OPEC’s lost grip on world black-gold market - oil executive

The oil prices are plummeting down to historic lows after OPEC decided not to cut down production of the black gold. The decision have sent shivers through the world’s economies – especially for the countries which have most of their budget tied to this commodity. But are there any winners in this situation? How long will this fall continue? What could the consequences for the planet’s energy industry be? We ask these questions to the CEO of Brazil’s Barra Energia. Former president of the World Petroleum Council Renato Bertani is on Sophie&Co today.

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Sophie Shevarnadze: Renato Bertani, CEO of Brazil’s Barra Energia, former president of the World Petroleum Council, welcome to the program, it’s really great to have you with us. Now, this is the steepest oil price fall since the global recession. How low can price fall? Could you give, like, a number?

Renato Bertani: Thank you, Sophie, for having me. Indeed, these are very substantial drop in oil prices, which happened somewhat precipitously in the last few months. I think this is a result of a combination of factors, but most importantly because of the world’s economy which is at best sluggish and some regions are actually in recession. So this is not really stimulating any consumption growth, and, to me, that’s the most important factor.

SS:We’re going to talk about factors in just a little bit. I was just trying to get your estimate of how much lower can price fall, realistically speaking, like, a number.

RB: Very difficult to predict. We’ve seen in the past it going down to $40 per barrel on Brent. It’s very hard to say if it’s going to get that low or not.

SS: How much of this oil price fall is due to growing shale production in the U.S.?

RB: Coming back to factors, that may be playing a role in this, because it is certainly creating a supply factor in the West, particularly. Again, I think, the key factor that is determining the oil prices is that production consumption, on the demand side, has not been very robust because of the world economy still recovering in some areas, slowing down in some others, we see China’s economic growth not as high as it used to be in the past. European economy is still struggling to recover, U.S. economy is certainly recovering a bit. Latin America – very slow growth. So I think this is the key factor determining why the demand is not really picking up strongly.

SS: But also, I’m thinking, at this point there are so many new players on the oil market, predominantly U.S., obviously, and it’s booming shale oil industry. So, are the times when OPEC could control the prices over, because its share in the global market has fallen from 50% to 30% in past couple of decades?

RB: Indeed, OPEC’s capability of controlling oil prices is being, at minimum, diluted, because there are a number of other significant players coming to the market. So, there’s Russia, there’s the U.S. with the unconventional oil, offshore Brazil – very important new province, with very significant discoveries in the last few years. So, we see that there are several players now that will have a role in establishing new balance between supply and demand.

SS: Now, this decision to keep the oil production levels unchanged – what’s in it for OPEC’s top producers? I mean, people are saying the only winner in the situation is Saudi Arabia, but even that seems a bit of stretch.

RB: Maybe, this is a longer-term view rather than the shorter. Remember, that if you are artificially controlling prices, you may benefit in a short term, but over the longer term what could happen if the oil prices were pushed back up, we would see continuous negative effect on the economic growth and at the same time, more expensive oil production could be coming to the market continuously in the next few years. I think this is a change in strategy of letting market forces prevail, so that by keeping level as it is, we will see price drops – again, I don’t know at what level – but that will be a positive factor to stimulate economic growth, which will stimulate oil consumption and, over time, we will see oil prices coming back to the original levels, if not even higher.

SS: ”Over time” is the key word there, because at this point there are parties involved that are being really hurt. I am saying out of OPEC members, Venezuela and Iran are hit the hardest by the falling oil prices. Now, I know you’re numbers kind of a guy, but, smart as you are, I’m sure you also think beyond the numbers: there are speculations that the rivals of Iran and Venezuela, they could be using the market behavior to gain political advantage. Have you ever thought of that?

RB: It’s hard to access which is the political agenda of the each one of the countries involved in this, but I think, again, the prevailing motivation here is to establish conditions for the demand to continue robust and to continue growing over the next few years. So, “over time” is the key term here, and that means, maybe, one year, maybe two years, maybe 3 years, but the real fact is that the world will continue needing a substantial amount of oil for its economic development. Now, if we look at this in the fairly longer term, we’ll see that the production of the existing fields inevitably will deplete – this is natural for all producing reservoirs. There has to be a lot of new oil to be brought on stream. There are estimates that indicate that the world will need to invest about a trillion dollars per year in exploration and development of new sources of crude over the next 20 years. So, that money, that capital, will only be going to be deployed in this industry if the demand continues strong and the prices continue strong. So, I think, the short-term, indeed, indicates a tendency for this significant price drop. But I see this as volatility, typical of this crude market, and I see oil prices coming back to the original levels maybe in one year or two.

