Energy Transition in the Middle East
This week on the podcast our guest is Dr. Bassam Fattouh, Director of the Oxford Institute for Energy Studies (OIES). OIES is a world leading independent energy research institute specializing in advanced research into the economics and geopolitics of energy. Dr. Bassam Fattouh is an expert on oil markets, including OPEC, the energy transition, and the economic environment of the Middle East.
Here are some of the questions that Jackie and Peter asked Dr. Fattouh: What are the challenges of energy transition for oil producers in the Middle East? Are they diversifying into new energy types and Carbon Capture and Storage (CCS)? Were you surprised by the latest OPEC+ decision to cut production by 2 MMB/d when the US and Europe are acting to reduce oil prices? How does the Middle East view US shale oil now? Do you see a future for Russia in OPEC?
The OIES publishes publicly available papers to help understand oil, natural gas, and energy transition including – solar, hydrogen, CCS, nuclear and much more. Please see their website: https://www.oxfordenergy.org/
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Episode 178 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast with Peter Tertzakian and Jackie Forrest, exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
I’m Peter Tertzakian. Welcome back. Well, Jackie, last time, we spoke a little bit about COP27. We now have closure to that meeting in Sharm el-Sheik in Egypt, and well, there was some things that came out of it.
Jackie Forrest:
Yeah. Well, it was a dramatic end. Apparently, the overnight session went for nearly 36 hours. I don’t know if you saw some photos of the people on Sunday. Looks like they hadn’t slept in 36 hours, but there was some agreement to support a loss and damage fund. Now, we were skeptical that there would be an agreement on that, so I think that was a win. Now, there’s still a lot of details, for example, which countries are going to contribute and what are the details of what it would look like and how much money. So, all the details are still not there, but there was an agreement that this concept is required.
Peter Tertzakian:
I think there’s also some uncertainty in terms of how such a fund is triggered for payment. How do you distinguish between just regular weather and actual damage caused by anthropogenic climate change? So, there’s a lot of work to do from what I can tell in terms of the details, but there’s progress being made on that front. There was the usual calls of increasing ambition and so on, which really didn’t go very far. I have to say that it’s going to be very difficult to even achieve the current level of ambitions in terms of some of the scenarios put forward. Even the Paris Agreement, I think, given the current state of the world, we talked about that last time, is going to be very difficult to achieve.
Jackie Forrest:
Yeah. Well, and I guess, so what you’re speaking is there’s some disappointment that people didn’t make even greater ambition-
Peter Tertzakian:
Oh, yeah.
Jackie Forrest:
… but is it really realistic that we can even deliver on this?
Peter Tertzakian:
I mean, I think we have to step back and say, well, what are the friction points? What are the points of resistance to achieving even the ambitions that have been currently set out because merely throwing more policy, more lip servers, more money at the problem is just not going to get us to where we want to go. We now have to start to get down to the business of how we’re going to do this, where we’re going to find the people to do it, and take it from there. So, anyway, those are just some thoughts, but there’s so much to talk about.
Some of the things we also want to talk about in our pursuit of understanding what’s going on in the world is what’s going on with things like geopolitics, which is a very top of mind subject given what’s going on in Ukraine, what’s going on with things like OPEC. We are delighted to have another guest from overseas today, and we want to welcome Dr. Bassam Fattouh, who is the director of the Oxford Institute for Energy Studies, and he’s also a professor at the University of London School of Oriental and African Studies in London. So, direct from London, we want to welcome Dr. Bassam Fattouh. Welcome.
Dr. Bassam Fattouh:
Thank you for having me on your podcast.
Peter Tertzakian:
Yeah. Well, welcome. Maybe before we get started, you can just tell us a little bit about yourself, the Oxford Institute for Energy Studies, which puts out some fantastic research, and we encourage everyone to take a look at that. In fact, we’ll post the website link, but tell us a little bit about the institute and what you do.
