Opec at 60: ‘Road to stability long and bumpy’

On the occasion of Opec's 60th anniversary, Algerian energy minister and current Opec president Abdelmadjid Attar was interviewed by Argus' Ruxandra Iordache on the producer group's achievements to date and the challenges that lie ahead.

How would you describe Opec's 60th anniversary on 14 September? What are Opec's challenges and opportunities in the future?

It is truly a matter of legitimate pride to celebrate the diamond anniversary of Opec. That such a developing-country organisation survived the test of time and has even gone from strength to strength is by itself a great achievement. I wish to take this opportunity to express my thanks and gratitude to all those persons who have contributed to such success.

The world in 1960 was so different. Many countries were still suffering from colonialism and were still in the midst of the struggle for independence. My country, Algeria, was one of them. The oil industry was dominated by a few international companies, dictating their terms on the countries where they operated, including by unilaterally setting the price of oil. It is against this background and with a view to safeguard their sovereign rights and interests that five countries decided to establish an organisation of oil exporting countries, Opec. It was an unprecedented, courageous and visionary act.

Ten years later, the oil industry went through fundamental changes, with member countries asserting their sovereign rights to the exploitation of their petroleum resources, notably through nationalisations and by establishing national oil companies, and with Opec setting the price of oil. Then the cyclical nature of the oil business, market requirements, technology advances, policies and regulations imposed themselves. Opec skilfully adapted to this reality, by focusing on supply and demand fundamentals, extending a hand of co-operation to other oil exporting countries, being an active actor of the producer-consumer dialogue, and expanding its coverage to other global issues, such as sustainable development, poverty alleviation and environment.

It is recognised by all that Algeria played an active role in Opec. It was in Algiers, in 1975, on the occasion of the first Opec summit, that the Opec fund for international development (Ofid) was conceived to support economic development and social progress in developing countries. Since then, more than 130 countries have benefited from Ofid's support, an achievement that we are proud of. It is also in Algeria that landmark agreements have been adopted, in 2008 and 2016.

Today, Opec is a respected, credible, and influential organisation. Its voice is listened to in multilateral fora. This crisis year has been a clear demonstration of the unique ability of Opec to act, in partnership with other oil exporting countries, in order to avoid chaos and bring back much-needed stability. This positive role is now recognised by all.

Opec has been successful for three main reasons, I believe: sovereign equality of its members, loyalty to its mission, and ability to adapt to new realities.

What are the challenges ahead? What are the opportunities?

The immediate challenge is to navigate through this unprecedented crisis stemming from the Covid-19 pandemic. It is a huge challenge. I will come back to this later on.

It is difficult to project what the future is going to be. It will be shaped by the interplay of technology, policies, consumer behaviour and geopolitics. So clearly, there are many possible future energy paths and we could likely face many surprises, too. Twenty years ago, the common view was that the world was drowning in oil and prices will never reach $30/bl again; 15 years ago, oil supply peak was a hotly debated issue along with huge US gas imports projected needs. None has occurred.

The world will undoubtedly need more energy, due to population increase, expanded economic activity, improved living conditions and poverty alleviation. This is good news.

The key challenge is to respond to these energy needs in a sustainable manner, which means providing an affordable and environmentally-sound energy.

To this end, I believe that all energy sources will be required. Energy systems are huge, and energy transitions take time. Coal continues to be used decades after its demand has peaked, even in countries claiming to be green.

So, I believe that oil will continue to satisfy a large share of world energy needs in the foreseeable future, though its share in the global energy mix might be declining.

And I believe that Opec will remain relevant, as long as it continues being open, flexible, forward-looking and able to adapt.

With the first stage of the latest Opec+ agreement behind us, where do you see the oil market?

The last six months were truly without precedent in the history of Opec, and probably the oil industry. The Covid-19 pandemic led to a dramatic loss of lives and livelihoods, everywhere. It also resulted in a sudden, global and synchronised decline in economic activity, a drastic limitation of mobility and, consequently, a sharp reduction of oil demand. In April, demand of oil contracted by over 20mn b/d, and oil prices went spiralling down, losing more than 70pc of their value compared to the beginning of the year. We have even witnessed for the first time a negative price for oil.

