Q&A: Kuwait's Opec governor, JTC chairman
Kuwait City, 9 November (Argus) — Opec governor for the state of Kuwait and chairman of the Joint Technical Committee (JTC) of the Opec and non-Opec production agreement Haitham al-Ghais spoke with Argus about the progress and future of the market rebalancing deal that has been in place since January this year. He discusses whether the November ministerial meeting will be too early to decide whether to extend output cuts, the range of proposals under consideration, increased Nigerian and Libyan production, and the outlook for US shale.
How do you see the market at the moment? Are the Opec, non-Opec production cuts working?
When we say the market today is good, my reference point would be the beginning of this year. And I specifically say that because that is when we, as a group of producing countries, both within Opec and the participating non-Opec countries, signed the joint declaration of cooperation, and said that from 1 January this year we are going to embark on the road to re-balancing the market, and bringing the overhang in global stocks back to within the five-year average levels. So, if that's the reference point, and that is the target that we have identified, I think we have made very clear strides and great progress so far.
The pact has been holding together, that is number one. In the past, pacts have not held together for very long, especially with rising oil prices. Oil prices today are by far higher than they were at the beginning of the year. This is of great benefit to all countries participating under this agreement. Since July, Brent has gone up by nearly 40pc.
Second, in terms of the target of bringing the stock overhang down, I would not say we have achieved full progress yet, but I would say we have achieved at least 55pc. At the beginning of this year, the overhang in OECD stocks was 340mn bl. The latest data we have so far for September shows that the overhang is now down to just below 160mn bl, which is almost a 55pc reduction. So, we still have work to do, but in terms of where we were and where we are now [it has been positive]. In addition to that, floating storage has almost disappeared globally, so these are all positive signs. And the market structure, prices forward curves have begun to turn into backwardation, which is a sign of tightening avails in the prompt end of the curve.
We never said from the beginning that this would be a one day job. It would take time and perseverance, and I believe the most important factor has been the exemplary conformity level by the countries that have signed up to this Declaration of Cooperation. There have been unprecedented levels of conformity — over 100pc. I would say on average, from January to September, the conformity rates have reached 100pc, and in September we reached a historic level of 120pc conformity, for Opec and non-Opec combined.
The bottom line is that we see the market sentiment becoming more bullish. It is very evident. Even in the net length, you see in paper markets — whether it is New York or London — you see significant increases in net length over the past few weeks. There are more and more signs of physical markets also tightening, and of course very clear indications of healthy oil demand.
Do you have any indications of compliance levels for October yet?
I believe we are going to be seeing similar levels. When you see what has happened in Kurdistan, for example. And we already also know that Saudi Arabia is leading the way by aggressively cutting supplies to the market. We ourselves are sticking to at least 100pc conformity. From day one we have been stable at 100pc.
We have also had a number of countries improve due to the efforts by the monitoring committee. And it is picking up. I think we are going to have similar levels of conformity [in October], and I think everybody is beginning to see the value of this deal. Producing countries that have signed this deal are beginning to see value. You are talking about $64/bl Brent now, whereas at the beginning of the year we were talking of around $50/bl Brent. So, there is no doubt that the deal has been successful so far, and we now have to find the right way to move forward, because, as I said, we still have some more work to do. It's not a done deal yet.
Opec, non-Opec are going to be meeting in Vienna in three weeks' time. Can we expect decisions to be made about the agreement when we still have four months to go before its expiry?
As you know, the deal was extended until March 2018. So yes, as you said, we still have four months until the deal ends. And, logically speaking, the more information you have, and the more data you have, the better the decision you can make.