Dr. Bassam Fattouh:
Sure. The Oxford Institute for Energy Studies or OIES was founded in 1982. It’s a world leading independent energy research institute, and it’s incorporated as a charity under UK law. Our team is made up of world-renowned experts drawn from commercial, academic and policy backgrounds. We produce high-quality independent research and unique analysis of topical energy issues. Our rigorous research knowledge and expertise really places us firmly at the center of the energy debate, and we contribute to a more coherent and balanced understanding of international and energy markets and issues including the energy transition and decarbonization paths. Our publications are read worldwide, and they are publicly available on our website. Our researchers and research are widely sourced in the global press.
We also convene highly specialized events, but these are mainly for the sponsors of OIES. We also hold regular meeting with our sponsors to discuss our latest research and relevant current issues. For our funding, we rely on sponsors mainly from the private sector and mainly from the energy space. I invite everyone to visit our website at oxfordenergy.org where they will be able to find more information about OIES and access all our research, podcasts and other valuable information.
Jackie Forrest:
Well, Bassam, I agree with you that everyone should check out the website. We will put a link to it in the show notes. The interesting thing is it helps you understand fossil fuels, but there’s a ton of great information on energy transition like solar, hydrogen, CCS, nuclear. We actually did talk in a previous podcast about the paper you put out around the costs of transporting the various flavors of hydrogen and some of the challenges with that.
Peter Tertzakian:
Yeah, that was excellent. That was excellent.
Jackie Forrest:
Yeah, so excellent research, and thank you for your contribution to the debate around energy transition.
Dr. Bassam Fattouh:
Absolutely. Our research covers wide areas and particularly, we’re doing a lot of work on the energy transition, as you mentioned, hydrogen, CCUS, with climate change negotiations, financing the energy transition, and most importantly, carbon markets and the interlinkages of all of these topics. So, I encourage everyone actually to visit our website, those who are interested in the conventional fuels but also in the energy transition and decarbonization.
Peter Tertzakian:
Yeah, it’s really important to have that holistic view of all energy systems, and I feel you have one of the premier institutes to do that.
Jackie Forrest:
All right, well, let’s talk a bit about what’s going on. The war in Ukraine, in Russia obviously is a big topic. We’ve covered it a lot on our podcast. A new dynamic to the energy transition is that some folks could use energy as a weapon as Russia has, and this has put geopolitics back into the conversation in terms of thinking about energy policy. How do you think it’s changing things today and maybe in the future?
Dr. Bassam Fattouh:
Well, energy policy always had multiple dimensions. This include environmental sustainability, energy security, affordability, development, and economic competitiveness. I think the world, particularly Europe, has experienced the benign environment in the past few decades. High growth rates, low inflation, globalization, abundance, and relatively cheap energy, I would say, and this is, in a way, lower the importance of the dimensions of energy security and affordability and energy policy, but the Russia-Ukraine war changed all of this. Security and affordability have now become key factors shaping energy policy.
Peter Tertzakian:
I want to pick up on a couple of things that you said. In Europe, it’s been, I think you said a benign environment for the last certainly decade. I would argue actually it’s sort of the western economies as a whole have been under this relatively stable, benign environment potentially arguably since the last oil price shocks in the 1970s. So, back then, there was increased government intervention. We’re seeing a lot of government intervention now. What do you think government intervention looks like as we go forward? Is there going to be more subsidies for the price of the fossil fuels, more emphasis on switching to renewables? Can you sort of summarize how you’re thinking about that?
Dr. Bassam Fattouh:
Well, market forces are a central part of the energy system, but the government really is ultimately responsible for guaranteeing that everyone has access to affordable energy, also for securing the public goods of decarbonization and security of supply. So, a key question really is how to balance the role of government versus market in current and future market designs. I think the current crisis is causing a swing away from markets towards state intervention. Governments are providing support packages to protect consumers. They are imposing or thinking of imposing windfall taxes on energy companies to finance the support packages. They’re imposing or contemplating to impose price caps in energy markets. There are also increasing calls for redesigning electricity and carbon markets.