SS: So, that’s your estimate, huh. But should OPEC leaders be the only ones the world’s demanding to cut production? Who else should play the role in balancing the market, in your opinion?

RB: Again, I think, in the end, it’s the market, the consumer market that will dictate how much demand it can take. It is traditional supply and demand balance. To the extent there is cheap supply on the market, the market will continue taking it up, will continue consuming and will continue growing the demand. As the demand grows up, this certainly will see oil prices coming up again. So, it’s a new dynamic which is dictated a lot more by the old supply-demand law, rather than by individual players dictating what they can get out of oil prices.

SS: I understand your approach to this whole thing, where you think in one year or two years’ time everything’s will go back to normal, the market will stabilize itself, and everything’s that’s happening, is happening for the profit in the long run. But, I do want you to consider and analyse with me some other theories that exist around this falling prices. For instance, the global news outlets have been interpreting this OPEC’s decision as an attempt by Saudi Arabia to undermine high-cost shale oil production in the U.S. by driving down the price to make it unprofitable. However, IEA estimates that most U.S. shale output will actually remain profitable even at $45 per barrel. If Saudi Arabia is really trying to kill shale – and I want your opinion on that as well – is it prepared to push prices that low? These are just thoughts, but I do want you to consider them and analyze them with me.

RB: Yeah. It’s very difficult to assess what is exactly behind Saudi Arabia and other OPEC members. If that’s the strategy to kill or take the shale oil out of the market, it can only last for some time, because the net effect will be that – as I indicated before – prices will have to come up as soon as we’ll see demand growing substantially; and then, later one, we will see oil shale, extra-heavy oils of Canada or even Venezuela becoming competitive again. In these so-called “sweet spots” – absolutely, oil shale can be profitable at $40, $45, $50. In some other areas which are not that productive, that require more massive drilling and fracking – I’m not sure. I would say, in some other areas, they’ll need $70-80oil to continue having a robust level of investment.

SS: Now, Russia has said it can sustain lower oil prices, U.S. has said before it can manage with $57 per barrel. In reality, what kind of price canthey take? I want your personal opinion on this?

RB: There’s no specific price at which the industry can be sustained either in Russia or in U.S. I’m sure there’s a range of oil fields, both in Russia and U.S., and anywhere else in the world that can be sustained and continue producing profitably with oil at below $40. On the other hand, there’ll be fields that need $70-80 oil in order to continue to be profitable, so I think the oil price drops and if this drop persists over a long term, meaning a few months or one year, some of these producing fields will be becoming uneconomic and will have to be shut down.

SS: Now, besides the profit and business, I want to talk about some other factors that are involved in this whole process, because it’s a global process. For instance, after the Arab Spring, Gulf countries have been pouring money into social programs to prevent explosion akin to that of Syria and Egypt, for instance. With OPEC letting oil prices fall and biding its time, don’t these countries run a risk of budget cuts, unpopularity, and social unrest? That could be happening at some point. I mean, you’re talking about one or two years before the market gets up and stabilizes itself, but a lot can happen in those two years, no?

RB: I agree. I think each country will have to manage their own budgets very-very carefully, particularly those that rely on oil revenues, or on assistance from oil-producing companies. There is an uncertainty ahead of us in the next couple of years, and I think all countries should be exercising a lot of caution on the way they plan their internal expenditures.

SS: Now, there’s another huge problem: for instance, the International Energy Agency says that ISIS threat to oil fields in Iraq is going to affect oil production and investment there. Is that going to affect the market, what do you think?

RB: That’s one of the volatility effects that are typical of this oil industry. This historically has been like this. There may be production disruptions to our industry, of all sorts: it could be, as the example that you indicated with ISIS, it could be a natural disaster; just to give you an example, when Katrina hit the Gulf of Mexico, overnight, almost 2mn barrels of oil were knocked out of the market. So, this volatility is intrinsic to our industry, and we have to manage and plan, taking into consideration that this sort of volatility will exist.

SS: What does the whole situation, including volatility and falling prices mean for the Asian markets? Could lower oil prices be an attempt by OPEC to woo big buyers like China over from competitors like Colombia and Russia, for instance?

RB: I think all of these markets are really having a look in this in the long-term. Importing countries and

exporting countries definitely will be looking at this as one event in the long-term cycle, where – this is my opinion – we will see oil prices steadily coming back to original levels, and slowly increasing, just because the future supply and demand balance will require that oil prices will really have to increase in order to attract the investments that will be necessary to keep the supply at the level of demand. So, overall, I see over the next 10-20 years a steady increase of oil prices with cycles of low prices – like we’re seeing now – and eventually even spikes of higher prices that may be triggered by disruptions in the supply, by wars or by natural disasters. So, again, it’s a matter of the long-term view on the industry.

