We have just come out of one of the worst downturns in the history of oil. As we collectively endeavor to move forward, it is very appropriate to step back, take stock and draw lessons from this difficult chapter and ensure we work towards confining extreme market volatility to the past.
Innovation is the life-blood of our industry. Over the last 20 months, OPEC has embarked on one of the most innovative enterprises ever known in the history of oil: the Declaration of Cooperation. This innovation was a response to an unprecedented market turbulence which had a devastating effect on our industry.
We should note at this point, that price cycles are not new in the history of oil: indeed, in its research on price cycles, OPEC has identified six since the early 1970s.
This current price cycle should be considered unique for several reasons. Firstly, it is the most overwhelmingly supply-driven of all the cycles we assessed in this exercise. Secondly, the magnitude of the price drop is the highest in real terms. Thirdly, the recent oil price drop has been considerably sharper than the decline in prices for other commodities, which is in stark contrast to the oil price collapse of 1985-1986, when all commodity prices declined in a similarly steep manner. And finally, the downward cycle had equally negative ramifications for consumer countries in the OECD. The multiplier effects of this cycle were reflected in the deflationary pressures experienced by these countries.
From 2014 to 2016, world oil supply growth outpaced that of oil demand, with world oil supply growing by 5.5 mb/d, while world oil demand increased by 4.1 mb/d.
By July 2016, OECD commercial stock levels reached a record high of about 386 mb over the five-year average. The OPEC Reference Basket price fell by an extraordinary 80% between June 2014 and January 2016. Investments were choked-off, with exploration and production spending falling by an enormous 27% in both 2015 and 2016. Additionally, nearly one trillion dollars in investments were frozen or discontinued, and many thousands of high quality jobs were lost. A record number of companies in our industry filed for bankruptcy.
Our industry was on life-support and a medical breakthrough was necessary to revive it. Thankfully, a breakthrough came in the form of the historic Declaration of Cooperation. This landmark decision was the culmination of the extensive consultations undertaken throughout 2016, which aimed to build consensus about the strategic urgency of rebalancing the global oil market in a collective manner.
Twenty-four oil producing nations agreed at the first OPEC non-OPEC Ministerial Meeting held on the 10th of December 2016 in Vienna, on a concerted effort to accelerate the stabilization of the global oil market through voluntary adjustments in total production of around 1.8 million barrels per day. The second OPEC non-OPEC Ministerial Meeting, held on the 25th of May 2017, extended the voluntary production adjustments for another nine months commencing on the 1st of July 2017.
Following the third OPEC and non-OPEC Ministerial Meeting on the 30th of November 2017, the Declaration of Cooperation was amended to take effect for the entirety of 2018.
If one word was used to describe the impact of the Declaration of Cooperation, it would be ‘transformative.’ A new player has emerged on the global oil scene: the OPEC-non-OPEC strategic partnership; conformity has been at a record-breaking high and the market rebalancing process has gained massive momentum. Not bad for a partnership which many cynics did not think would get off the ground in the first-place!
Conformity averaged 107% per month in 2017, across all participating countries. I am pleased to announce that January’s 2018’s conformity level was 133%. While commercial oil stocks in the OECD rose in January 2018, this is typical for the season and they remained 74 mb above the latest five-year average. This represents an astonishing reduction of over 265 million barrels since January 2017, when we started implementing the production adjustments.
There are further positive signs for the global oil market. Global economic growth is forecast at 3.8% for both 2017 and 2018. Indeed the IMF reported in Davos at the World Economic Forum that 122 countries around the globe have registered positive economic performances. Correspondingly, global oil demand growth has also been on the rise; with the 2017 forecast having been revised up to now stand at 1.6 million barrels a day. For 2018, the encouraging dynamic is set to continue with a forecast of 1.6 million barrels a day. Additionally, all three benchmarks- Brent, WTI and Dubai- remain in backwardation.
Despite these momentous achievements it would be extremely reductive to suggest that the Declaration of Cooperation is only about the voluntary adjustments in production. Undoubtedly, they have been indispensable for returning a degree of stability to the oil market. However, the adjustments are only the ‘tip of the iceberg’ of what the Declaration of Cooperation truly is.
This historic agreement is an assertion of certain principles: namely, that we are always stronger together; that there are limits to what can be achieved working alone in silos, but there are limitless possibilities to what can be accomplished by working together. When these 24 participating countries join in concerted action, united by the common principles of equity, transparency and fairness, they can meet any challenge.
The Declaration of Cooperation is also an invitation: an open invitation to all stakeholders in the energy community to join us and contribute their ideas, their know-how to achieving a sustainably stable oil market in the interests of producers, consumers and the global economy.