To me, some of these measures increase policy risks and uncertainty facing investors, and this could impact investment decisions and the pace of the transition. Now, the real question is, how long will this continue? For instance, will necessary admission that net zero targets are being missed force further government intervention? To me, these are really serious risks.
Jackie Forrest:
All right. Well, let’s talk about COP27. One of the things that came out of it, and I’m sure you’ve been reading this over the weekend, is this message that the political clout of fossil fuel producers impacted the progress. Specifically, there was debate around phasing out of unabated coal that was there last year, but should oil and gas be part of that as well? There was a lot of debate, and apparently, the oil exporters didn’t want that in. I mean, it’s basically saying we shouldn’t be investing in new oil and gas. In the end, it wasn’t put in. Do you have any thoughts on, was that the right decision?
Dr. Bassam Fattouh:
Well, I think the question of oil and gas exporters and their transition policies within a net zero world, I think that’s a topic which is very much worth focusing on, many oil and gas exporters are exposed to extreme weather events that are severely affecting their population and economies, but also oil and gas exporters face much bigger challenges than international energy companies when it comes to monetizing their reserves. Oil and gas exporters proved hydrocarbon reserve to production ratios extend for multiple decades. So, they face the challenge of monetizing a much larger reserve base in a net zero world. Also, oil and gas trends and their distribution shape their political economy and are central to their development strategies. The risk of losses in export revenues could disrupt their socioeconomic wellbeing given the high reliance of their economies and public finances on all revenues.
So, the key question really is, what strategies should oil and gas exporters pursue given, I would say their domestic political and economic constraints and energy transition, which is changing their prospects of oil and gas demand, but to speed is uncertain and whose impact is not uniform across the globe and at times when perceptions, behaviors and policies are changing very fast.
Peter Tertzakian:
Yeah. It’s interesting. We should also make a distinction between oil exporters that are controlled by national oil companies versus independent oil companies. So, in that regard, when I think about countries in the Middle East, the Gulf region, some of them have really some pretty impressive expenditures on things like hydrogen and solar power and all those sorts of things. What are some of the strategies you’re seeing that are really exciting and innovative in these major oil exporting countries?
Dr. Bassam Fattouh:
Well, this is an excellent question. Economic diversification really is the most obvious strategy, but I would argue that there are real challenges to achieving meaningful diversification, particularly fiscal diversification. Diversification into different sectors away from their competitive advantage runs the risk of failing to establish economically viable new export sectors. Also, achieving diversification requires building human capital, improving education system, extensive reforms to improve their business environment, transparency on governments, and very important as well, removing barriers to private sector participation.
There is really uncertainty about how quickly or even whether such extensive economic and structural reforms can be implemented in most oil and gas exporting countries, but I would argue that beyond this, there are additional reasons as well because at the end of the day, the oil and gas sector still enjoys higher margins than any new industries or sectors that the governments aim to establish. Also, the oil and gas exporters need to leverage on oil and gas revenues to ease the pain of structural reforms.
I would also add to that, that the reduced investment flows into the oil and gas sector, which we are seeing today, can cost supply to fall faster than demand and this will result in higher margins, at least for short periods of time. So, exiting too early from such an established strategic sector deprives the countries of an important source of income and a key source of competitive advantage. Therefore, policies based on the premise that oil and gas exporters move away from this strategic sector are, in my view, not realistic nor optimal. So, the call really becomes, if diversifying from the oil and gas sector is not optimal and it cannot be achieved at a rapid pace, then the question really becomes how to enhance the competitiveness and increase the resilience of the hydrocarbon sector in the net zero world.
Jackie Forrest:
Well, and that’s a good question then. What are countries doing? We know that some of them are increasing production. Saudi Arabia has announced an increase of a million barrels a day in their capacity, and UAE we know is adding production. So, in the face of all of this talk about declining oil demand, they’re adding production. Is that the right strategy?
