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No intention to repeat 1973 oil embargo, al-Falih says

Published: Updated:

Saudi Arabia has no intention of using its oil wealth as a political tool in the controversy over the killing of journalist Jamal Khashoggi, and the kingdom plans to boost crude output again soon.

"For decades we used our oil policy as a responsible economic tool and isolated it from politics," Saudi Energy Minister Khalid Al-Falih said in an interview with Russia’s TASS news agency published on Monday.

"So let’s hope that the world would deal with the political crisis, including the one with a Saudi citizen in Turkey, with wisdom," he said.

Al-Falih said there’s no intention of repeating the 1973 oil embargo, in which the kingdom and several regional allies squeezed supplies to the U.S. and Europe in retaliation for their support for Israel.

Saudi Arabia is ready to raise its output to 11 million barrels a day "in the near future" and has the ability to lift production as high as 12 million barrels a day if the market requires it, Al-Falih said.

The world needs to show its appreciation of the efforts and multi-billion dollar Saudi investment that made this possible, he added.

HERE ARE EXCERPTS OF THE INTERVIEW:

Over the last year and a half, Saudi Arabia has been widely mentioned in the Russian media because of the OPEC Plus deal, signed by OPEC and Russia that helped to stabilize the market quite significantly. Are you happy with how this agreement has been working out so far and what was the main outcome for the global oil market from this deal?

Allow me to go back a few years back. At the beginning of this decade, oil prices were $100 per barrel and many people thought that this was the new normal. Demand was growing, slower than now, but still growing, supply and demand in balance. But in reality the balance was due to outages in some countries due to geopolitical issues. High oil prices were hurting demand and we saw that demand slowing down considerably by 2014.

It takes time for demand to respond, but it ultimately responds. We saw it in 1980s, in 2000s, we are seeing it now. In a period of 3-4 years after the price hike we see the demand response. And also, which is more significant, we saw the supply respond in a form of expensive oil from offshore and most notably from US shale coming on strongly. And ultimately the oil caused an oversupplied and unbalanced market.

In 2013-2014 it was obvious to us that market was not sustainable under those conditions. And as a result we saw the price crash from $100 to $25-30 per barrel. Consequently we started our discussions with our Russian colleagues, most notably there were discussions at the leaderships level in 2016 during the G20 meeting in China, where president Putin met with His Highness The Crown Prince.. And they agreed that Russia and Saudi Arabia needed to help the world to get out of the slump. Because the slump was hurting the world, not only the producers, but even the consumers, who were affected by the slowdown of industrial growth, inflation, negative interest rates. After that first meeting we met later.

And not the two of us agreed, but 24 countries in Vienna in December 2016 agreed to create the OPEC Plus alliance to manage production . We did not shock the market by constraining supply. We did it very gently. And the result was that by early this year the market was returning to balance. Excess inventories, which were very high and depressed the market, disappeared. We are now close to 5-year normal average of oil stocks. Supply and demand are close to each other, and the market is balanced. Of course, it helped producing countries like Russia and Saudi Arabia. But, also it helped consumers a lot. Returning the oil markets to balance was the lubricant for the global economy to return to the growth to the very healthy rate we are seeing now. All the parameters of the global economy are healthy. So, in a nutshell, we appreciate Russia’s role. What we want to do? This cycle is ending, and oil market will ultimately go through another cycle. We want to keep supply and demand balanced in the long term. In last three to four month we have coordinated with minister Novak to increase supply, because by May this year there was a lot of stress in the market about the shortage of oil, especially with sanctions and with reductions in some countries like Venezuela and Mexico .

There were concerns, that there would be a shortage of oil. And if we continued the same policy that we had had in the previous 1.5 years, we would see the oil above 100 again. So we intervened. We had discussions with minister Novak during the Saint Petersburg Economic Forum in May and we met in Moscow during the opening of the World Cup. Finally we agreed that it was time to change the course. The policy of withdrawing supply has accomplished its mission, and now it is time to gradually release supply. We have managed to convince the OPEC Plus group. And from June till now we see the market has relaxed. So we have proved to ourselves that we can work with Russia and keep the markets balanced whether there is the shortage or oversupply. So I want to emphasize that given the success of two years coordination between KSA and Russia, we need to establish the framework for the long-term coordination. . Oil market is always cyclical, and without cooperation that cyclicity causes the severe volatility. And it is important to help moderate the volatility so that all participants and especially investors know that big producers like Russia and Saudi Arabia are working together to balance the markets.

— When you talk about long-term stability what do you mean in particular? What will be the future of the OPEC Plus deal given that the current deal expires at the end of the year? Do you plan to extend this agreement for the long term?