So, there are two schools of thought. One is that maybe a decision will be made at the November meeting, while some countries have voiced their opinion that maybe it is too early to make a decision now, and that we should wait till beginning of next year to have more information, more solid ground, and more data to enable us to make a better judgement. One thing is clear however; all countries, Opec and non-Opec, have voiced their opinion that they will continue to do whatever it takes to improve the situation in the oil market, and bring the global overhang back to where it should be. So, I think it is up to the information we provide the ministers before the November meeting. The JTC [Joint Technical Committee] will meet on 28 November, and then the JMMC [Joint Ministerial Monitoring Committee] will meet on the 29th, the Opec meeting will happen in the morning of the 30th, followed by the non-Opec group joining in the afternoon of the 30th. I think it is probably premature now to say what will come out of the meeting, but I think the best way to put it now, is that there will have to be consensus on the course of action.
Let us not forget that the Opec meeting on the 30th is a routine meeting. It is a scheduled meeting that happens twice a year, regardless. So it is not specifically a meeting for the purpose of deciding what to do with this agreement. So, definitely it will be discussed, ideas will be tossed around the table, opinions will be taken, and I think the ministers will come up with the right decision at the right time.
If no decisions are made in November with regard to an extension, can we assume there will be an extraordinary meeting in January or February?
Definitely. There has to be some decision made. What the decision will be and when it will be made is open. Indications are that yes, everybody wants to continue cooperation. There is still work to be done. So I think the best way I would put it is that the ministers cannot decide without data. We will provide them with all this data just before the meeting. If they see that something should be announced on 30 November, they will. They will agree among themselves and announce it. If not, maybe there will be an extraordinary meeting in January or even February.
In terms of a next step, there has been talk of both an extension and/or deeper production cuts.
We have said from the beginning ... when the deal first started and everybody was so sceptical, we need to wait it out. Our focus is to stick to what we can do, which is to remove that surplus amount of barrels from the market. And this is what we have been doing. ...There are certain fundamental parameters that we have to monitor and observe, and that is how you calculate where you are heading. We know where we are heading. It is just a matter of time. We get a curve ball every now and then — a certain extra volume coming from the US tight oil production, or extra barrels coming from Libya or Nigeria. We have to keep adjusting. There are many unknowns in the equation. But I think, despite these unknowns, for us the target is clear, and we are handling the bulk of what is required in terms of trying to rebalance the market, and it is working. It is just taking time.
So, there could be many options on the table. An extension, deeper cuts, or some other surprises! We are now hearing that Uzbekistan wants to attend. The duration of the extension even [is up for discussion]. All of these things will be discussed with the availability of more data and information. We are still at the beginning of November and we have this whole month to go through. I think when we meet on 30 November we will have a much clearer picture.
In terms of the duration of an extension, we are hearing six months and nine months as possibilities. Could the extension be for 12 months even?
It could be. But again, it is hard for us now to say what the situation will be like in March onwards. So, if I am to make a decision now about three, six or nine months, it is very hard now, in November, to decide how the market will be. We still have to go through the fourth quarter, when demand usually slows down somewhat, and quarter one when there is a huge refinery maintenance programme coming up in the Mideast Gulf area. ...
Concerning Nigeria and Libya, Saudi oil minister Khalid al-Falih suggested that 2.8mn b/d would be an acceptable upper limit for their combined production while exempt from the production cut agreement. With production in both countries now approaching that level, do you feel this is still an acceptable cap?
The Nigerian minister was explicit. He said once we stabilise at 1.8mn b/d, we are willing to join the effort. That was explicitly said back in July, and I think that is still the Nigerian position. Having said that, we see the news every day, and Nigeria is still up and down. In Libya, also, we see the same thing. Last week, Libya had eight ports shut-down. This week they are back on, but still the situation is so volatile. But, from our meetings with our Libyan technical counterparts, we understand that they are hovering between the 800,000 b/d to 1mn b/d level. I do not think they can do much more than that at this stage. Having said that, in the second half of the year there seems to be good demand to absorb all those additional quantities which are coming out of those two countries.
But, let us put the Libyan and Nigerian volumes back into context. When did the increases really begin in these two countries? May? June? That is when they really started to ramp up, and specifically in Libya. But, if you look at it from the beginning of the year, when this deal came into effect, you look at the average, which is a more realistic way of looking at it. You should not just take two or three recent months when there was a big bump in production and say Libya or Nigeria are flooding the market. You cannot do that. You have look at it in the overall context of the agreement.
