The ‘Declaration of Cooperation’ at four: mature and competent

OPEC Bulletin Commentary – October 2020

On approaching the fourth anniversary of the ‘Declaration of Cooperation’ (DoC) on December 10, it is a good time to look back at the accomplishments that have been achieved through this visionary collaboration. An entity in its own right on the international energy scene, the DoC has matured and become ever more competent with time.

In a year when OPEC is celebrating its 60 years of existence, during the most dramatic oil market downturn in living memory, the DoC has taken on an importance and status that its initial creators likely could not have conceptualized.

Mohammed Sanusi Barkindo, OPEC Secretary General, who had just taken the reins of the Organization in the summer of 2016, came in at the depths of a market depression. The market had taken a beating for two years, investment had collapsed, layoffs in the industry were rampant. Behind the scenes in the fall of that year, Barkindo was participating in “shuttle diplomacy” that would see him travel far and wide to try and gain a consensus on how to manage the disastrous situation.

Back then, in 2015–16, the world came close to a catastrophe of epoch-defining proportions.

The situation was based on an unusual premise. The previous five oil cycles had stemmed either from a deficit of oil demand, or a surplus of oil supply. This was the first cycle which incorporated both. From 2014 to 2016, world oil supply growth outpaced oil demand, growing by 5.8 million barrels/day (m b/d), while world oil demand increased by 4.3m b/d. The OECD commercial stock overhang continued to swell so that by July 2016, it had reached a record high of about 403m b over the five-year industry average. The OPEC Reference Basket price fell by an extraordinary 80 per cent between June 2014 and January 2016.

Nearly one trillion dollars in investments were either frozen or discontinued, and a record number of companies in our industry filed for bankruptcy. According to the consulting firm Graves & Co, almost half a million jobs were lost in the global oil and gas industry.

In the face of this impending disaster, OPEC’s landmark agreement in Algiers at the 170th (Extraordinary) Meeting of the OPEC Conference on September 28, 2016, was a stepping stone to consultations between OPEC and non-OPEC nations. This culminated in 24 oil producing nations agreeing to the DoC at the historic first OPEC and non-OPEC Ministerial Meeting held on the December 10, 2016, in Vienna in a concerted effort to accelerate the stabilization of the global oil market through voluntary production adjustments of around 1.8m b/d.

The effect of this cooperation on the oil market was transformative. A long-absent element of stability was reintroduced, and this had a knock-on effect on the world economy, which after faltering for ten years experienced a long-awaited synchronized growth upswing. Accompanying this success were significant changes in industry-wide and public perceptions of OPEC.

The world had just caught its breath from this situation when the COVID-19 pandemic came out of left field. Predictions starting in February went very rapidly from bad to a worst-case-scenario situation, with oil demand dropping through the floor by up to 30 per cent and sentiment rock bottom in ‘Black April’.

Nobody had ever seen or attempted to manage such a loss in demand, with worldwide lockdowns grinding the world economy to nearly a halt. This perfidious killer triggered the seventh and most devastating oil market cycle. Oil demand fell by over 17m b/d in 2Q20 and for the year, demand is estimated to drop by 9.5m b/d. It brought with it not only economic devastation and massive job losses, but a horrific loss of human life and overstretched health care systems.

Extreme times call for extreme measures, and DoC participants calmly and assuredly made hasty steps to address the situation. At a milestone meeting in April, the participants agreed to the longest and deepest oil production adjustment in history — 9.7m b/d. This is nearly five times more than the breakthrough production adjustments reached in December 2016.

Predictions hold that without these profound measures, the oversupply would have added a further 1.3 billion barrels to global crude oil stocks, which would have driven available global crude oil storage capacity to top out within the month of May. This could have easily led to a market collapse of unprecedented magnitude.

Having the DoC already in place, with tried and true experience and the deep connections built over years, meant that its participants had simply to leap to action when the bottom fell out of the market. If there is a silver lining to this human tragedy, it’s that it has brought oil market participants closer together. As OPEC has reached out to every corner of the industry, it found that all were eager to share their voices and opinions, to try and battle this worst of situations together.

The recently released 2020 OPEC World Oil Outlook points out that these actions are not only essential today, but will have a great impact upon tomorrow. The medium- and long-term outlook is inexorably linked to current production adjustments.

Currently, world oil demand is expected to grow by 6.5m b/d in 2020 and the economy should recover to a level of 4.6 per cent in 2021 from –4.1 per cent in 2020. These indictors tell us that a recovery is in the works, though it is fragile and must be carefully monitored.

Through this greatest of disasters, the Organization has once again ably demonstrated its credentials as a body committed to international cooperation, working with other producers, honouring its commitments and promoting mutual respect among all nations. Over the past four years, the participants of the DoC have shown flexibility, grounded on the core principles of equity, fairness and transparency.

Even as the world is suffering from battle fatigue after the long struggle with COVID-19, one must ask, where would the oil market — and indeed the world economy — be today without the DoC?

The future of the oil industry will remain challenging in the post-pandemic world, with new calls to speed up the energy transition to mitigate climate change in the rebuilding of economies. Who better to bring a steady and guided hand to the situation than this dedicated, experienced and committed group?

OPEC Bulletin (October 2020)

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