.

MR. DEFTORIOS:  OK.  Even in the climate of the World Bank suggesting only 2.7 percent growth in 2017.

MS. CROFT:  Well, we’ve seen ‒ if you look at Indian demand growth, it’s actually been ‒

MR. DEFTORIOS:  It still holds up.

MS. CROFT:  It’s holding up incredibly well.

MR. DEFTORIOS:  Very good.  Final question, I think we have a microphone.  Please stand up.  A very brief question, please.

Q:  Thank you. It’s a question and some remarks.  I’m talking about the ‒

MR. DEFTORIOS:  I think you should kindly introduce yourself because you ‒

Q:  Yes.  Dr. Alamri, governor for Iraq and OPEC and head of oil marketing company.

MR. DEFTORIOS:  Thanks.

Q:  I think this argument is very important to the international oil industry, but we have to say something that international oil industry has been changed since 2014.  And therefore, there is geopoliticals and also a new structure in this industry, even the elements that influence the international markets have changed.

If we talk about investment and world economy, investment, I had a lot of ideas about the investment.  We need investment there to avoid any shortage later.  We should emphasize and maybe also question, where should this investment come from?  From non-OPEC countries, especially America, or from OPEC countries?  Because if it’s come from shale oil and huge investment and the breakeven changed from 90 to 80 to now maybe the latest figure 40 figures, that means the investment, especially now, there is hundreds of small companies investing in America, so nobody can control them.

So therefore, any price up, if the price a little bit up, then this will be reflected and the investment in shale oil.  So that means if the shale oil increased the production investment and then the production is slow, it will affect the price.

MR. DEFTORIOS:  OK. 

Q:  So and also, there is ‒

MR. DEFTORIOS:  Just very quickly because of time.

Q:  Yes.

MR. DEFTORIOS:  Thanks.

Q:  Therefore, I think the main element that influence the price is the United States of America in all cases, either economy or politics or energy, plus China.

So if you remember, China, when their growth 13, 14 to 12 percent, the oil price up because of huge demand.  Now the China growth, between six to seven, so it affects the demand.  There is a demand, but slow demand, so this affects also the price.

So about 70 percent effect of American factors, 10 percent or 20 percent China.  So these two countries, if they increase, America increases production and China increases its consumption, they will make balance.  If not, I think there will be no shortage in the future if the investments come from America.  Thank you very much.

MR. DEFTORIOS:  Thank you.  That’s great analysis.  If you didn’t hear, he’s the governor to OPEC from Iraq and a very close colleague of Minister Luaibi.

Helima, I’m going to put you on the spot here and you have the final comment.  It’s got to be tight, though.  If this money goes into the U.S., do you actually see the money going in to some of the other producers, like Iraq?  Now, there’s a question mark about the contracts you signed before.  They were service contracts and I understand there’s flexibility now in Iraq to go to production-sharing agreements.  But do some of the low-cost producers actually need to restructure the offers on the table to the international investors to make it a little bit more enticing?

MS. CROFT:  No, of course.  I mean, I think the big issue that attracts the U.S. is many things, but also the political and economic stability of the U.S. as a producer.  And so I worry deeply about a market, you know, several years out if we do not get the investment as needed in Iraq.  I mean, Iraq is supposed to be, at one point there was a figure, 40 percent of new supply in the coming decade was supposed to be Iraq.  And so if Iraq doesn’t get that investment and doesn’t reach the great expectations, I think it has, you know, very negative implications for the market.

MR. DEFTORIOS:  OK, thanks for doing it so quickly.

I just want to do a quick housekeeping comment.  We’re going to take a break here.  Listen for the announcements because His Excellency Khalid al-Falih is going to come back with Fred Kempe, the chairman of the Atlantic Council, for his special address.

Minister, I appreciate you sticking to your time at the beginning.

Majid, thanks for the succinct introduction.

The global police chief of oil did a very good job navigating it.  And the rest of the panel, I thought, was superb.

Let’s give a nice round of applause and we’ll take a short break now.  Thanks very much.  (Applause.)

(END)

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