Chief Executive Officer of Rosneft Oil Company Igor Sechin has presented a keynote speech at the energy panel of the 23rd St. Petersburg International Economic Forum.
The event was attended by Chief Executive Officer of BP Robert Dudley, Qatar’s Finance Minister Ali Shareef Al-Emadi, Head of Qatar Investment Authority (QIA) Mansoor bin Ebrahim Al Mahmoud, Chief Executive Officer of Baker Hughes Lorenzo Simonelli, Chief Executive Officer of Glencore Ivan Glasenberg, Chairman of CNPC Wang Yilin, President of ExxonMobil Global Projects Company Neil Duffin, Chief Executive Officer of Equinor Eldar Sætre, Chief Executive Officer of Trafigura Jeremy Weir, Chief Executive of Vitol Russell Hardy, Chief Executive Officer of Gunvor Torbjörn Törnqvist, Russian Energy Minister Alexander Novak, the representative delegation from Venezuela, Ministers of Oil of Angola and Iraq, ambassadors of Portugal, India, Mozambique, Qatar, and Venezuela, Governors of Russian regions.
The panel moderators were former Executive Director of the International Energy Agency Nobuo Tanaka and Russian TV journalist, State Duma deputy Evgeny Primakov.
This year, the discussion during SPIEF is being held under the sustainable development agenda, but it is happening in a very challenging period of time. According to Igor Sechin, now energy market participants need to answer the question, “Have we or have we not passed the point of no return?” The market principles of work and the mutually beneficial dialogue are being pushed aside, while the strategy of regulatory pressure and unilateral sanctions takes the leading role.
Energy as a global industry which plays a revenue-generating role in most countries has become the first hostage of the unilateral political agenda, and we see the signs that this disease is spreading into the other industries. The only global regulator is not only biased but is, in a very evident way, servicing local interests. Therefore, rephrasing the famous President Trump slogan “Make America great again!”, I would like to appeal to the participants of this session to make the today debate slogan, and maybe the slogan for the all subsequent work to be “Let’s make the market great again!”, or “¡Vamos a volver la grandeza propria al mercado!”, said the Head of Rosneft.
Igor Sechin noted that there is an increasing impact of geopolitical change on energy markets nowadays. The main accentuation comes from the current US Administration. “We see that they are trying to reform the global economic and political space, to break down the market links and arrangements that have been established for decades, and to eliminate the rules of competition. The sanctions and trade restrictions are being showered not only upon various nations treated as “pariahs” but also upon the traditional partners amongst traditional American allies. What are the reasons behind such policies? I believe, they are coming from the growing awareness of the critical weakening of the role and capabilities of the United States in global economics and politics,” he said. Back in 2000, the US supremacy over China in terms of the GDP was almost threefold but at the moment China surpasses the USA in terms of the GDP and in terms of the purchasing power parity by almost 25%. By 2050, the Chinese economy’s supremacy over that of the USA would be twofold.
“In these conditions, the USA aims not just to accelerate its own economic development, but also to decelerate the quantitative and qualitative growth of its main competitors, which increasingly leads to the loss of moral leadership by the US, since this country historically was one of the key ideologists of the open market and competition. It is the oppression of competition that became the dominant feature of the economic and foreign policy of the USA, while the use of forceful approaches to solving problems has turned into a special American style of doing business, or, quoting the recent statement by Chinese Deputy Foreign Minister, Mr Zhang Hanhui, into a style of “naked economic terrorism and chauvinism,” Sechin underlined.
According to CEO of Rosneft, the key challenge for the “global energy transformation” that implies the accelerated development of highly efficient energy conservation technologies and their adaptation to the rapidly changing market requirements (the result of which would be, for instance, the 2.6 times reduction of sulphur content in fuels by 2020 and decrease of sulphur compounds emissions by 5 million tonnes per year) is the geopolitical instability that increases the risks for producing countries, specifically through the actions, policies, and tweets of the global regulator represented by the US leader. “These Twitter comments create nothing but short-term one-time price fluctuations for the oil and gas industry. In other words, the policy of the global regulator creates uncertainty of the general vector of development and high volatility at the markets,” he added.
With reference to this, Sechin insists on focusing the discussion on the issues of overcoming external threats, reducing volatility and increasing the stability of the global energy community.
In the last 25 years, the global economy has been growing at an average rate of 3.5% per annum, and relatively high rates of growth are expected to continue, which is the basic driver behind the growing energy consumption. The second important factor defining the level of energy consumption in the world is energy intensity. With reference to the current level of the oil prices at $60-$70 per barrel and taking into account the change in the GDP structure, the advancing growth of the technology industry would hardly bring the speed of the decline in the energy intensity over 1.5-2% per annum in the foreseeable future.