We have started OPEC Plus as a six month agreement. And we saw that six month is not enough to bring inventories down. Partially because US shale had continued to increase and partially because it took Russia almost four months to reduce its production by 300,000 bpd because there were many oil producing companies in Russia. So it took us some time to achieve that. But we extended the 6 months deal, and now it has been working for almost 2 years. In practice we only apply production reduction for Russia for 1.5 years, because for the last few months we agreed for Russia to produce as much as it can.

But nevertheless we want to sign a new cooperation agreement that is open-ended. That does not expire after 2020 or 2021. We will leave it open. And what we would like to do is continue for OPEC and non-OPEC to work together. And the difference is that there will be no fixed term for the agreement, which allows us to bring production up or down. It should not have fixed production target. But it allows us to perform regular coordination and sharing information on what are our views on the market, supply and demand, how healthy the market is, what kind of intervention we need, if any, and when. Another new aspect is to create a secretariat for OPEC Plus. For now there is no secretariat.

Only OPEC secretariat both serves OPEC and OPEC Plus. For non-OPEC countries from OPEC Plus we will offer to them to create a secretariat in Vienna to work closely with OPEC. Of course, if any of OPECPlus countries wants to join OPEC, we have a process in OPEC to consider membership. But many countries expressed the desire to work closely with OPEC, but not to join OPEC. And we respect this approach. Russia is one of those countries. But there are many variations on how to cooperate. The latest discussions we had in June showed that OPEC Plus countries want to continue to work within a longer-term framework.

— In a worst case scenario with Iran do you have enough spare capacities in OPEC and OPEC Plus, and particularly in Saudi Arabia to fill this gap?


Obviously, since June we increased our production a lot. We were at 9.9-9.8 (mln bpd) in April and May, and now we are at 10.7. At the same time our friends from Russia and UAE have increased production as well. So our spare capacities for the entire globe at the moments are much less today than they were back in the past. We have relatively limited spare capacities and we are using a significant part of them. For now we in Saudi Arabia have 1.3 mln bpd of spare capacity, UAE has assured me they have over 200,000 bpd remaining. But we do not know what is going to happen in other countries.

We know Kazakhstan plans to increase production with Kashagan and Tengizoilfields., Brasil is expecting to increase production. And US shale could bring additional volume of oil. So it may happen that we may not need to use spare capacities. But if you have other countries to decline in addition to the full application of Iran sanctions, then we will be pulling all spare capacities.

— So do you think you have enough opportunities, and enough capacities to keep the oil market balanced, to avoid sending prices soaring to over $100 per barrel?

I cannot give you a guarantee, because I cannot predict what will happen to other suppliers. Saudi Arabia now in October produces oil at the level of 10.7 mln bpd. I can say that we can go up, if necessary, to 12 mln bpd. This I can assure. But if 3 mln bpd disappears, we cannot cover this volume. So we have to use oil reserves. But it is very important for the world to support Saudi Arabia, because it is the only country that invest heavily in spare capacities. We invest tens of billions of dollars constantly to in-build capacity we do not use, only in shortage situations.

It does not work for us; money is parked as insurance for the rest of the world. Today we are using some of it, tomorrow we will be using most of it, if disruptions in other countries will take place. We see there were disruptions in the past like Gulf War, but there were no shortages of oil because of our spare capacities. That requires us to continue our policy of investing. But Saudi Arabia needs to be appreciated and supported, recognized for doing very honorable duty for the rest of the global community. It is important for us to highlight that our production is likely to go up in the near future to 11 mln bpd on a steady basis. So we have to make a decision do we increase our total production capacities from currently 12 to 13 mln bpd. And this decision requires incremental investments from $20 bln to $30 bln. This is the capital cost for each one million barrels of additional capacity.

— You say that the world should support and appreciate Saudi Arabia. But now we are weathering a difficult period of turmoil because of the case of the Saudi journalist that has disappeared in Istanbul. Some analysts, based on comments from the Saudi media, say that because Riyadh is unhappy with the treatment by the West in this case, Saudi Arabia could cut supplies by up to 0.5 mln bpd. What sort of response can you provide to these predictions?

I think that rational people in the world know that oil is a very important commodity for the rest of the world. If oil prices will go too high, it will slow down the world economy and would trigger a global recession. And Saudi Arabia has been consistent in its policy. We work to stabilize global markets and facilitate global economic growth. That policy has been consistent for many years. We suffered in the past from political crises, this is not the first time. This incident will pass. Of course, this is not my mandate to speak about it. Our government through political channels is addressing this issue. But Saudi Arabia is a very responsible country, for decades we used our oil policy as responsible economic tool and isolated it from politics. So lets hope that the world would deal with the political crisis, including the one with Saudi citizen in Turkey, with wisdom. And we will exercise our wisdom both in political and economic fronts. My role as the energy minister is to implement my government’s constructive and responsible role and stabilizing the world’s energy markets accordingly, contributing to global economic development.

— So can people relax? There won’t be a repetition of 1973, correct?

There is no intention.

FULL INTERIEW