OPEC producers stand at the precipice of unprecedented opportunity while international oil companies stagger from the fallout of COVID-19.
The current discussion in energy markets, exaggerated by ongoing media reports about peak oil (BP Energy Outlook 2020), fledgling demand from the International Energy Agency, and lower demand forecasts for 2020-2021 from OPEC, should not be seen as threatening members of the Organization of Petroleum Exporting Countries (OPEC), but maybe as an opportunity.
Most of the negative news is coming from the former Seven Sisters and their offspring, not from the likes of Aramco, ADNOC, Gazprom or KOC. There seems to be a media frenzy hitting oil, claiming the Era of Oil is over, or that we have reached peak oil demand. The reality, however, is a very different picture.
While the world’s most famous energy organization, OPEC, celebrates its 60th anniversary, the organization needs a new strategy. The old guard in OPEC’s Vienna headquarters, or those at the helm of the different national oil companies (NOCs) around the world, should re-assess the viability of its current crude oil export market strategies, and see if there is the option for an integrated oil market approach.
OPEC, the new kid on the block in 1960, after its establishment in Baghdad, has become the conservative factor in the market. The world has gotten used to it, which means market assessments are becoming stale, not vibrant. Looking at the real potential of NOCs, and the current market situation, a new opportunity is there to establish a new “Seven Brothers,” made up of Aramco, ADNOC, KOC, NNPC, Sonatrach, Gazprom and INOC (Iraq National Oil).
Generally speaking, OPEC has been a success story, being a major market regulating factor, stabilizing oil prices and supporting global economic growth. Set up not only to increase the producer’s share in oil revenues, but also to counter the market control of the so-called Seven Sisters of the time (Exxon, Mobil, Texaco, Chevron, Shell, Total, BP and ENI), OPEC can look back with a smile. This strategy has worked for decades, but it is now under extreme pressure.
Since the start of the 21st century, its overall market share has decreased substantially, while new non-OPEC producers have taken over. The re-emergence of the United States as the world’s largest producer, and the proactive market strategy of Russia, and its former Soviet Union compatriots, has confronted the old OPEC guard with threats to its very existence. Still, OPEC’s leaders, especially Saudi Arabia, the United Arab Emirates and Kuwait, have been preventing its demise by setting up an unforeseen, active, and successful partnership with Russia.
The Saudi-Russia-UAE triangle has been behind a reemergence of the market power of the group. Taking in a former political and energy adversary has been a masterstroke of statesmanship for Saudi Arabian Crown Prince Mohammed bin Salman, Abu Dhabi Crown Prince Mohammed bin Zayed and Russian President Vladimir Putin.
A successful OPEC 2.0, otherwise known as OPEC+, was set up, and was able to counter the immense demand-supply crisis of the last years. COVID-19, however, has been a black swan, not foreseen by anybody, reshaping markets, demand and supply and the future.
Until now, OPEC’s producers have been reactive in the market, leaving traders, hedge funds and the former Seven Sisters to influence prices. The current high-noon scenario for international oil companies (IOCs), such as Shell, BP and others, is creating an opportunity that OPEC’s producers can seize. Total media focus at present is on the fledgling role and future power IOCs.
Scenarios painted by BP, Shell and financial markets are bleak, as the financials are not favorable anymore. We could already be past peak IOC oil (and gas) production, with activist shareholders and media and government pressure continuing to force them to become green, and further dampen future production estimates. Lower investments combined with lower revenues, margins and dividends, will be the major threat to the position and power of the Seven Sisters.
The potential market vacuum, however, can and should be filled by NOCs and possibly independents, such as Petrofac. Even if demand for oil and gas will someday peak, the call on NOC oil will increase. Lower production by IOCs will shift demand to NOCs and new incumbents.
At present, IOCs are bleeding on all sides. Their market value is diminishing, while investors are leaving. The lack of pro-active strategies and possible overestimating their own power positions has become clear, but seems not yet to be recognized in London, The Hague and some other places. The integrated oil companies of the past will be removed or substituted by the new Seven Brothers of the Future. Their margins and financial powers are different, making a full-scale Seven Brothers scenario likely in the next 10-15 years.
OPEC strategists should be focusing not on demand-supply traditional issues, but setting up a strategy to make OPEC+ an integrated upstream-downstream powerhouse, controlling or mitigating market risks.
Keeping in mind the outflow of hydrocarbon financing at IOCs and independents, NOCs could be looking at a win-win situation, without changing dramatically its operations, just OPEC strategies. Let us not forget that NOCs are the lowest-cost producers in the world, with many supported by some of the largest sovereign wealth funds in the world.
A growing market power of the NOCs (or Seven Brothers) will also directly propone a reemergence of OPEC(+). If Vienna strategists and powers in Riyadh, Abu Dhabi or Moscow, are able to combine all, a new era is on the horizon. The Aramco’s of the world have become integrated operators and market shapers.
Now is the time to integrate market power and political strategies, and integrate oil and gas upstream and downstream sectors in a new OPEC strategy, to shake and move markets.
New leaders are emerging already, such as Saudi Minister of Energy Prince Abdulaziz bin Salman al-Saud and the CEO of ADNOC, Sultan Ahmed Al Jaber, who have the potential to take the world’s biggest oil organization forward, into a new era for black gold.