“Bearing this in mind, we believe, as well as the leading sector analysts, that the demand for energy resources by 2040 will be growing by 1.5-2% annually,” Sechin noted. There is no doubt that the demand structure will sustain some changes related to the introduction of energy-saving technology, various emission commitments, but overall this dynamics will remain quite positive, which is defined in the first place by the growing GDP and the higher quality of life of the humankind for the several decades to come.
Environmental requirements will lead to a reduction of coal in the energy mix from the current 27% to 21%. However, coal will remain an important resource in the balance of such countries as China and India, where its share even in the future will be quite a weighty one – at about 40-50%. Of course, the alternative energy (mainly solar and wind), at the current regime of regulatory and fiscal incentives, will grow at the fastest rate - more than 2% annually. However, the contribution of alternative energy to the global energy mix will remain relatively small and will grow from the current 12% to 16% by 2040.
In the absence of breakthrough solutions, gas, as the most environmentally-friendly fossil fuel, will replace not only coal but also nuclear energy, since a number of countries consider this area as potentially dangerous.
“The natural gas, as opposed to alternative generation, can provide stable production of power. Moreover, natural gas is the fuel of the future for oversize vehicles and marine vessels. We expect an increase in the gas demand from the transport sector five times by 2040. Therefore, gas demand will grow at the fastest pace among fossil fuels (at the level of about 2% per year), which will lead to an increase in its share in the energy mix from 22% to 25% by 2040,” Igor Sechin said.
He also believes that the demand for oil will grow steadily at about 1% per year, which means growing consumption in absolute terms. By 2040, the global oil consumption will increase by about 20 million barrels per day. The support for this demand for oil and the refined products will come both from an increase in the standard of living in developing countries and the mass distribution of passenger cars in them, as well as steady demand from the petrochemical industry.
“As a result, although the share of oil in the global energy mix will decrease from 32% now to 28% by 2040, its consumption will grow in absolute terms, and its significance as the backbone of the modern energy will remain unchanged. The demand for oil in terms of growth is inevitable,” Sechin said.
In addition, in his speech, the Head of Rosneft covered the topic of now popular scenarios of low-hydrocarbon development. “The most important component in the “green” scenarios is the topic of faster growth in the use of renewables. But these scenarios cannot be substantiated by either the dynamics in energy efficiency, available technological changes, or structural changes in the global economy,” Sechin emphasised.
An illustrative example in the market becoming aware of clouded commercial prospects of landmark projects in the field of “new energy” are electric vehicles. Igor Sechin spoke about their phenomenon of overestimation in June 2017, when Tesla’s share price was at $340.
“Those who heard me then and divested could earn good money because the current price of Tesla’s shares does not exceed $200. But those of you who hear me today will be able to earn even more. There is a stereotype in the public opinion that electric cars will easily “crush” the oil industry and their mass distribution is a matter of the near future... Not to mention the fact that it’s quite difficult to recognize a transport that contains significant amounts of lithium and cobalt as an environmentally-friendly one. No one today has an answer to the question of how to build a truly closed and complete cycle of the turnover of these metals in batteries. And there is written far more than we are able to discuss today about their exceptional damage to the environment. Given that electric cars solve neither the problem of emissions reduction nor the problem of harmful industries, the share of electric cars in the global fleet will not exceed 12-15% in the foreseeable future, which will be compensated by the growth of traditional transport in developing countries in terms of absolute values,” the oil chief told.
Still, according to Sechin, the main factor of changes in the world energy markets is the oil production output in the USA. Ultimately, this will determine the global supply of liquid hydrocarbons, the balance of supply and demand, and the evolution of oil prices, as well as the prices of all other energy resources. After all, oil as the largest component of the current commodity markets is effectively assuming a central role in the intersection of financial and commodity markets.
The Head of Rosneft noted that one shouldn’t see as accidental that the day when Trump declared this Golden Age, the US Summit started hearing the activities to prohibit and act against the Nord Stream 2 pipeline project.
“It’s undoubted that the reality of the current date is that the energy by way of political clout is being used by the United States in big time. The introduction of sanctions of the threat of their application is devastating to the global energy industry. The American Golden Era for the rest of the marketplace may turn out to be the age of energy colonialism. Should the energy consumers in the world become hostages to this continuous electoral race in the United States?” Sechin wondered.
He said that the United States, in order to exert pressure on the oil and gas sector, select the countries whose budgets are primarily being maintained from the export of energy resources. In addition to this direct pressure, there is also an indirect one - some of the countries turn out to be cut off from the support by IMF which this way undermines the principles of its work.
According to Sechin, a very iconic step in spreading of this sanctional disease is the situation with one of the Chinese technology leaders, the Huawei Company, which is directly being pressurised through such measures as the arrest of its CFO, and the prohibition to cooperate with American technology companies.
