Oil market perspectives beyond the short term

Keynote address delivered by HE Mohammad Sanusi Barkindo, OPEC Secretary General, at the 25th International Caspian Oil and Gas Exhibition and Conference, 30 May 2018, Baku, Azerbaijan.

It is a great pleasure to return to the beautiful city of Baku, the cradle of the oil industry that has fuelled the current civilizations — hence the sustainable growth, development and prosperity witnessed across the regions of the world over the last century.

Azerbaijan was the location of many “firsts” in the historic development of this industry. Within three decades of the first oil well being drilled in 1846, the world witnessed the building of the first wooden oil derrick in 1871, the first distillery in 1876 and the first oil tanker ship in 1877.

From these simple beginnings, Azerbaijan’s industry has continued to flourish and grow, culminating in 1994 with the signing of what we refer to as the “Contract of the Century” in which Azerbaijan signed an extremely lucrative oil contract with an international consortium.

Since then, the Azeri oil industry has experienced steady expansion, and, to this day, investors continue to value the growth potential that this great country can offer through its rich resources in both oil and gas.

These milestones would never have been reached without a skilled and dedicated local workforce. Time and again, their expertise, hard work and integrity contributed to the successful completion of many complex projects across this country.

All of these achievements were attributed to the stable and forward-looking policies, visionary leadership, and investor-friendlytransparent environment.

There is no clearer illustration of this than the impressive Shah Deniz project. The second phase of the project was commissioned yesterday by President Ilham Aliyev, himself an industry veteran. This multi-billion dollar capital investment is one of the largest energy project developments in the world with huge, positive multiplier effects on the domestic oil and gas sector, as well as on the country’s economy, on the region and the world as a whole.

The Southern Gas Corridor is changing the energy landscape in a fundamental way. It is poised to further enhance and strengthen energy security in an increasingly uncertain world.President Aliyev aptly captured it yesterday when he asserted that energy security guarantees national security.

I was last here in Baku a little more than two months ago, from 18 to 19 March, and had the great honour of meeting His Excellency, President Ilham Aliyev, along with His Excellency Parviz Shahbazov, Minister of Industry and Energy, and other senior officials.

We had fruitful discussions on Azerbaijan’s ongoing cooperation with OPEC as part of the historic OPEC-non-OPEC Declaration of Cooperation, and we explored opportunities for enhanced collaboration in the future.

Excellencies, we are grateful for your steady support and excellent contributions, and look forward to continuing to work very closely with you as, together, we move forward to enhancethis framework of cooperation.

And lastly, I would like to recognize, with utmost gratitude and respect, His Excellency, thelate Natig Aliyev, who, up until his untimely passing last year, was a driving force in the lead-up to the Declaration of Cooperation. I assure you, he, and the rich legacy he leaves, will be fondly remembered.

The historic Declaration of Cooperation − voluntarily entered into by 24 countries and in which Azerbaijan played a leading role − literally rescued the oil industry from its worst downturn and has fundamentally changed the energy landscape.

  • It has caused a significant change in industry-wide and public perceptions of OPEC. The Organization has ably demonstrated its credentials as a body committed to international cooperation, working with other producers, honouring its commitments and promoting mutual respect among all nations.
  • Bringing together24 sovereign producing nations is unparalleled in the history of the oil industry. The enhanced relations between participating countries now constitute a fundamental and essential feature of the ‘new world of energy.’
  • It has reintroduced a long-absent element of stability to the market – there is now far more optimismand confidence in our industry, compared to two years ago.
  • It is a transparent andfully accessible platform; it is open to all producers. It has evolved into a broader continuity partnership that can work for everyone, across all timeframes, to help deliver the sustainable market stability we all desire.
  • The importance of the Declaration has also received backing from other producers, as well as from consumers.
  • It has had apositive impact on the global economy, and trade worldwide has increased, helped by the stimulus provided through the Declaration.
  • It has enabled industry investmentto gradually pick up, albeit not yet to pre-2014/15 levels, and has resulted in many jobs returning and unemployment easing.
  • The financial markets, in general, and the financial oil market, in particular, have welcomed the forward guidance provided by the Declaration. It has given them a sense of understanding and security, and to avoid any crisis like that seen in 2008.
  • The impact of the historic cooperation has exceeded even the most optimistic of predictions. It underscores what can be accomplished through a constructive, continuous and fully committed approach to helping achieve a sustainable oil market stability.

The effective implementation of the Declaration has halted the worst oil market downturn in history, reversing the decline by enhancing the rebalancing process. Here, the huge overhang of more than 400 million barrels was removed, and thereby using a 5-year average was a useful reference to closely monitor and evaluate the stock levels in a complex global supply and demand equation.

The next critical phase in the whole process is to sustain these accomplishments of market rebalancing, a gradual recovery in investments and the return of confidence in the industry.

How will we achieve this? Going forward, through a broader and institutionalized framework of cooperation based on the Declaration’s core principles of equity, fairness and transparency, we will look into developing metrics and designing mechanisms to help govern against future shocks and extreme volatility in the market.

As the implementation phase continues to advance and we take stock of the successes we have accomplished thus far, we must also step back and consider the larger picture and theperspectives over the medium to long term.

One of the greatest and most pressing challenges before us is ensuring that there will be adequate levels of investment in a predictable fashion to meet the world’s future requirements.

So far in 2018, the pace of investment has gradually picked up, yet we are still not seeing enough robust investment in long-cycle projects, which are the baseload of future supply, and the foundation of this industry’s future.

In the period to 2040, the required global oil sector investment is estimated at $10.5 trillion to meet future world oil demand that is expected to surpass 111 million barrels a day by 2040. This represents a staggering increase of 16 million barrels a day. Indeed, the world will attain the 100 million barrels a day level of consumption much sooner than projected.

This is a clarion wake-up call that every effort should be made to avoid a potential supply gap that could present a serious challenge to the industry in the medium to long term.

This will be essential, not only to maintain current production levels under given natural decline with compensation needs at 4% to 5%, but also to ensure a steady flow of oil to meet rapidly growing demand in the long term. It will also be a key foundation for future global economic expansion.

I am convinced that the only way to meet these current and future challenges is through close cooperation and dialogue with like-minded partners.

With the Declaration of Cooperation, we have initiated a new era in international energy collaboration, the likes of which the world has never seen before. What is required is to buildupon this model process. We must institutionalize it and expand it even further for a sustainable market stability beyond the short term.

Our collective efforts in last 16 months will go down in the history books of this great industry as the most courageous collective resolve by a broad coalition of OPEC and non-OPEC producers to rise together to address the challenge of restoring much needed market stability on a sustainable basis. And there’s no better place to remind ourselves of that than here in Azerbaijan, where it all began almost 150 years ago as the cradle of our industry.

In closing, I would like to take this opportunity to invite the world’s global oil producers to join OPEC and its non-OPEC partners as we continue to work towards bringing about a lasting stability in the global oil market. All major stakeholders stand to benefit, including consumers, as together we pave the way for future economic growth and prosperity for current and future generations.

Keynote address delivered by HE Mohammad Sanusi Barkindo, OPEC Secretary General, at the 25th International Caspian Oil and Gas Exhibition and Conference, 30 May 2018, Baku, Azerbaijan.