I am recalling this context to underline the importance of the April Opec+ agreement and the decision taken by 24 countries to co-operate and work hand in hand, with the objective to overcome this crisis. We can say today that it is a successful agreement and we shall all be proud of this achievement.

Where are we today? Clearly, oil market fundamentals are improving and rebalancing is underway. Indications of economic recovery are visible in most countries and regions, aided by a successful containment of the pandemic and sizeable government support to wither the adverse impacts on jobs and businesses. Mobility has improved everywhere, though it still remains at lower level than before the crisis. According to the Opec Secretariat, oil demand is expected to increase by around 10mn b/d in the third quarter, compared to the second, leading to depletion of global stocks at a pace of around 3mn b/d, with this figure increasing to even more than 5mn b/d in the fourth quarter. Going into 2021, the picture is even rosier, with market rebalancing continuing and global stocks depleting at a pace of 4mn b/d.

However, uncertainties remain large. The number of new infected cases is soaring in some countries, though with lower severity. Oil prices have declined in the last week, and market contango has widened. Is this a temporary correction, or is it an indication of strong headwinds ahead?

What is sure is that the journey to stability is still long and the road bumpy. We need to remain vigilant. Until an efficient treatment or vaccine is made available worldwide, the downside risks to market stability cannot be ignored. I can assure you that we carefully monitor market evolution and remain ready to take further corrective actions, should market stability require that.

What is the biggest challenge still facing Opec? Do you think the second phase of lower Opec+ cuts began too soon, given the likelihood of a second wave of the Covid-19 pandemic?

I do not think so. Clearly, the transition to the second phase was smooth and market reaction was positive. The Opec basket price remained stable in August, fluctuating within a narrow range of $44-46/bl.

The biggest challenge facing Opec in the short term relates to the pandemic. How is it going to evolve? Will the world face a second wave? When is a vaccine going to be widely available? Clearly, downside risks stem from a resurgence of the pandemic that would lead to substantial reduction in economic activity. However, there is an undeniable fact: countries have a better knowledge of the disease, are better equipped and have mitigation policies in place. So, I believe the impact is likely to be less dramatic than in spring. Trade tensions constitute another risk that could surprise to the downside.

But I remain optimistic, prudently optimistic.

Medium to long-term, the challenge is to adapt to potential changes in lifestyles, economy, trade, technologies, policies and geopolitics. We are also in the midst of an energy transition. It is difficult to foresee what would be its future path, given the diversity of drivers, be they related to technology, policies or lifestyles. However, it is clear that we already entered a period of change. Opec should, as in the past, adapt to new realities and find adequate responses that promote the use of oil, such as cleaner technologies and more sustainable production patterns. It shall not do this alone, but with partners. The charter of co-operation adopted last year could be a suitable platform for such permanent co-operation in the medium to long-term, expanding to other areas than oil market related matters.

Opec hesitates to target a global oil price. But what would be a comfortable one?

Opec does not have a price target. It aims at ensuring a balanced market and reducing oil price volatility in a manner that safeguards the interests of its member countries, ensures secure supply to consuming countries and a fair return to those investing in the oil sector. Opec member countries rely on oil export revenues to satisfy the needs of their populations and finance their socio-economic development programmes. Furthermore, oil is an exhaustible and non-renewable resource and requires large investments to be produced.

Finally, a large part of the end-user price is due to consuming countries' taxes. Consequently, from this perspective, it is clear that the current price is a too-low oil price.

The comfort zone depends on circumstances. Today, in the face of this unprecedented crisis that resulted in a huge stocks build-up, this zone could realistically be within a range of $45-55/bl. However, after market rebalancing, this zone will have to migrate to much higher levels. Huge investments are needed to cope with increasing demand and oil fields' natural decline.

The Opec+ agreement has achieved strong, but incomplete compliance, with some repeat overproduction from certain countries. Is Opec+ satisfied overall?