Dr. Bassam Fattouh:
Well, oil and gas exporters, particularly those in the Gulf, can compete on cost. Actually, they can even take measures to lower production costs further, for instance, through maintaining capital discipline, enhancing efficiency, promoting R and D in the hydrocarbon sector, but in addition to cost, another area of competition which will become increasingly important is reducing the carbon intensity and lowering the carbon footprint of oil and gas production.
I would say that some exporters, particularly in the Gulf, are in a very good position to compete on that front due to the low carbon content of their crude and due to their investment in infrastructure to reduce gas flaring and methane emissions, but of course, more needs to be done. This is where, I think, carbon capture utilization and storage or CCUS is a key technology for these countries to enhance the resilience of their hydrocarbon sector. This is one area that I have been looking at in some details. That’s where I believe that CCUS in particular is likely to play a key role because CCUs is a key technology for reducing emissions in the oil and gas, for instance, capturing and storing CO2 from gas processing plants.
The CCS in this industrial application is very well established, but I would say also that CCUS is also a key technology to enable more hydrogen. Many oil and gas exporters are endowed with massive and relatively cheap gas reserves, especially that most of the gas is associated with valuable liquids. So, development of hydrogen business is really a very important component of diversification within their energy sectors.
I would also add that many of these countries are diversifying into products and exports closely related to hydrocarbons and energy intensive industries. So, think about, for instance, petrochemicals, steel, cement and fertilizers, but of course, heavy industrialization into energy intensive industries increases domestic greenhouse gas emissions and make it more challenging to achieve climate targets. So, that’s where also CCUS is a key technology actually to mitigate emissions and energy intensive industries and hard to abate sectors. To me, this is really is also key to increase the competitiveness of their industries.
Jackie Forrest:
So, Bassam, Canadian producers have a similar strategy. I don’t know if you’ve heard, but our oil since, producers have all banded together and are planning to get to net zero. There’s plans to build large CCS projects here, although it’s still on paper. There are hopes that that would be around by 2030. In the Middle East, where are they? Are they constructing stuff? Are they still writing PowerPoint slides about their plans around CCS? When would this happen?
Dr. Bassam Fattouh:
Well, they’ve announced many projects at least recently. So, Saudi Arabia announced a massive project in CCUS capture, and they have some pilot projects as well. The UAE has been utilizing also CCUS as well, but of course, more needs to be done. The problem with the CCUS or the challenge with the CCUS I would say is the high upfront and operation cost of CCUS project. I would add to that as well, that as you move to the clusters, there’s the integration and interdependency risks.
Now, you could create revenue streams for this project, for instance, through EOR, use of CO2 in other industries, but opportunities are limited compared to the scale required. Given that storing CO2 in itself does not create value, there are very limited business models available that could secure large scale financing of CCUS by the private sector alone. That’s basically where I see that governments must put in place a supportive regulatory framework and incentives and financial incentives such as tax credits, carbon pricing, but I would add to that, instruments dedicated to CCS that rewards storage, for instance, in the form of CCS obligations and CCS certificates and credit storage units.
Also, this mechanism should be developed within the Article 6, and I think particularly under Article 6.2 of the Paris Agreement where it allows for the creation of CCS clubs. I would go further, and I would argue that oil and gas exporters could establish a competitive advantage in CO2 storage, given their geological storage capacities. They have access to depleted hydrocarbon reservoirs and deep saline formations. They also have a very developed existing infrastructure. They also have technical resources, expertise in subsurface technology through decades of hydrocarbon exploration. So, to me, these are all factors why CCUS can play a key role in their transition policies in oil and gas export transition policies and making their hydrocarbon sector more competitive and resilient.
