Interview with the Secretary-General of Organization of Petroleum Exporting Countries
After a historic agreement reached by the Organization of Petroleum Exporting Countries (OPEC) last week to curtail oil supply by 1.2 million barrels per day for the first time in eight years, OPEC Secretary-General, Mr Mohammed Barkindo spoke with the News Agency of Nigeria in Vienna, Austria.
First of all, to give perspective, the agreement was reached following extensive consultations with key non-OPEC countries, including the Russian Federation who have agreed to also cut supply by 300,000 barrel per day.
Nigeria and Libya were exempted from the cut due to the current economic, political challenges facing both countries.
The duration of this agreement is six months effective January 1, 2017, extended for another six months to take account prevailing market conditions and prospects.
Nigeria is facing serious challenges in the oil sector chiefly the issue of militancy in the Nigeria Delta region. As a former NNPC Chief Executive how in your view can this be contained and is there any role OPEC can play to assist Nigeria in resolving the problem?
I will start by responding to the OPEC role. Nigeria is a very important member of OPEC. It has always been a leading advocate of market stability. What OPEC did in drafting the Algiers accord if you recall is to take into account the special circumstances of Nigeria plus Iran and Libya, to allow these other countries to restore their production capacity and capabilities before they can participate in any supply management.
On the domestic front, I have been talking to the Minister of State, Emmanuel Kachikwu and he assured me that discussions are ongoing with various groups, various stakeholders in other to get a lasting solution to the situation in the Niger-Delta.
First of all our ultimate objective as a group is to maintain stability on a sustainable basis. What we saw before the severe correction of oil prices in 2014 was run away prices that saw some crude yield going as high as 120-130 dollars per barrel.
When the correction came, we saw how our crude yield lost over 80 per cent by January, February this year. OPEC is not interested in having such large fluctuations and volatility in the market. What we are interested in is stable market that will provide equilibrium prices that will be fair and not only to producers but consumers as well.
What exactly is the equilibrium price?
As I said earlier we saw prices reaching their peak of about a 120-130 dollars per barrel that was unprecedented in the history of oil, largely due to supply restrictions that took place in some of our member countries right from 2011.
In 2008 in response to the financial crisis that impacted on demand, OPEC in withdrew about 4.2 million barrels per day from the market. Shortly after that we had outages in Libya that practically lost nearly 1.6 million barrels per day.
Iran was also under sanctions that impacted on their production as well as their exports. And in our own country Nigeria, due to the circumstances in the Niger-Delta we saw production contracting by 700,000 to 900,000 barrels per day.
So the sum total of all this, brought severe shortages in the market and as a result prices skyrocketed and those prices gave rise to incremental supplies from high cost areas particularly the shell provinces in North America.
The United States also brought into the market an average of almost 7 million barrels per day that was largely unexpected. Most analysts did not project that the shale revolution that swept across North America particularly the United States would bring supplies to such very high levels that we saw.
Of course OPEC member countries were also now invited to ramp up their production in other to stabilize prices. So the joint action from both sides raised supply to very high levels and began to impact on stocks on inventories.
Inventories started rising gradually. In the industry we have a five year average and once stocks are above those five year averages, then prices begin to reduce.
The relationship between stocks and prices is an established inverse relationship. It’s mathematical. Once you have high stocks in the market, then you see prices going the other way round and vise versa.
Total commercial stocks round the world was probably over 3-4 billion barrels per day. If you do both OECD, non-OECD stocks, both commercial as well as strategic reserves, you are talking of nearly 7 billion barrels of stock both onshore and offshore.
When the offshore storage got filled up, we saw traders hiring vessels and because freight risk came down, it became cheap for them to store crude even on vessels, so that if there is an urgent need to supply somewhere, the vessel will just move there.
So both the onshore and offshore got filled up and the result is crash in prices.
So what OPEC is focusing on since i came is how we can rebalance this market and to do this, we have to withdraw supplies to the market and it is only then that you will be able to achieve the equilibrium price.