This truly is a partnership which is broad and inclusive, as demonstrated by six additional countries issuing a ‘Declaration of Support,’ at the third OPEC- Non-OPEC Ministerial Meeting in November last year, which recognized and acclaimed this contribution to oil market stability.
Testament to the Declaration of Cooperation’s durability is the fact that on a daily basis, OPEC and non-OPEC partners develop ways of institutionalizing our collaboration:
-The OPEC and non-OPEC Ministerial Meeting is on a firm footing as a policy-making forum; the third edition of which took place in November, as these meetings are convened back-to-back with our biannual OPEC Ministerial Conferences;
-A series of OPEC and non-OPEC Technical Meetings have been successfully organised under the umbrella of the Declaration of Cooperation and are now held back-to-back with OPEC’s biannual Economic Commission Board meetings. The Third OPEC and non-OPEC technical meeting will take place in June;
-We have established joint OPEC and non-OPEC technical coordination meetings on environmental issues, under the UNFCCC process;
-The organs designed to monitor the implementation of the Declaration of Cooperation as well as developments in the market, namely, the Joint Ministerial Monitoring Committee (JMMC) and the Joint Technical Committee (JTC) have evolved into “jewels in the crown” of OPEC and non-OPEC cooperation. These are invigorating and dynamic forums, held on a monthly basis, which feed in the policy making process.
I am delighted by Nigeria’s determination to contribute to the Declaration of Cooperation partnership’s successes. President Buhari recently reaffirmed this in a speech presenting the National Budget for 2018 to the National Assembly in November: “We shall continue our positive engagement with other oil producing countries to ensure that the momentum generated is sustained.” With Nigeria playing this role, I am certain these words will be fulfilled.
Market stability is critical because oil will continue to play an integral role in the future energy mix. This is a key-takeaway from the most recent edition of OPEC’s flagship publication, the World Oil Outlook, launched in November. The 2017 WOO provides a comprehensive analysis of what lies ahead for the global oil industry until 2040.
Oil is expected to remain the fuel with the largest share in the energy mix throughout the forecast period. Oil and gas together are still expected to provide more than half of the world's energy needs from 2016 to 2040, with their combined share relatively stable between 52–53%.
Primary global energy demand is expected to increase by 35% in the reported period. Correspondingly, long-term oil demand is expected to increase by 15 mb/d, rising from 94.5 mb/d in 2016 to 111.1 mb/d in 2040. The majority of this rising demand will come from developing countries, increasing by almost 24 mb/d, to reach 67 mb/d by 2040. Significantly, this means there is no expectation for a peak in oil demand over the forecast period to 2040. World consumption is on course to exceed 100mb/d, much earlier than projected.
It is also important to note that to meet the projected increase in global oil demand, investments worth an estimated $10.5 trillion will be required. This underscores the absolute necessity of a sustainable and stable oil market, conducive to encouraging the type of long-cycle investments necessary to prevent supply gaps in the future.
Oil is an essential building block for economic growth, especially in developing countries. Throughout its history, our resource has stimulated development, prosperity and social mobility. Indeed, oil has played a pivotal role in lifting millions of people out of poverty. Put simply, oil has fueled our civilization.
The Sustainable Development Agenda 2030, adopted at the historic summit of the UN in September 2015, to which our President made an important contribution, has enormous implications for our industry. I believe oil can make a constructive contribution to the achievement of many of the Goals and targets within the Agenda, in particular: SDG 7 which seeks to ensure universal access to affordable, reliable and modern energy services; SDG 8 which promotes inclusive and sustainable economic growth, employment and decent work for all; and SDG 9 which seeks to promote sustainable industrialization and foster innovation.
Oil’s poverty-eradicating potential should not be unduly shackled. The right to have access to modern energy services for the first time, to provide warmth, light and mobility should not be overly impeded.
OPEC remains fully engaged and supportive of the Paris Agreement. We firmly believe that a global consensus from the multilateral process remains the best and most inclusive way for all nations to collectively counter climate change in a fair and equitable manner.
The world will continue to need all energy sources, especially for the 1.1 billion people in developing countries that have no access to electricity and the 2.3 billion deprived of commercial energy. Therefore, rather than discriminate against any energy source, it is vital that we collectively develop and adopt technologies, as well as all-inclusive energy policies, that transform the environmental credentials of all energies, including the 1.5 trillion barrels of proven reserves which currently exist.
We are emerging from a dark and painful chapter for our industry; however, with the Declaration of Cooperation providing an anchor of stability, a new page is being written, one which has the interests of producers, consumers and the global economy at its heart.
With the OPEC-non-OPEC strategic partnership fulfilling its responsibilities and Nigeria playing a leadership role, one cannot help but brim with confidence that working together; we can achieve a better tomorrow.
By HE Mohammad Sanusi Barkindo,
OPEC Secretary General.