Jackie Forrest:
Well, it seems to me, there’s a lot of parallels in the conversations that are happening here in Canada and in the Middle East. I mean, a lot of our producers are talking about the importance of Article 6 so that we can continue to develop our hydrocarbon resources and get credit for reducing the emissions even if it may be in reducing emissions in someone using coal somewhere else, but also, we’ve talked a lot about how you get paid. There’s been a number of policies roll out here in Canada recently, including a tax credit for CCUS. We obviously have a carbon price, but even some new news that we might have some certainty to that price over many decades. Where is that in the Middle East? Are they talking about having a carbon price like Saudi, or is it the national oil companies are just investing in that? Is that a barrier for the Middle East to move forward? Because if you’re waiting for Article 6, I think you might be waiting a long time to be able to invest in these projects.
Dr. Bassam Fattouh:
Well, this is really the challenge of how to finance CCUS project. So, the idea that you shift all the costs of the producers alone, this is not likely to work. So, the idea is to try to find new mechanisms to spread the cost and basically for the flow of revenues to flow through the supply chain and not to shift the cost only to producers alone. That’s why I’ve been arguing that there are those mechanisms under Article 6 and particularly under Article 6.2, but this requires harmonization of policies, strong cooperation either through multilateral or bilateral agreements. That’s where I think the oil and gas exporters should take a leading role, not only improving those technologies and scaling up these technologies, but also in developing this mechanism to help them generate a stream of revenues and scale up CCUS.
Peter Tertzakian:
Yeah. I think all this stuff is great. I think you are going to see a scale up in CCUS. I think the process technologies and scale-ups in CCUS are going to drive the cost down, and we’re going to see greater adoption upstream, but I keep coming back to the idea that upstream emissions are relatively small, say 15%. It’s the downstream consumption emissions that are really contributing to the issue. Yet when you listen to the narratives coming out of conferences like COP27, overwhelmingly, the burden of the fossil fuel dominance is placed on the supplier and the producers, yet with little discussion about the role of the consumer.
So, we could talk a lot about this, but one of the things I’m wondering if you’re willing to share is, what do you think or what does the institute think is the timeframe for peak oil demand? When is consumption going to slow down of things like oil? Do you have a peak oil demand scenario?
Dr. Bassam Fattouh:
We don’t do our projections of oil demand, but let me make just few observations on that. The first observation that I would make is that basically, the models are extremely sensitive to the underlying assumptions. So, if you change assumptions about population growth, economic growths, global carbon taxes, you actually can get very different numbers on when oil demand will peak. So, you can push it forward by 10 years or couple of decades or bring it forward by couple of decades.
The other observation that I would make is that many of the projections that we see are actually not forecasting. They are backcasting. So, you assume, for instance, you’re going to reach net zero in 2050, and then you walk your way backward and why it’s very important to distinguish the forecasting from the backcasting and also to realize that when you go backward, there are multiple paths.
So, for instance, if you think of the IEA as one of the paths, but there are many other paths, and you can basically decide different path depending on the criteria that you basically bring. Go back from net zero in a certain year and basically walk your way backward. Another observation I would make as well, that many basically, people tend to think that there’s one peak after which all demand’s going to decline very sharply, but in reality, and that has to do with the fact of modeling, but in reality, you can end up with multiple peaks, you can end up with a peak and then a plateau, and then a more gradual decline. It’s quite important also to remember what’s going to happen to supply as well because when you are projecting forward about oil prices, long-term oil prices, not enough only to look at oil demand, but it’s also quite important to look at oil supply as well.
That is why some of the debate, which is coming out all the time that the Middle East are the losers of the energy transition, I find that that debate is really very simplistic and very deterministic. I’m happy to discuss why that the case if your listeners are interested in this.
Peter Tertzakian:
Sure. Yeah. I think it’s a really important discussion because I think there’s some fundamental principles of economics that are overlooked when we think about peak oil demand. I mean, it’s like a low cost producer is always the last out of the market, and the Middle Eastern producers are the lowest cost producers in the world, so they’re going to be around much longer, I mean.
