Publications

27.07.2017

ONLY CONSULTATIONS BETWEEN OPEC, RUSSIA & USA CAN STABILISE OIL MARKETS – IGOR YUSUFOV

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Igor Yusufov, Russia’s former Energy Minister.

25 July 2017, Sweetcrude, Lagos — Mr. Igor Yusufov, an erstwhile minister of energy is one of the initiators of the first ever Russia-OPEC oil production solidarity cut back in 2001.
Mr. Yusufov has been working in a high government position for 30+ years and is now the head of the $3 bn Energy Investment Fund and think-tank working on dozens of oil and gas exploration projects in Russia.
In a response to inquiry from Hector Igbikiowubo, Sweetcrude Reports Editor-in-Chief regarding the OPEC and non-OPEC collaboration aimed at stabilising the oil market he provides the following insight.

Excerpts:

Can you provide us with insight on the global energy aspects of the Trump-Putin historic meeting agenda?

When we analyse possible effects of the first ever meeting of President Putin and President Trump, we have to be prepared that energy matters will not be mentioned among strictly political issues which both heads of states discussed in Hamburg. In fact, it is not a great surprise; in order to establish a fruitful cooperation in this highly sensitive and politically satiated sphere, you ought to first determine the general rules of interstate cooperation. Unfortunately, the Obama administration left a diverse heritage of unsolved and artificially created problems in bilateral relations brought as the result to one of the lowest levels ever. Anyway, there is no doubt that the pragmatic orientation on American policies proclaimed by President Donald Trump would be under a crucial test on the approach towards the energy cooperation with Russia since it is a very promising direction of the American oil and gas industry.

What exactly are the immediate and long-term implications of the Trump-Putin meeting for the global energy industry? 

The meeting of Russian President Vladimir Putin with U.S. President Donald Trump which took place within the framework of the G20 summit in Hamburg has set a constructive tone for the solution of the major issues in the field of economy in general and energy, in particular, confronting Russia and the USA – he is the main result of their first encounter. The problem of complex development of new oil and gas provinces, the improvement of technologies for hard-to-recover reserves development and definite mutual interest of both Russian and American energy companies belong to the agenda of the new Russian-American energy dialogue – and now there is a very positive disposition to revoke the idea of this dialogue.
Cooperating with leading American companies as Haliburton for many years Corporation Energy I founded 6 years ago for the exploration of oil and gas deposits in Russia and abroad sees constructive understanding sprouts emerged in the course of the historic meeting of Russian and U.S. Presidents in Hamburg. In my opinion, this is a practical prerequisite for a qualitatively new stage of the energy dialogue in which I have had the honour to participate in the early 2000s as Russian energy minister.

In view of the current slide in oil prices and the efforts by both OPEC and non-OPEC countries to stem the slide, what do you think both groups expect the American leadership under President Trump to do to stabilise oil prices? 

Latest statistics show that OPEC countries fulfilled their production cut pledge to approximately 100% – with the understandable exception of Libya and Nigeria, those countries were not bound by the OPEC+ deal. At the same time, the International Energy Agency declared this week that a slow increase in international oil demand could cause against this background a further price slide.
At the same time, as one of the authors of the 2001 first ever OPEC+ production cut with Russian participation I acknowledge that OPEC+ mechanisms implementation could lose economic sense after March 2018, additional ideas are needed, for example, the invitation of Libya and Nigeria to the Joint Ministerial Monitoring (JMMC) session due to begin July 24th in Saint-Petersburg, Russia. Anyway, for the majority of serious oil and gas analysts, it is obvious that another “round of stability” on international energy markets could begin only after some sort of consultations between Russia as a major producer, the OPEC and the United States. I am sure that this market oriented superpower would in fact not risk really massive oil and gas exports unless a persuading calculation of the revenues will be presented. Now we witness only isolated cases of such deliveries. But let us compare the prices of production and transportation of American LNG with further reliquidation in a hub in Poland with a comparatively cheap production and simple pipeline delivery from Russia.

In view of the current slide in oil prices, do you think the collaboration between OPEC and non-OPEC countries to stabilise prices is sustainable in the medium to long term?

The prolongation of the November 2016 OPEC+ deal till March meant the conversion of the 2001-invented effective mechanism of extreme prices volatility into a proved market measure of at least mid-term effectiveness. Under the present condition of oil production increase by Nigeria and Libya by 428 000 barrels a day and 650 000 barrels a day, in the US I do not exclude a timeout in the implementation of the OPEC+ mechanism – at least till the United States enter a dialogue on its oil exports with traditional producers and Nigeria and Libya could be integrated into common efforts to stabilise global prices.

Both Nigeria and Libya which were previously excluded from output caps have witnessed increased output recently. Both countries have now been invited to an OPEC meeting scheduled for July 24th in St. Petersburg, Russia. The expectation is that both countries will be required to join the output cap regime. Do you think their inclusion in the output cap regime will stem the slide in prices?

