21 Dec 2020 16:00

IMEMO, Interfax expert meeting with special guest Deputy Prime Minister Novak addresses protracted oil demand recovery

MOSCOW. Dec 21 (Interfax) - The third expert meeting of the joint project of the Russian Academy of Sciences' Institute of World Economy and International Relations (IMEMO) and Interfax titled 'Russia and the World: A Professional Conversation' took place on December 21 with the special guest Deputy Prime Minister Alexander Novak. The experts discussed the protracted oil demand recovery on the backgdrop of the Covid-19 pandemic.

The meeting's moderator was Russia TV Channel VGTRK Deputy General Director, Global Energy Association President Sergey Brilev and the list of speakers included Nobel Peace Prize Laureate, Global Energy Prize International Award Committee Chairman Rae Kwon Chung, Dean of the international energy business department of the Gubkin National University of Oil and Gas, corresponding member of the Russian Academy of Sciences Yelena Telegina, and Principal Director on Energy Studies at the Institute for Energy and Finance Alexei Gromov.

Unpredictable conditions

It could take longer than previously expected for oil demand to recover, with some experts talking about two or three years, Deputy Russian Prime Minister Alexander Novak said during the meeting titled "Energy Transition and the Post-Covid World."

"The situation we came up against at the start of the year and the conditions we are in now - this was totally unpredictable and unprecedented in scale. Nobody could say exactly what consequences the pandemic would have for the global economy and which were felt particularly in Q2 2020. Today, all of these forecasts made in Q2 when we signed the agreement on joint oil market steps are for one reason or another not entirely materializing," Novak said.

He said the sharp drop of 22-25 million bpd in demand for oil seen in the spring of this year could have resulted in markets being saturated and for the first time ever have brought oil production to a standstill as there was not enough storage capacity in the world for a length slump in demand. "On selected local markets like the United States we saw that saturation resulted in a negative WTI crude price," Novak said.

Novak said earlier it was thought oil demand would recover more than it actually has by the end of 2020: demand is currently 6-7 million barrels per day less than it was prior to the pandemic, even after recovering by 15-17 million bpd.

He said there had nevertheless been a second wave of lockdowns, if not as severe, which is behind limited consumption, while lifestyle changes, including an increase in remote meetings, are a second factor.

The measures taken by the OPEC+ countries in April this year to reduce oil production by 9.7 million bpd prevented the market from becoming saturated, with market players now geared towards a gradual recovery of production as demand increases, Novak said.

"We thought that by the end of the year demand for oil would have recovered more than we are actually seeing today. Right now, demand has recovered by 15 million-17 million bpd but, relative to what there was prior to the pandemic the overall drop in demand is around 6 million-7 million bpd. Nobody back in March was able to predict a second wave globally, although it is of course not as severe. But demand is limited, and we are seeing this in terms of mobility, people's activity, for example if we look at the timeframe for the recovery, demand was higher in July-August than it is now for several positions. For example the use of gasoline, motor fuel in general, consumption was around 40% higher than it is now," he said.

Novak said that although demand was recovering gradually, some "irreversible changes in the way of life for people all over the planet" was being seen for example remote meetings.

"So our forecasts are now altering - the recovery will be slower than we originally planned, and many experts are saying that recovery will take two or three years," he said.

Novak recalled the measures taken by OPEC+ countries in April this year to reduce oil production by 9.7 million bpd. "In general we ae geared towards increasing output as and when demand recovers because the cut-backs are unprecedented and this is important for export nations, including for Russia," he said.

Hope for U.S. participation

Russia sees the new U.S. administration's energy policy as directly opposite to that of the last four years, the deputy prime minister said.

The new administration is more focused on the climate agenda, he said, "but we have to see what decisions will be made."

Regarding possible cooperation on oil production cuts, as happened within the framework of OPEC+ and G20 in April of this year, Novak said that if fluctuations in oil demand are small, there is no need for cooperation, but in the opposite case, cooperation would benefit everyone, expressing hope that the U.S. under the new administration will take part in such restrictions.

"If we speak about the possibility of the countries cooperating in order to level off the negative factors that are profoundly influencing the market, then if the fluctuations are small, there is no harm in doing this, if such joint actions, like this year, of course benefit everyone, and we hope that U.S. policy will not affect those joint coordinating decisions that are designed to play a positive role for the world economy," the deputy prime minister said," he said.