If you look at it from January to today, the average increase is around 470,000 b/d combined for both those countries, versus the reference for our production adjustment, which is October 2016 production levels. So, it has been absorbed...
But, I think the good thing is also that we have also had phenomenal demand strength this year, especially in the second half of this year. And that has supported the effort we have taken to curtail supplies to the market by nearly 1.8mn b/d. So, I think all in all, there is a comfort with the way things are right now, and I think once the situation really stabilises in both those countries, then it will be another discussion.
You have mentioned US shale — do you see the shale threat peaking at any point in the near future?
Personally, I do not think it has peaked. I think it has slowed down. Projections made at the beginning of this year for shale oil growth in the US were in the magnitude of 700,000-800,000 b/d year on year. Now, both the IEA and the EIA itself, in addition to Opec, have all revised down their forecasts for growth. Now we are talking about forecasts of about 400,000-500,000 b/d. So this is a significant downward revision compared to the beginning of this year.
I think in the beginning of this year everybody overestimated the resilience of shale oil, and I think for a period of four or five months we have had a period of fairly stable prices at around $45/bl WTI, and I think investors were putting pressure on the shale producers as they wanted to see more profitability as opposed to more volumes. I think that is where the tide began to change. So, all forecasts are now basically saying we are only going to see more growth in the Permian, and the other plays are not going to witness more growth — at best production there will remain flat.
That brings us to forecasts for 2018. With the rise on oil prices now, people are projecting around 700,000-800,000 b/d growth versus 2017. This [growth] is a bit higher than this year. That is something that is expected. But, going forward, I think rig counts are dropping on a weekly basis, we see more drilled but uncompleted wells, and the productivity per well is slowing down, which is an important factor. Costs are also going up while fracking crews are leaving the scene and not coming back as easily as they used to. There is less money coming into these companies to invest. If you tie all these things together which we are seeing and hearing, I think this is going to make life more difficult for shale production the US going forward.
The production constraint agreement will come to an end at some point. Do you have an idea yet what this end will look like?
How can we talk about an end when we have not even achieved the objective? I think the envisaged end would reflect something that mirrors the same sense of responsibility that Opec and non-Opec have undertaken so far to re-balance the market. So, if you have nations who are working together in this cooperative way, who come up with this creative and structured methodology to re-balance the market and clear the overhang, you cannot expect these same nations to come and say: "game over." The market, the market players and the media are always looking for what is now being called "an exit strategy." Why don't we change that into "a continuity strategy" for example?
This Declaration of Cooperation could become something of a permanent Declaration of Cooperation. You have responsible people running these oil and energy ministries in all these countries and it's our joint responsibility to keep this market balanced, and stimulate investment in the industry. We do not want to see these big swings in prices — having oversupply, then under-supply and then shortages in the market. It is not in our favour and not in the favour of the industry. So, that same sense of responsibility that exists today in managing production will be mirrored in terms of when the ministers feel that the objective has been achieved.
You touched on the idea of a longer-term framework of cooperation between Opec and non-Opec. Do we know yet what that would look like? Is it, in effect, an expanded Opec? Have countries outside of Opec suggested they would be willing to theoretically link their decision making, in some way, shape or form, with other producers?
I think Opec has always been welcome to having new members joining. You now have Equatorial Guinea who just joined. Countries have gone out and come back for various reasons.
In terms of how we institutionalise this framework of cooperation, one of the ways we are looking at it is to have regular workshops and discussions at a technical level between non-Opec countries and Opec as an organization. Take, for example, EU-Opec dialogue, and there is already a well-established Russia-Opec dialogue, China-Opec dialogue. All of these are forms of keeping in close contact with certain countries and try to keep that cooperation and discussion ongoing. It is not clear yet how we can take that to the next step. But we are working on this and once we finalise internally the criteria [for this kind of next-level cooperation], it will become clearer and clearer in the future.