Jackie Forrest:
Well, and I would add, the IEA recently came out with our world energy outlook, and it showed the amount of capital spending needed out for the next 20 years. Even in the policies like the announced pledges, we need more capital investment than we’re doing today. So, that would speak to a transition where oil prices remain fairly high because there isn’t much spending on new projects, and Middle East producers maybe do okay during that period. Bassam, I’m sure you’ve thought a lot more about this, so interested in your thoughts.
Dr. Bassam Fattouh:
Yeah. I would like to add to the other points as well, perhaps few additional points is that the Middle East oil and gas exporters are also not a homogeneous group, and their resilience and core sources of comparative advantage really very tremendously. As I mentioned before, the transition can also cause dislocations in energy markets that some Middle East exporters can benefit from.
Also, some key oil and gas exporters are not standing still, and they are evolving and responding to the challenges that the energy transition may bring. They are developing opportunities in hydrogen, CCS, utilization of CO2, renewables, but also in the traditional hydrocarbon business. Some oil exporters or Middle East exporters are much better prepared than others. The point that I always make, that they may be in a position to benefit from the transformation associated with the energy transition and can play an important role in the process.
If you notice as well that they are extremely active in the climate change negotiations, so that’s, to me, the concept of losers and winners. That is really not a useful concept. So, to me, that’s why this is basically not to say that net zero world will not pose real challenges to Middle East oil and gas exporters, but I think the focus really should be on whether Middle East exporters are prepared to deal with these challenges, whether they are adopting strategies to make themselves more resilient in face of massive transformations in the energy scene. I think those types of questions I think are much more interesting rather than identifying who’s going to lose and who’s going to win from the energy transition.
Jackie Forrest:
Well, let’s talk about … We’ve been talking about 2050 a lot. Let’s get to the here and now. Want to talk about the short-term oil markets A little bit. Big news, the last few months was when OPEC Plus decided to cut their production by two million barrels a day, although the actual cut was smaller. That was the headline number. This is at the same time that the U.S. and Europe are suffering from high prices and doing all they can, including entering their strategic oil reserves to keep prices low. Did that surprise you?
Dr. Bassam Fattouh:
To me, really, OPEC latest decision is in some way consistent with a past behavior. For instance, in 2008 and in the face of the global financial crisis, OPEC responded by implementing very deep cuts as global oil demand took a hit, but this time, perhaps it’s different in one important aspect. OPEV decided to act preemptively and in a timely manner and not wait until the weak signals on the global economy take their toll on the oil market.
Despite all the talk that this decision was politically motivated and that this move endangered the global economy, actually, the decision proved to be the correct one in retrospect. The reality is that since the announcement of the cut, the demand outlook continues to deteriorate, so has sentiment, and now, we expect the market to shift into a surplus for the next few quarters.
Now, in the past, such preemptive and proactive moves were not feasible as the cohesion within OPEC was not strong, and it took months to negotiate output cuts. As a result, OPEC responses always arrived late after market balances have weakened sharply, but the dynamics within OPEC have now changed, and OPEC can respond in timelier manner, and particularly under the leadership of Saudi Arabia, the cohesion within OPEC is much stronger and its ability to assess trends and response has dramatically improved.
One more point I would also point to is that many member countries are producing at maximum capacity and below their quotas, which implies that most of the OPEC Plus producers did not have to cut real barrels but paper barrels from unmet quotas, which made reaching that decision easier. That’s why it’s important to emphasize that despite the announcement of two million barrel per day cut, the actual cut is much lower, and that is in the range of somewhere between 750,000 barrels per day to 900,000 barrels per day, why also one needs to take into account as well because at the start of the Russia and Ukraine war, there was a wide belief that we will witness a big disruption of Russian oil Supplies. We were among those people, but in the reality, that deception turned out to be much more limited so far and certainly well below initial expectations of big supply disruption of two to three million barrels per day. Russia succeeded in redirecting crude exports away from Europe to other parts of the world, particularly to Asia and within Asia, to India and China. So, the anticipated disruption from Russia really did not materialize.
Peter Tertzakian:
Right.