“I believe that the Chinese colleagues have a sufficient number of instruments to respond, so the discussion in the media about the possibility to prohibit the export of the rare-earth metals as their response may be well-founded. Such a mechanism of response could be quite effective - simply because 80% of the rare-earth metals in the world are being produced in China,” Rosneft CEO noted.
Igor Sechin told that, despite the significant number of new projects (more than 49) launched in 2018, the sanctions towards Iran and Venezuela, as well as the sectoral sanctions against the Russian oil and gas companies, led to the total production of liquid hydrocarbons subject to the unilateral restrictions amounting to almost one-third of the global oil reserves. This is a kind of anti-record that the global economy never had.
“Nobody should entertain any illusions: sanctional pressure from the US upon Iran and Venezuela sets the aim to disrupt the economies in these countries and have their leadership changed,” Igor Sechin believes.
The impunity of the US sanctions policy in the absence of a reaction from the world community contributes to its replication in other energy markets. According to the US Department of Energy, its efforts to develop the US gas exports “allow exporting American freedom molecules around the world,” the Head of Rosneft recalled.
He associates the behaviour of the United States on the global energy market with the output growth in Texas, where the main part of the Permian Basin and the Eagle Ford Basin are located. The output here has already reached 5 million barrels per day, exceeding the total production of Iran, Venezuela, and Libya.
“This result was achieved not so much through the implementation of shale projects, but rather through the introduction of new sanctions, due to which production in Iran and Venezuela is sharply reduced. As a result, while about 1.5 million barrels per day of the global output were hit by the sanctions in 2018, this year this volume could increase to 2.5 million barrels per day,” Sechin shared his forecast.
According to him, further growth in production in Texas may require a “new sanction victim”, which could be attacked by the US sanctions in order to put oil from Texas, instead of oil from the victim country, on the market. “Any producing country may become such a victim,” the Head of Rosneft emphasised.
Increasing US pressure on the global oil market would not have been possible without changing the status of the United States, which became an oil exporter for the first time in a long time. As Sechin told, since the lifting of the export ban at the end of 2015, which had been in effect for 40 years, the United States have been rapidly increasing its oil exports: compared to 2015, the country has increased it 6 times and has already reached 2.7 million barrels per day that is comparable with the extraction of such countries as Brazil (2.7 million barrels per day), Kuwait (2.7), the United Arab Emirates (3.1). The geography of shipments is expanding as well. Earlier the American oil was only bought by close neighbours of the USA, but now the number of importers has grown to 40 countries.
“Active development of export pipeline and port infrastructure will allow not only to double the volumes of oil exported from the USA to 5 million barrels per day in a few years, but also to create an “overcapacity” for the future growth of production. Already by 2020 the USA will become a net exporter of oil, and in 2024 the export capacity for oil and oil products in the USA may reach 9 million barrels per day,” Igor Sechin told.
Given the external challenges and volatility, one can see the effect of increased competition for the investments, especially in part of lowering the tax burden and creating various stimuli. Igor Sechin called this a phenomenon of “tax regimes’ competition”. He used the USA, where unprecedented supportive measures in the industry in the form of lowering the tax burden and regulatory barriers were taken in recent years, as an example. Specifically, reduction of the profit tax from 35% to 21% allowed the shale companies to substantially increase investments. In 2018, with all the tax relieves and improvement of the price environment, the industry reported a positive, while still not large, free cash flow.
The lowering of tax burden in Saudi Arabia in 2017, when the profit tax rate was reduced from 85% to 50% and royalties were cut as well, led to the national oil company Saudi Aramco reporting the world record net profit of more than $100 billion for the year 2018.
“Let me note, that Saudi Aramco also receives additional tax stimuli, including those compensating lower prices at the domestic markets, which in the previous year amounted to $41 billion. I point out, that the decision to provide the stimuli was not an easy one and was extremely important for the Saudi budget, seeing as the it is balanced at the oil price of 85 dollars per barrel,” Sechin noted.
According to him, Chinese authorities also began developing measures to stimulate the economy by selective subsidies and lowering taxes as a reaction to slower economic growth. For instance, the shale gas extraction tax rate was reduced from 6% to 4.2%; measures were taken to lower taxes on oil futures deals at the Shanghai Energy Exchange. In 2019 the VAT and social insurance rates were reduced, which, according to Chinese authorities’ estimates, should lower the tax burden by about $300 billion this year.
In Russia one can observe oppositely directed trends, Sechin said, as the regulator balances between the tasks of increasing budget revenue and stimulating economic growth with simultaneous search for solution to social problems at the expense of the market. “I’d like to express hope for the return to market forms of regulation and principles of pricing in order to removes the imbalances at the market,” he noted.
