Nobuo Tanaka: I
am the moderator Nobuo Tanaka, former executive director of the IEA, International
Energy Agency. I’m very much honored to come back here again this year to moderate a session. We
will have fast the speak up of Mr Sechin to present the case, but before having that let me iterate that
issues of oil sector or gas sector now. As you can easily imagine, the oil price went very low, now come
back a little bit, but still uncertainties of the price is the issue for us. The IEA mentioned about this low
oil price scenario. It may continue even in 2020s if several preconditions met. One is that OPEC policy of
maintaining the share rather than the price. In second, the peace in the Middle East somehow managed to
continue. The third – the resilience of the shale oil in the North America. And the fourth is the slowing
growth of emerging economies like China and India continue. Without these continuing conditions all
met, probably IEA’s view is that low price may not sustain too long, we hope that. But today we have 10
CEOs and chairmen, and let’s have discussions about the future of the oil market. Because IEA
cautioned, because of the low oil price, that dependency to the Middle East will increase much more.
And Middle East due to the shortage of revenue, getting less stable, means the country like Japan
(importer) will depend more and more on Middle East which becomes less and less stable. This is the
biggest risk, the IEA warning. But to make the different story, that role of Russia is very important as
non-Middle East supplier. So, now let’s listen to Igor Sechin, the Chairman of the Management Board of
Rosneft. Please, Mr Sechin.
Igor Sechin: Dear colleagues, participants and guests of the Summit,
On behalf of Rosneft, one of the organizers and sponsors of the Forum, I would like to welcome the
participants of the Summit and wish successful work to all of us.
Our Summit is different from all other events, including those held within the framework of the Saint
Petersburg Forum – today it is attended by genuine leaders of the oil and gas business, that carry out
substantial extensive work in the industry and play the key role in supplying energy to the world
economy.
In this regard, sharing our opinions about the situation in the world oil market is especially important.
Please note that my liability is limited due to deliberative nature of this presentation.
The current situation at oil market is rather more complex and puzzle-like than what we've seen in the
period of balanced market. It can be said that market tools regulating industry functioning have been
deformed. The reason for it lies in those notorious sanctions, as well as in reliance on short-term
financial market instruments and in manipulation with market institutions at the expense of damage for
long-term relations between consumers and hydrocarbon producers as well as for fundamental
development factors. Different players are testing the industry and market mechanisms, looking for an
opportunity to secure their interests, often to the detriment of the fundamentals of its development.
Even statistics is no longer a reliable benchmark for analysis, since reference points for making both
strategic and investment decisions are disappearing.
The market is experiencing unprecedentedly high volatility. Today, the prices have almost reached the
level of the year ago, although this January-February, they plummeted down to USD 27/bbl, and a
number of large investment banks were testing the levels of USD 20 and below, predicting severe
downturns in the global economy, including a “hard landing” for the Chinese economy and stagnation of
the economy of the USA.
Analytical agencies do not contribute to forming rational expectations of the market players. On the
whole, this is not surprising – the International Energy Agency represents consumers’ interests who were
happy with low prices; the American Energy Information Administration of the US Department of
Energy published its forecasts without linking them to price levels at all; the position of OPEC’s
Secretariat is at odds with comments of its member countries' representatives. Obviously, the issue of
adequate information and balanced, substantiated market analysis has become one of the most urgent
ones.
In the oil industry, price volatility is projected on a long-term investment cycle of capital expenditures,
and the ability of oil companies to meet the demand of the global economy. Thus, the decline in oil prices
and volatility have already resulted in the loss of approximately USD 350 billion in investments, which
will definitely have its effect in the mid-term. If previously the industry was based on implementation of
long investment cycle objectives, now the balance is definitely upset.
Presently, the oil market has started momentum towards achieving the balance in the mid-term. Our
expectations in this regard are, for the most part, associated with the year 2017, rather than with the
second half of this year. Of course, there is a number of uncertainty factors, primarily, pertaining to the
behavior of certain producers, who have actually assumed the role of regulators in the oil market, as well
as in the financial sector. At present, a certain positive trend has emerged, but, despite the visible search
for balance, risk factors are so numerous that we may lose the equilibrium at any time.
Today, as we move away from the acutest phase of this severe crisis, we can pay more attention to
analysis and discussion of underlying factors decisive for the industry development, and it is necessary,
in some sense, “get back to basics” by discussing the relevance of the long-term investment cycle for the
consumption and the relation between them.
First of all, demand continues its sustainable growth in emerging economies. We all know relevant GDP
growth statistics for such rapidly growing economies as China – 6.5% per annum, India – more than 7%,
Indonesia – 5%, Vietnam - 7%.
Therefore, in general, we believe that what we hear frequently about threats to development of the global
economy and of economies driving the energy demand growth is grossly exaggerated. Even in OECD
counties the decline in demand reversed with the growth reaching 1.1% in 2015. At that, along with this
potential, the role of alternative energies is presented in a distorted fashion. Not only is it the matter of
construction of expensive infrastructure, it also entails loss of budget revenues in the countries that
implement programs aimed at developing this sector.
I have already mentioned elsewhere that such oil market short-term and mid-term development
fundamentals as sustainable demand growth, including new growing markets of emerging economies,
and decline of investment activity in the sector, within the forthcoming 4-5 years should result in a
dramatic change of the market and its growth after stabilization.
In the medium-term perspective, a certain shortage of new oil supply will appear. It will hardly be a
matter of physical deficit, rather, a growing tension in the balance of demand and supply. If the financial
market feels it in advance and reflects in prices, we will be able to avoid a new turbulence and to resume
the investment process via ensuring an adequate diversification of liquids supply sources.
At least, today energy agencies are unanimous about their confidence with regard to the growth and
consistent recovery of oil prices (in real terms). Thus, a few days ago, I discussed these matters with one
of the most distinguished global energy expert and analyst Edward Morse, who, in one time, had been the
first to predict the shale revolution in the USA. Today the Citi Group analytical service headed by him
gives quite optimistic estimates regarding oil prices in the nearest years – more than USD50 this year,
about USD60 in 2017, and USD64 in 2018. At the same time, he confirmed that even these price levels
fail to cover the full cycle costs for many projects that the industry needs, and, therefore, investments into
such projects involve high risks. There are also alternative opinions, for example, many financial
agencies are talking about a potential oil price decline - however, in my opinion, and such estimate may
be attributed to the attempts to solve the task of creating financial reserves. Everybody pursues own
interests. It is essential, though, that industry trend expectations should be articulated by industry-related
agencies, thus helping ensure the necessary coordination and unbiased balance of interests.
Separately, I would like to note, that this unprecedented price volatility that we've witnessed, has tested
the very basics of the industry. Events of last several years have shown that in fact the paradigm of oil
market had changed: for a long time it has been a common belief that OPEC cartel of producers is
regulating the oil market; then, owing to groundbreaking technologies, a new regulator appeared which is
the shale oil production in the USA. However, in our view, the new reality lies in the fact that market
developments are increasingly determined by a number of factors that include availability and quality of
resources, impressive progress in development and application of cutting-edge technologies of the