The invitation of Libya and Nigeria to the Joint Ministerial Monitoring (JMMC) session due to begin July 24th in Saint-Petersburg, Russia is a very energic measure – hopefully their representatives will come to the cultural capital of Russia with the corresponding mandate to join the OPEC+ process. But anyway for the majority of serious oil analysts it is obvious that another “round of stability” on international energy markets could begin only after some sort of consultations between Russia as a major producer, the OPEC and the United States. I am sure that this market oriented superpower would in fact not risk really massive oil and gas exports unless a persuading calculation of the revenues will be presented.

Several commentators and analysts have said that OPEC has lost its capacity to determine oil prices and the supply thereof. In view of the impact of shale oil production and its impact on both the price and oil supplies, do you agree that indeed OPEC’s glory days are over?

Looking back at decades of my experience in international energy I would not remember a single international discussion where the eternal question of OPEC consistency would not be evoked. But anyway the 1960 founded cartel comprising now 14 nations is still the only sound internationally renowned body expressing the interests of oil producers, although according to Corporation Energy data OPEC produces some 43% of oil extracted worldwide.
For decades the question of the Russian membership in OPEC is discussed at different levels. For decades the answer of Russia as one of the two leading crude producers remains negative – with the will to cooperate with OPEC on technological and the marketing level, which has been proved by the consistency of OPEC+ deals.

On the other hand, there are prerequisites even for the strengthening of the OPEC voice among traditional producers: доказанные запасы нефти стран, входящих в картель, составляют 73% мировых запасов, включая 48 %, которые приходятся на долю 6 стран-участниковof the world’s proven oil reserves including 48% from just the six Middle Eastern members.
Since a kind of dialogue of oil producers with American participation seems to be inevitable for market stability, the role of OPEC as a significant party in this dialogue could be even enhanced. Anyway, in the early 2000s when I was Energy Minister we laid down an efficient background for the cooperation between Russia-OPEC and even OPEC – International Energy Agency, which I still consider my personal contribution to markets stabilisation efforts.

Recently Russia’s Gazprom complained about the U.S. efforts to snap up a part of its gas market share in Europe impacted by sanctions. Can you provide us with an insight regarding what reaction we are to expect from the Russian government in response to this development?

I would not assume that Gazprom “complained” about the American activation in gas deliveries- it is really not the style of the world`s biggest gas producer. But the recent development in the international gas trade provides real stuff for reflections.

In the beginning of July, the President of Poland Andrzej Duda said that his country could become a regional hub for the supply of liquefied natural gas from the U.S. to neighbouring countries; this issue was discussed during his talks with American President Donald Trump. In April this year, Poland signed a single LNG supply contract with the U.S.; the volume of the contract was not specified. Poland consumes about 15 billion cubic meters of gas per year, while Gazprom supplies 10 billion cubic meters of gas. In 2015 in the North-West of Poland, the LNG terminal Swinoujscie was launched with a capacity of five billion cubic meters per year. In June 2016, the Polish government announced the plan under which the LNG terminal in Swinoujscie, as well as a gas pipeline that will connect Poland with the Norwegian shelf, would ensure Poland’s independence from gas supplies “from the East” until 2022.

In my opinion, the intention of the U.S. to start direct supplies of liquefied natural gas (LNG) to Poland as well as to the countries of Central Europe marks neither the beginning of a trade war nor the emergence of a new factor in the potential aggravation of Russian-American relations. At a press conference after the G20 in Hamburg President Putin considered the statement about the US readiness to increase sharply in exports of shale gas as an expression of “healthy competition which benefits everybody.” Thus, the head of Russia emphasized our support for open markets including energy markets and shared the U.S. commitment to “open and fair competition”. By the way, this provision was reiterated by American President Donald Trump, in particular during the discussions at the meeting of the G20.

According to Putin, the cost of LNG production as well as its shipping from the United States to the traditional markets of Europe and Asia is much higher than production and transportation of both Russian LNG and natural gas transported by pipeline. Absolute confirmation of these words can be found from the calculations made by Corporation Energy experts.

Established in 2011 and estimated at $3bn, the Corporation Energy invests primarily in hard-to-recover oil and gas production in Russia. Some experts of the Corporation, which till recently has been called Fund Energy, participated in effective and mutually beneficial Russian-American energy dialogue in the early 2000s proclaimed by the two presidents Vladimir Putin and George Bush.

During the US-Russia Energy Summits in 2002 and 2003 the experts and business representatives of the two countries proceeded from the assumption that oil and gas supplies from the United States, which were interpreted in a purely theoretical aspect those years, could make sense only if they were effectively coordinated with traditional suppliers including Russia which occupied and occupies a key place. I am convinced that such consultations in which all traditional suppliers may be involved in the future could contribute to the establishment of long-term stability of the energy markets.