Reacting to the policy of fiscal regulators, the biggest global energy companies adapt to market changes in different ways, making bets on different areas of business, the CEO of Rosneft pointed out. For example, ExxonMobil and Chevron increase investments into shale output, Eni and Total focus on conventional oil production. Total, Equinor and BP develop renewable energy, Saudi Aramco bets on refining and petrochemicals.
According to Sechin, Russia is one of the most reliable participants in the global energy market, as it is opposed to the short-sighted policies of restrictions and non-competitive struggle. Russia, together with the USA and Saudi Arabia, is one of the three world leaders in terms of oil production.
According to the estimates of most analysts and experts, The Russian Federation has the best portfolio of promising new projects in the world. The commissioning of new projects will continue in the next two to three years as well. Market experts talk about new oilfields adding about 1 million barrels per day of production by 2022.
“We agree in many ways with analysts’ prognoses on the prospects of new Russian projects. The new Russian projects have the best prospects on the global industry with reference to the scale of the resource base, the quality of oil, the net cost. At the same time, I have to note that, in spite of being correct in their assessments, our analytic colleagues know far from everything about the prospects of the Russian Arctic, which is a region of strategic importance for our development,” Sechin explained.
The resource potential of the Russian Arctic for future projects of Rosneft exceeds 20 billion tonnes of oil. “This evaluation includes projects both in the Kara Sea, where we can exceed 15 billion tonnes of reserves following the oncoming drilling, and to the north of Krasnoyarsk region, where great discoveries and vast projects await that will significantly impact the global oil industry,” Sechin told.
“As my colleagues from BP we have joint Taimyr projects with already know, recently the subsoil users of this region, particularly in Payakha group of fields, obtained outstanding productivity results of exploratory drilling bordering with the highest flow rates ever registered in Russia and Saudi Arabia - 720 tonnes per day on a 3 mm carbine. According to our conservative estimates, onshore reserves of the north of Krasnoyarsk region reach 5 billion tonnes”- Igor Sechin stated.
According to him, Rosneft has already reported the country’s leadership about these results and received support for implementation of this project. We are talking about development of an integral project including resource base and infrastructure of the operating Vankorskoye, Suzunskoye and Tagulskoye fields and a number of new major projects located to the north from Vankor, particularly Payakha cluster in West Irkinsky area.
“At the moment we are working with the Russian Government to build a legal framework for a system of investment stimulus providing margin and global competitiveness of Arctic oil cluster that will become the main source of load flow of the Northeast Passage and will loudly announce itself in the world market in the coming years” - Igor Sechin stated.
As far as financial and industrial indicators are concerned, Rosneft has come a long way and today is certainly one of the world energy leaders. As an example Sechin showed the dynamics of Rosneft development for the last 20 years.
“Hydrocarbon production of the Company rose by 17 times and reached 286 mmt of oil equivalent. The Company stake in the world oil production increased from 0.4% to 6%. Total revenues increased by over 240 times, investments - by 160 times. Rosneft’s every 12th rouble is invested in Russia today. Rosneft’s share of the industrial GDP in Russia exceeds 15%. Rosneft’s tax payments are crucial for society. At the moment, Rosneft’s annual mineral extraction tax alone amounts to 16,000 roubles per citizen in Russia,” Sechin told.
“Last year, I already noted an excellent opportunity to increase the efficiency of interaction with the state on an illustrative example of tax changes and continuous operation at the largest Samotlor field. It has been just a year but the provided stimuli have already yielded results! Due to the increase in production in 2018 following the provision of the benefits, the budget received an additional over 20 billion roubles, and this does not take into account the increase in profitability for shareholders, of which the Government of the Russian Federation is the controlling one. The trend of the field’s output declining by 5% annually has been reversed,” Sechin explained.
According to him, with this in mind, the Company is completing work with the Ministry of Finance of the Russian Federation to create investment incentives for large projects both in Western Siberia and in new strategic regions that will provide promising production and strengthen the country’s position in world markets in the coming decades.
“In the current challenging situation, it is more important than ever to oppose non-market instruments with effective cooperation and mutually beneficial cooperation,” Igor Sechin emphasised. “I also do not exclude that the appearance of the global industry may change - with the possible retirement from the industry of those companies that do not possess the above characteristics. As for Rosneft, I am sure that “everything that does not kill us makes us stronger”, so during our discussion, I ask you not to forget about the long way that industry leaders have gone, despite tactical challenges, geopolitical and price volatility. In real life, the Golden Era can be truly golden only for all market participants as one,” the Head of Rosneft concluded.
Speech of I.I. Sechin on the Energy Panel
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