The overall conformity is indeed relatively high. It reached 97pc in July. This is satisfactory. At the same time, what is even more satisfactory is that, without credit for over-conformity, the level is the highest since January 2017, meaning a substantial improvement in compliance by most countries. Having said that, I wish to underline the repeated statement by the JMMC that achieving 100pc conformity from all participating countries is required, for reasons of fairness as well as vital necessity to wither the current unprecedented crisis and rapidly restore market stability for the benefit of all.

Furthermore, participating countries have agreed in June to compensate for overproduced volumes. I believe that this is a landmark decision. It provides enhanced credibility to the agreement and to Opec+ pledges and actions.

Let me take this opportunity to underline and praise the positive role of His Royal Highness Abdulaziz bin Salman, minister of energy of the Kingdom of Saudi Arabia, and chairman of the JMMC. His hard work, smart diplomacy and persuasion skills have contributed to successfully navigate through this crisis, and to turn the JMMC into a credible monitoring body.

Do you see Opec+ compliance continuing at strong levels (above 80pc) into next year, if crude oil demand improves and global prices continue to rise? Is there a risk of diminishing compliance in a higher oil price environment?

I am confident that conformity levels will remain high in the future, for at least four reasons.

First, there is a clear willingness of participating countries to co-operate towards oil market stabilisation.

Second, the sharp and harmful fall in prices observed in April was a clear demonstration to all actors in the oil industry that, in the absence of strong and credible co-operative adjustment actions by oil producing countries, it would require very low oil prices to stabilise the market, with damaging consequences to producing nations, consumers, the oil industry, and ultimately the world economy.

Third, should demand and prices increase, the required level of production adjustment will be revised down.

Fourth, the active role of the JMMC in monitoring market conditions, compliance and compensation is set to continue.

As we saw in June, Opec must sometimes respond to market conditions with very short-notice decisions. But many producers commit their term supplies months or even a year in advance. How do these obligations to buyers limit Opec's responsiveness?

I do not think this is an issue. Country crude export allocations are made with due consideration to the sovereign decisions taken by the said country within the context of Opec and Opec+.

Why did Opec decide to now require compensation for overproduction? Was this widely embraced by members, or has it led to tensions?

As I have explained earlier, this is a landmark decision. It was supported by all participating countries. I am thankful to all partner countries for such support. It makes Opec+ actions more credible vis-a-vis market participants. Furthermore, and this is important to underline, in July and August JMMC meetings, countries with low conformity rate have reiterated their commitment to compensation.

Would Opec+ reconsider, on an individual case-by-case basis, adjusting the cut baseline or targets of specific countries?

This falls within the remit of the Opec conference and the Opec+ ministerial meeting, and requires a consensual decision.

The Opec configuration has shifted over the years, but the group has not attracted a larger new producer to its ranks since Angola in 2007. What benefits would Opec argue that membership could offer for a major and growing producer such as Brazil?

Opec welcomes all countries to join, be they big or small exporting countries. It strived to develop co-operation and partnership with other oil exporting countries. The best example is the Declaration of Co-operation, a successful platform of collaboration of 24 countries. The Charter of Co-operation aims at being a permanent platform for such co-operation. I hope that more countries will join this multilateral, co-operative, win-win and forward-looking undertaking.

Brazil is an important oil producing and consuming country. In June, the secretary general of Opec held bilateral discussions with Bento Albuquerque, minister of energy. The dialogue is ongoing with Brazil.

Over the years, there have been suggestions of friction between big and smaller Opec producers. Are there any, and how does Opec guarantee the interests of all members are served?

No, there is no friction. Such suggestions are simply not correct.

Opec is an organisation of equals. According to its statute, it shall be guided by the principle of the sovereign equality of its member countries. Each member has one vote and conference decisions require the unanimous agreement of all its members. Opec's budget is also equally funded. Chairmanship of the conference and the board of governors is on a rotational basis.

I believe that this very principle of sovereign equality is the key driver behind Opec's success and great achievements in 60 years of existence. Building consensus may take lengthy discussions, many contacts and bilateral meetings. However, this brings diversity and richness to ideas and solutions. It is a source for smart flexibility. It is not a waste of time.