Exclusive Oil & Gas 360® Pre-OPEC Interview with Former Shell Oil President
With all eyes peering toward Vienna tomorrow, analysts and experts are in near lockstep that OPEC will maintain production, with a few saying it may raise its cap which OPEC has out-produced for the last 12 months.
Oil & Gas 360® interviewed John Hofmeister, former President of Shell Oil Company (ticker: RDSA), to get his thoughts on what the cartel might do at this first meeting since last Thanksgiving Day, when it shocked the oil markets with status quo production, sending Brent and WTI into a $50 tailspin.
West Texas Intermediate closed down at $57.98 on Thursday.
While sub-$60 oil prices continue to batter many, if not most shale producers, it does have its place, says Hofmeister. “My hat’s off to the Saudis,” for using low oil prices to put countries like Iran and Russia in their place, he told Oil & Gas 360®.
“If demand is stronger we will see an even tighter supply situation which could affect prices moving perhaps north of $85-$90 a barrel by the end of the year,” Hofmeister said, pointing to decline rates and higher demand pushing oil prices toward triple digits.
Steady as she goes
OAG360: What are you expecting to see come out of tomorrow’s OPEC meeting?
JOHN HOFMEISTER: I am expecting ‘steady as she goes’.
OAG360: And what if anything would stop OPEC from continuing to increase production, producing over its quota?
JOHN HOFMEISTER: I think it all depends upon how people read global demand. And global demand depends very much on economic strength around the world.
What we’ve seen in the U.S. is encouraging in terms of demand. We’ve seen demand for oil products rise through the first half of the year, which I think is good; its normal American behavior as prices are lower.
But I don’t think we see the same in Europe. I think China is still a question mark in terms of its demand growth for this year, as is India. And frankly the other BRIC countries, Russia and Brazil, I think are struggling. So if global demand doesn’t rise and OPEC maintains its current production, the only thing that affects the oil price is the decline rate from existing fields that are already being worked. And what’s the impact of withholding drilling from particularly oil shales in the U.S.?
I think we will see tightening of supply as the second half of the year unfolds, and if demand is stronger we will see an even tighter supply situation which could affect prices moving perhaps north of $85-$90 a barrel by the end of the year.
But that all depends upon demand. I think supply will decline with the normal decline rate, even though we haven’t seen significant decline so far this year. Don’t forget 4%-5% of existing reservoirs go away every year and have to be replaced. So if we’re not drilling—especially in the U.S. at the rate we were—and we’re not completing wells as we were in the U.S. before the downfall of the oil price, then we’re going to see the impact from natural decline rates affecting normal production.
OAG360: Is there any real benefit to the smaller members of OPEC remaining in the organization? It seems like they are getting hurt a lot worse by the low prices.
JOHN HOFMEISTER: Well, there are two categories I would speak to. One is the “accountable/responsible” smaller members, where they are not really getting much short term benefit, but long term they’re better off staying put.
The other group is the “unaccountable/irresponsible” group that will do whatever it takes to satisfy themselves in whatever world of virtual reality they live in—such as Venezuela, Nigeria, Iraq, Libya. They are of no benefit to anyone, frankly.
They only look out for themselves. They live in an unreal world, they’re not accountable for what they do, and their countries are essentially all but bankrupt. And so they are hangers-on, as far as I’m concerned. They’re like parasites on the OPEC reputation, and I don’t really count on that group for anything other than sustained irresponsible behavior.
OAG360: In terms of production, how high do you think the Saudis are willing to go?
JOHN HOFMEISTER: Probably about where they are. I think they’ve seen pretty good market share retention, maybe a little bit of growth, that puts them in the ten plus [10 MMBOPD] category. I think it strains them if they go much higher; they can always go lower but I don’t think they intend to go lower. So I see them pretty much ‘steady as she goes’.
No winners in the price war
OAG360: I know you said we can expect to see demand to shake out towards the end of the year, do you think that will be about the same time we see if there’s been a winner of an oil price war, if you want to call it that?
JOHN HOFMEISTER: I really don’t see any winners coming out of this. OPEC countries, many of them are losing money, so they’re not winning. The price is not high enough for their social costs.
I think Russia and Iran are being punished in large measure for their international behavior, which is viewed by many people around the world as unacceptable. The lower oil price is teaching them a powerful lesson in that they do not set the destiny of the world. They may have ambitions—Iran and Russia—they may have defensive ambitions, or they may have offensive ambitions, but they are vulnerable to the commodity called oil.
Oil props up their economies and their social structures. I think that is probably the greatest benefit to the lower oil price is that the rest of the world can see Iran and Russia put in their places. Because without the monetary income that they’re accustomed to with high oil prices, their ambitions cannot be sustained, and then their international hegemony is curtailed by the lack of resources. My hat’s off to the Saudis for teaching Russia and Iran where they fit in the world.
OAG360: Do you think that if Russia and Iran were willing to work more cooperatively with the global community that we’d see prices come back up, or is this the new reality?
JOHN HOFMEISTER: I think Russia and Iran will exploit whatever situation they can for their own benefit. They could care less about the rest of the global community. They’re out for themselves–have been, will be–and the extent to which many Western countries have kowtowed to Russia, especially with their misbehavior in Ukraine, Crimea, et cetera. And the way in which people are kowtowing to the Iranians in terms of the proposed nuclear agreement, I think will be seen as a historic embarrassment.
These are bullies. I think we should be clear: these are international bullies, these two countries, and they’re out for themselves, and I think the Saudis have done the world a favor by punching them both in the nose–which is the only way to teach a bully how to behave. The oil price is a very strong tool to put Russian and Iranian ambitions where they should be, which is: live with the rest of us; quit trying to take over whatever you’re trying to take over.
OAG360: Is there anything that ISIS can do to significantly affect oil prices?
JOHN HOFMEISTER: Yes, if they take over the southern Iraq oil fields.
OAG360: And do you think that’s a likely scenario?
JOHN HOFMEISTER: I hope it’s not likely, but I can’t say it’s not likely. In other words, if the Iraqis don’t do a better job of looking after themselves, they will have a serious, serious problem going forward if ISIS penetrates the southern Iraq oil fields.
The world will pay a price for that as well. Because while ISIS may maintain some production, I think there will be a huge withdrawal of technical expertise if ISIS in in charge. An oil field that is not guided and managed by technically professional, capable people will tend to collapse. And that will have multi-million barrel a day repercussions on the oil supply.
OAG360: Will that drive prices up in the short term?
JOHN HOFMEISTER: The fear of it will start to drive prices up. The actuality of it will definitely drive prices up.
OAG360: The long term effects would be more detrimental without management there in those fields, correct?
JOHN HOFMEISTER: It’s short, medium and long term.
If ISIS arrives in the southern Iraq oil fields you will see the technical talent flee either back to their home countries or to safety zones in Iraq. They will flee. That will immediately have effects on oil production, because the talented workers will just disappear. They will not trust living under ISIS. So that’s a short term effect.
Medium term, how long will they stay? Can the Iraqis actually throw them out?
And over the longer term, if they don’t throw them out, then say goodbye to the southern Iraq oil fields for a long time to come.