But to answer your question, we are not yet at that equilibrium price but we are on course.
Will the expected increase in the price crude lead to a rise in PMS price in Nigeria?
The greater concern today is the low oil prices to our national treasuries and to our central banks and to our economy. And this is not a concern only for OPEC but also to non-OPEC.
For the first time it’s not only producers but also consumers that are worried about the low crude oil prices.
Some months back, I was invited to the IMF meetings, and the main reason they invited me is to hear from OPEC to what efforts are you making to rebalance the market because we also are not benefiting from this low prices, high volatility regime in the oil and gas sector which is threatening future supplies.
Also, crude oil production is very capital intensive, if there is no consistent investments especially in the E&P and across the supply chain, then the future supplies are gradually and steadily being put at risk and this is of great concern to the rich industrialized countries, the consuming countries and that was why the IMF invited us.
For the first time we had a convergence of producers and consumers and we all agreed that this cycle that we have seen since 2014 to date is inimical not only to producers but also to consumers.
Cumulatively OPEC 14 member countries have lost revenue to the tune of over 1trillion dollars so we have been focused on this challenge.
The issue of how much, products will be sold in the individual countries is a domestic fiscal policy of every member country and we don’t normally get ourselves involved in these sovereign issues.
There is a committee set to monitor compliance of member countries to the new agreement. Is there a mechanism to sanction any country that does not comply?
The committee that was set up yesterday in accordance with the agreement provides for a ministerial committee of five countries three from OPEC Algeria, Kuwait and Venezuela and two from non-OPEC countries.
Russia is expected name the countries. This committee will meet with the secretariat to draw up detailed mechanisms including the compliance framework for the implementation of the agreement.
When nations enter into these binding agreements, they are sovereign nations, they strive as much as possible to abide because it is a collective interest, from when the announcement was made prices rose by about 13 per cent.
I don’t know how many billions of dollars will accrue to member countries so it is a win-win solution not to OPEC member countries but to non-OPEC producers as well.
This is an effective, balanced, credible agreement that is based on the principles of equity, fairness, transparency and verifiable.
Does that mean you do not envisage some non-OPEC members increasing their production to still flood the market and thus keep prices down?
As we speak now, we are discussing and planning to meet with them this Friday 9th of December to work out the framework not only of their contribution but as you have heard Russia made an announcement pledging their support to not only what we did but also made their contribution.
Russia is also coordinating non-OPEC group and together we’re supposed to meet next week to address this.
What about the USA, how involved is the USA in this deal have they keyed into the agreement?
Well the USA has never met with us as a group for obvious reasons because of their laws when it suits them they refer to the anti-trust laws but what we are doing is in the interest of all producers and consumers.
At the last IMF meeting, I met with several institutions of government in Washington and they support what we are doing because we have seen that this year alone, their production shrank by almost 800,000 barrels per day, 100s of their companies have gone bankrupt so they are looking up to us to remedy the situation.
In Nigeria, we are battling to refine crude locally and the when you were at the helm of affairs at NNPC, you championed bringing back these refineries. Up till now we have not seen any improvements, what do you think we need to do to bring these refineries back to life and what is the international benchmark for running a refinery properly?
The downstream part of this industry has always been the most challenging sector, through out the supply chain from upstream to midstream. You face more challenges as you go down.
The refining sub sector of downstream is the most challenging of the downstream sector because margins are very slim unlike in the upstream or midstream where investors can go to the bank to borrow even at high rates and recover their cost, make higher margins and reinvest.
In the refining sub sector, the margin traditionally is very slim.
Therefore governments in our own part of the world have to by necessity participate in this sector, they have to invest, its more of public service than a business in order to provide fuel for the domestic economy at home.
Almost all our refineries have aged we have not been investing consistently to maintain as well as upgrade these refineries to meet modern day requirements including capacity.
