Sechin: Oil markets are in acute crisis

Rosneft CEO Igor Sechin addressed the International Petroleum (IP) Week forum in London, stating that the oil markets are in a fairly acute crisis.

Image from Rosneft.

“In the second half of 2014 there was a drop in oil prices, which crisis-generation rate was higher than anything that has been seen before,” Sechin said. “This breakdown is positioned as a ‘fundamental oil crisis,’ which distinctive feature is that the balance of supply and demand for oil remains fairly close, within the past decade’s fluctuations.”

In his presentation at the “Seizing opportunities created by the changing markets, shifting trade patterns, and hedging against price volatility,” session, Sechin referred back to the 1980s when a significant drop in oil prices was accompanied by large Organization of the Petroleum Exporting Countries (OPEC) spare capacity, accounting for 24% of world consumption, and major discoveries in the North Sea. Today, Sechin said, space capacity amounts to only 5% of global consumption, only 2% or 2 MMbbl/d above a 10-year minimum.

“So, fundamentally, the crisis in oil prices in 2014 – is just a ripple on the water compared to the oversupply tsunami of 1985. The amount of excess capacity is five times less,” Sechin said. “Operating costs are two to three times higher. Instead of a deep drop in demand – a growth is recorded. The rate of decline in marginal production – is 10 times higher. There is a clear unbalance between fundamental drivers and the observed price dynamics.”

Sechin went on to say that in response to the extreme decline in prices, oil companies around the world have significantly reduced their investment programs. There have already been announced reductions of US$67 billion or on average 20-30% compared to the last year. He sited Wood Mackenzie, who estimated that in 2015, investments are expected to reduce in the amount of more than $100 billion.

When it came to the rigs in the US, he noted that there has been a sharp decline, referring to Baker Hughes’ January 2015 rig count that reported a decline of 27 units, marking and 18% decrease.

“Decline in investment will inevitably lead to the restoration of the balance of supply and demand in the oil market, but excessive reduction of investment in production now could lead to a shortage of oil already in 4Q 2015,” said Sechin.  

The Rosneft leader told the audience that oil demand is steadily growing, despite the unstable global economic recovery and that the growing world population consumes more energy. Despite the increase in energy efficiency and competition from other fuels, oil remains the main source of energy for transport and feed for the growing petrochemical industry.

He said that large oil reserves are in Russia, Canada, Venezuela, and the Middle East, in which he noted has the largest oil reserves. However, potential growth, he said, will inevitably rely upon "high-tech oil" - including oil sands, extra heavy bitumen oil, the Arctic shelf, shale, etc.

According to Sechin, for the improvement of the market information infrastructure, the following should be done: reorganize the exchange infrastructure of the oil market via strengthening of the role of producers and consumers, accompanying this with an increase of transparency of the exchanges to reduce the possibility of price manipulation and improve the efficiency and quality of market information.