The process of reducing oil production within the framework of OPEC+ "is not endless," Novak said, and once the market recovers, the countries will exchange more information about the state of the market.

As reported, in April, Russian President Vladimir Putin, U.S. President Donald Trump, and King of Saudi Arabia Salman bin Abdulaziz al Saud held telephone talks, during which they discussed the situation on the oil market. The heads of state supported the agreement reached within the OPEC+ framework on phase-based voluntary restriction of oil production in order to stabilize global markets and ensure global economic stability in general.

Putin said that Trump's participation in the efforts to coordinate oil production had been active and effective.

"We worked together fairly effectively to stabilize the energy markets. I know that President Trump - we personally had trilateral talks with the King of Saudi Arabia on this issue - personally took an active and highly effective part and in doing so he did of course back his own oil producers as well, he supported the [oil] sector. We stabilized prices, we succeeded in doing that jointly. This also indicates that of course in situations where we can combine efforts we act fairly effectively," Putin said.

In April this year, the OPEC+ countries agreed on record reduction of oil production in response to the crisis caused by the coronavirus pandemic. The OPEC+ agreement implied cutting production 9.7 million barrels per day in May-June followed by gradual recovery of production. It is assumed that the deal's action will continue until May 2022.

The G20 countries, which include the U.S., in turn, in April this year pledged to take all necessary and immediate steps to ensure the stability of the world market amid efforts to overcome the pandemic's impact on energy markets and to form a working group that will monitor response measures. It was later recognized that the decrease in production in the U.S. and a number of other countries would occur organically in light of the decline in all prices.

Gas market and clean energy

Meanwhile, the global gas market is recovering unexpectedly quickly from the shocks associated with the coronavirus pandemic, even considerably faster than the oil market, the deputy prime minister said.

"This year has not affected the gas industry as seriously as it has affected the oil industry even though we have also seen substantial price fluctuations in the gas market. We have seen a record price decline this year and again a rapid recovery toward the end of the year. For example, we see today that prices for spot markets have recovered to $210 per thousand cubic meters of gas. When prices were critically low, no-one could have imagined that such a recovery would happen so quickly," Novak said during the expert meeting.

"Interestingly, we observe on the gas market that despite the underground gas storage facilities (UGS) being filled higher than in previous years during the summer, gas withdrawal from UGS is proceeding at a faster rate by mid-December today, and we are at a level considerably lower than in other years, which is substantially affecting prices," Novak added.

"Regarding demand, I would like to say that the gas market has not been as seriously affected as the oil market. The overall level of decline that we currently see should be around 3% for the entire global market by the end of 2020. Moreover, at this amount as well, we expect that there will be such a forecast that the market will fully recover next year, meaning that market recovery will be faster relative to the oil market," the deputy prime minister said confidently.

"There have been more spot deliveries this year, and we have also observed a decline in the supply of liquefied natural gas that has become more competitive at low prices. There is of course currently a recovery in pipeline supplies that also speaks to the competitiveness of this means of supplying gas," Novak said.

Hydrocarbons currently make up 85% of the global energy mix but that share could fall 15% in the next 20 years, he said.

"The share of hydrocarbons in the energy mix is currently 85% but in the next two decades it could fall by around 15%. The share of renewable energy sources will increase. That is, there will still be more in the way of hydrocarbons, although the climate agenda will play a more and more significant role," he said.

Russia's own energy mix is "sufficiently energy-efficient and ecological," he said.

"Our energy mix is 19% nuclear power, 18% hydropower and already just under 1% renewables, which will rise to 4%. Accordingly, 37%-38% of our mix is clean energy from renewable sources. As for the rest, another 50% of the energy mix is natural gas and only 14% coal. That is, we are sufficiently effective in this respect, and the Russian power industry's hydrocarbon footprint is not as big as that of other countries like the United States, Europe, China, Australia, India and some others," Novak said.

'Russia and the World: A Professional Conversation' is a new joint project of IMEMO and Interfax. A series of expert meetings dedicated to the most important events in global politics and economics take part within the project's framework. Discussions involving scientists, public figures, and officials take place monthly in an online format and broadcast on YouTube.

The previous expert meetings as part of this project addressed the following topics:

  1. The expectations governments around the world have for the U.S. presidential election (October 29).

  2. 'Turkey under Erdogan: Global Interests in a Polycentric World' (November 26).