Dr. Bassam Fattouh:
This does not mean that we haven’t seen fundamental changes in the market, but most of these fundamental changes we have seen in terms of trade flows, redirection of trade flows, fundamental shift in trade flows, both on the crude side and the product side.
Peter Tertzakian:
Right, right. I’m going to key in on this notion that OPEC is stronger today, and I believe it is. One of the reasons I think is because it’s not as worried about U.S. shale as it was say around 2015, 2016. What’s your thinking about the U.S. shale situation as it relates to OPEC and how it responds to oil markets going forward?
Dr. Bassam Fattouh:
Okay, that’s a very good question. Let me try to answer it in few parts. First of all, U.S. shale will continue to be an important source of supply growth given the resource base but also the nature of its investment cycle. Also, the U.S. exports of crude and products have increased massively over the last few years, and this is really transforming the trade flows, but even oil benchmarks as well.
A clear example of this is the current plans, for instance, to include WTI in the Brent basket, but having said all of this, it’s important to put U.S. shale in some context when it comes to OPEC. U.S. production is yet to recover to the pre-COVID highs in 2019. Also, a lot of the recent increase in output came from utilizing drilled but uncompleted wells, what is known as DUCs, and the stock of these DUCs has been exhausted and reached the lowest level on record.
Also, U.S. shale is facing inflationary pressures and bottlenecks, but the biggest change really for the U.S. shale has been capital discipline that shale producer have been showing so far. Despite the increase in cash flows, these have not been translated into similar increases in CapEx and OpEx. The significant part of the cash flows is being returned to shareholders and paying off debt, and really without the increasing CapEx, the growth in U.S. shale will be much more limited than in previous cycle.
So, I think more fundamentally, the idea that the U.S. could act as a swing producer similar to the OPEC, I don’t think this was relevant at all, but at least now, it’s behind us. Despite the fact that U.S. shale constitute a flexible source of supply, the lags are long to act as a swing supplier. I would say that these lags are even becoming longer as ESG restricts financing into this sector, but at even a more fundamental level, I think the U.S. shale is behaving similarly to OPEC. I know this might sound crazy, but the role of OPEC is to maximize revenue for their governments and not output. The U.S. shale is no longer about maximizing output as well but about maximizing profits to their shareholders. So, in a way, their behavior has shifted closer to that of OPEC Plus, and that actually makes it easier as well from the OPEC perspective.
Jackie Forrest:
Now, OPEC in the driver’s seat does mean to me higher prices and all things the same, right? Whenever they’ve had control of the markets, they generally want to have prices higher. One question about OPEC, the new name is OPEC Plus because Russia is part of it, what do you think the future is for Russia? They’re going to have potentially a lot of sanctions, maybe a decline in their production. Do you can see them as an ongoing member of OPEC?
Dr. Bassam Fattouh:
Well, it depends on which time horizon you take. In the short term, all indicators are that Russia is keen to keep the relationship with OPEC. Also, from OPEC perspective, it took years to build this relationship, and OPEC would also like to maintain the current framework, which has now been extended until the end of 2023.
Having said all of that, in the medium to longer term, however, Russia’s position within OPEC will weaken for the simple fact that due to sanctions, it’ll not be able to increase or may even witness a decline in their productive capacity. Whereas the Gulf, the key Gulf producers within OPEC actually have very solid plans to increase their productive capacity, and this automatically will alter the power dynamics within OPEC Plus in the favor of the Gulf producer certainly.
Peter Tertzakian:
Well, Dr. Bassam Fattouh, it’s been delightful to have you to give us the international perspective of what’s going on in energy markets, oil, gas, renewables and the transition at large. Dr. Fattouh is the director of the Oxford Institute for Energy Studies. Jackie, I think, we’ll be posting his link.
Jackie Forrest:
We sure will. it was great to have you on our podcast. Thank you so much.
Dr. Bassam Fattouh:
Thank you for having me. It was really great pleasure to be joining you today. Thank you.
Jackie Forrest:
Thank you to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
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