I recall that even at 100 per cent capacity utilization of all the four refineries we still have to import PMS and other products.
Our domestic consumption has grown over the years as the economy expanded, as our population increased and our borders became more and more porous where all our neighbours relied on us to get fuel.
These challenges will have to be confronted in a wholistic manner, reforms are necessary in a wholistic and consistent manner.
We have been approaching these issues on a piecemeal basis if and when we need to intervene from time to time but the capitalization of the refineries to make them operationally independent, financially autonomous from government, to run them as a business paying for their inputs for their feedstock, charging for their processing services that they provide, retaining their earnings, reinvesting and with strong, independent regulatory body is the only way forward.
You just suggested that government should invest in refineries, does this not go against the administration’s desire to divest from the refineries?
Government will have to continue to provide public service, it is elected to provide that. The provision of energy services particularly petroleum products in our own part of the world has been more or less public service, without the involvement of government and its institutions, the enabling environment for the private sector to borrow and invest and recover its cost and reinvest has not been put in place.
Until you Reform the industry and provide that environment, those companies that you need to come and set those refineries and other processing plants will be shy because the credit institutions may not be cooperative because the returns are not attractive and the risks are very high, with all what is happening particularly in the Delta where naturally we would have needed more refineries there.
However, from what I have heard from minister Kachikwu, they’re doing everything possible to restore normalcy in the Niger Delta and then to embark on these much needed reforms that eventually in the fullness of time will provide the enabling environment for any investor both with and outside Nigeria to come and invest particularly in the down stream maybe together with government or independently.
On the issues between Saudi Arabia, Iraq and Iran, you have been credited with recording a diplomatic achievement in bring them together, what concession did OPEC make for them to agreed to this deal?
Both Islamic Republic of Iran and Iraq, they are founding members of this organization.
This organization was born in Baghdad in 1960, it was Iraq that invited other members like Saudi Arabia, Kuwait, Venezuela, together with Iran in 1960 to create this organization but, Iraq has been facing difficult challenges over the years.
Right now they are facing a war within their country against the Islamic State, several of their fields are under occupation by the ISIS. Iran is another founding member, very important member, that is just emerging out of the international sanctions that were imposed on them by the western countries.
Both of these countries are very important within OPEC, therefore no agreement will be effective without their participation.
I had to go to Baghdad and Tehran to meet their leaderships, because at some points, the issues became more political and therefore necessitated the need to meet with their leaderships to seek for their understanding, supports and to facilitate dialogue within the group.
When I met with President Hassan Rouhani of Iran in Tehran, he assured me that Iran, as a founding member of OPEC, will always corporate with OPEC, will do everything possible to have a stronger and more effective and efficient OPEC in the interest of Iran and all member countries.
He explained to me that as a result of the sanctions imposed on them, their production shrank. Before the sanctions, they were producing about 2.8 million barrels a day, but it came down to less than 1 million barrels a day, with several consequences on their economy and industry itself.
They just came out of this. So it’s a process, it will take them time to be able to rehabilitate their fields, raise their production capacity and restore their level of production.
Therefore he urged me to work with other member countries to see how we could address that concern but he assured me as a president, Iran will continue to be in the mainstream of OPEC.
With that, I proceeded to Baghdad, I met with the Prime Minister, Mr Haider al-Abadi who also explained to me the war situation and show me on a TV the war in Mosul, the northern part and Tajikistan area, which is a significant part of where their production comes.
He was very considerate and corporative and assured me that come November 30, 2016 his country will join the consensus and both countries fulfilled those pledges, which I expressed my deep appreciation and gratitude for showing that leadership as well as flexibility.
What about Saudi Arabia?
Saudi Arabia, we never had issues with them , they are the biggest producers, as you can see, Is the de facto leader of this group, and when it comes to decision like this, they are taking the biggest heat more than any other country, despite the fact that they are also having their own domestic challenges but they are taking this leadership with great responsibility.