SS: I’m just wondering, as someone who is not very familiar with the whole oil industry – I’m just asking you questions that anyone would want to know in this current situation. The current price that we have right now, is it real? What I mean, is it market-driven, should the oil be $70 or $60 instead of $100 per barrel – because I’m looking at ISIS and they’re selling $30 per barrel. Is this a real price that we’re seeing right now?

RB: I think the current price is really approaching what is market-driven. Clearly, it’s dropping because it’s reflecting the market perceptions over the supply and demand balance. There is currently a perception that there may be for this this year and next year an excess supply in the view of the levels of demand. So, indeed, this price that we’re seeing – I think it’s approaching what would be market equilibrium rather than being manipulated.

SS: But what is the market price for barrel right now? The real price?

RB: Well, it’s exactly what we’re seeing. We’re seeing around $70 per barrel, or $73 – from the last quotation that I saw - for brand crude.I think this is what the market price is.

SS:But do you feel like there’s a general fatigue of high oil prices? Hydrogen and electric cars are going commercial, there’s renewable energy, solar, wind, nuclear – they all are picking up. It seems we are in the process of kicking the oil habit, no?

RB: Yeah, this is one of the tendencies that we’re seeing, and not only because of the electric cars, but regulations, the need to diminish CO2 emissions, substitution for bio-fuels or other renewable sorts of energy. Nevertheless, we’ll continue seeing oil and natural gas as key part of the energy matrix of the world. At least 50-60% of the all consumption will be oil and natural gas for the next two decades. In order to continue meeting that demand, we’ll have to continue finding and developing new oil in evermore challenging and expensive provinces. So, that’s why I don’t think there’s a fatigue for high oil prices. What I see is that in the next couple of years there’s an excess supply over the demand and the natural market reaction to that is that oil prices drop.

SS: So, clarify something for me. There’s been this myth and a lot of talk about “Peak oil”, about how humanity’s going to use it all and, like, in 50 years’ time, all of these bad things are going to happen, because we’re going to be out of oil. But now, there’s this shale revolution which has expanded potential reserves, there’s the pre-salt oil that you like to talk about so much, which did the same. Tar sands, new oil fields are being discovered all the time. So, does this mean that we will never run out of oil after all?

RB: I don’t think we will run out of oil before the world ends its need for oil. We’ll be, as an industry, able to find oil as long as there’s demand. Over the long term, maybe, in the next 50-60 years – well, there may be technological breakthroughs, substitution, and then, progressively, oil will eventually be phased out of the energy matrix of the world, but not because there’s shortage of oil. There’ll be, potentially, substitutions from other sources brought about by technological breakthroughs. If you think about what happened since the world started consuming oil in the middle of the 19th century – the world consumed one trillion barrels of oil until the year 2000. Since the year 2000, until now, only 14 years later, we already consumed 400 billion barrels. Nevertheless, the oil reserves, which were about 1.1 trillion barrels in year 2002, are now at 1.7 trillion barrels! So, that means that in spite of us having consumed a lot of oil in the last 14 years, not only were we able to replenish all that oil that was produced, but on top of that, add a huge amount of oil that was discovered in all of these new provinces that you just mentioned.

SS: Fracking is huge these days, but its sustainability has been put into serious doubt by many environmental groups. Tar sands in Canada have drawn ecologists’ anger as well. At what does environment damage become too serious to bear?

RB: I think at the current pace it’s viable, because we continue developing. What I see, actually, is not that question; I see it as that in a number of places around the world, it will take a lo0ng time, if ever, to convince society, that that’s a good deal for society. Ultimately, any investment in this sector will have to generate a tangible benefit to local communities and local societies. They don’t have to dictate whether or not they want unconventional oil to be explored in their communities. So, the short answer to your question is – I think, it will take a long time, until this play, the unconventional oil spreads around the world. There is a number of other factors as well – the need for infrastructure, the need for proper regulation, and the availability of services, particularly for drilling and fracking, which has to be massive to develop in this place. So, there are several limitations for this play to become wide-spread around the world. I see it continue growing in U.S and in Canada, but modestly, in other countries.

SS: Thank you very much for this interesting insight into the world of oil. We were talking to CEO of Brazil’s Barra Energia, former president of the World Petroleum Council. We were talking about what the dropping oil prices are doing to the market, and what’s there to come in the future. That’s it for this edition of Sophie&Co, I will see you next time.