1. OPEC Behaviour and IOC strategy Professor Paul Stevens Distinguished Fellow, Chatham House Professor Emeritus, University of Dundee Visiting Professor, University College London (Australia) Distinguished Fellow, Institute of Energy Economics, Japan Petroleum Market Fundamentals and Risk IAEE 39 th Annual conference Bergen 20 June 2016

2. Chatham House | The Royal Institute of International Affairs 2 Presentation outline What has OPEC behaviour been? The current state of the oil market? Future state of the oil market IOC Strategies? NOC Strategies? Implications for OPEC behaviour? Will OPEC need to assert control? Can OPEC assert control?

3. Chatham House | The Royal Institute of International Affairs3 What has OPEC behaviour been? OPEC’s objective has always been defence of price September 1960 Resolution Needed a controlled market because of the tendency to create excess capacity Presence of economic rent Tendency to consensus “Accidents” Spare capacity mostly unintended except post-1985: Saudi strategy Record of control: mixed Currently???

4. Chatham House | The Royal Institute of International Affairs 4 Current State of the oil market (1) Since June 2014 oil prices have collapsed. Caused by uncontrolled spare capacity arising from “OPEC’s Dilemma” and the shale technology revolution leading to record inventories November 2014: the OPEC meeting launched prices onto a competitive market. First time since 16 September 1928 – Achnacarry agreement Not an OPEC response – a Saudi response: unwilling to act as “swing producer” Arguably no choice –legacy of 1980-85 Forget conspiracy theories: simply wanted the supply curve to go the right way = collateral damage?

5. Chatham House | The Royal Institute of International Affairs5 Current State of the oil market (2) Is the Saudi strategy beginning to work? Inventories falling (?) US tight oil supply falling Prices beginning to rise since January “Dead cat bounce” ? Demand recovery – how much strategic stock building outside OECD? Outages – Canada, Iraq, Libya, Iran(?) etc. BUT Took a lot longer than expected break-even versus shut-in prices AND there is a price ceiling “Fracklog” Increased price elasticity of supply plus shorter lead times July 2015 June 2016

6. Chatham House | The Royal Institute of International Affairs6 Two key questions for the future: 1. Will spare capacity re-appear? 2. Can OPEC control any spare capacity? 1. Will spare capacity re-appear? Remember before, apart from Saudi Arabia’s policy post 1985 its emergence was unintended – Demand - uncertain State of global GDP? Impact of “OECD disease”? – Supply – very uncertain BUT will be the key to future spare capacity Behaviour of the IOCs? Behaviour of the NOCs?

7. Chatham House | The Royal Institute of International Affairs7 IOC strategies: Problems with the upstream Lost their technological edge Post 2008 financial markets have become anti large, long term, high risk projects Resource nationalism has limited access to low cost reserves Cash flow problems and maintaining the dividend; the unburnable carbon issue. How much are they likely to invest in the upstream?

8. Chatham House | The Royal Institute of International Affairs8 Behaviour of the NOCs OPEC countries need to increase q to offset a lower p But being starved of funds? Opening up of the upstream to FDI? Will become very competitive given trying to attract the contracting investment pot?

9. Chatham House | The Royal Institute of International Affairs9 1. Will spare capacity re-appear? Current outages unlikely to be resolved soon IOC’s supply will probably be constrained NOC’s supply may also be constrained depending on their ability to attract FDI Will Saudi Arabia deliberately maintain spare capacity? Ultimately as spare capacity hovers around the danger zone: Prospects for a price spike are greater?

10. Chatham House | The Royal Institute of International Affairs10 2. Will OPEC be able to control any spare capacity? February: production cap agreement: Russia, Venezuela and Qatar – meaningless April in Doha: failed Given the state of Saudi-Iranian relations any agreement is extremely unlikely. Overall conclusion: Oil prices will experience ever greater volatility as the result of a competitive market

11. THANK YOU FOR YOUR ATTENTION pstevens@chathamhouse.org