Chief Executive Officer of Rosneft Oil Company Igor Sechin has presented a keynote speech at the energy panel 'Global Energy Transformation' of the 24th St.Petersburg International Economic Forum.
The event arranged with support from Rosneft Oil Company was attended by Bernard Looney, Chief Executive Officer of BP; Neil Chapman, Senior Vice President of ExxonMobil; Dai Houliang, Chairman of CNPC and Chairman of PetroChina; Robert Dudley, Chairman of Oil and Gas Climate Initiative OGCI; Alok Kumar Gupta, Managing Director and Chief Executive Officer of ONGC Videsh; Lorenzo Simonelli, Chairman of the Board of Directors and Chief Executive Officer of Baker Hughes; Russel Hardy, Chief Executive Officer of Vitol; Jeremy Weir, Chairman of the Board of Directors and Chief Executive Officer of Trafigura; Ivan Glasenberg, Chief Executive Officer of Glencore; Jay Prior, Vice President for Business Development of Chevron, Rovnag Abdullaev, President of the State Oil Company of Azerbaijan Republic; Karin Kneissl, a new independent member of Rosneft Board of Directors and Karen Kostanyan, Managing Director, Head of Russian Research at Bank of America Merrill Lynch.
In his speech, the head of Rosneft provided a detailed analysis of the global economic situation amid the pandemic and drew the attention of the energy panel to the fact that market participants underestimated the risks of instability in the world.
According to him, sustainable energy development must rely upon a sound market competition of all types of energy generation, which guarantees the supply of clean and affordable energy to consumers and a minimal environmental footprint.
'We have, on numerous occasions, discussed with you the issue of instability risks' influence on the global markets, but such 'black swan' was not conceivable, including its swiftness, origination and implications. If previously we considered the overproduction, imperfect regulation and unilateral sanctions to be the main risks, now these factors turned out to be of lower priority in comparison with the universal disaster,' Igor Sechin noted. He said that the pandemic left no choice to anyone; all countries had to impose the quarantine restrictions, social distancing measures and to curb business activity. At the same time, the quarantine severity and duration, as well as the nature of support to economy considerably varied from country to country.
'The creation of vaccines raised hope for the occurrence of herd immunity and created an illusion of a rapid recovery from the crisis. However, the scale of the pandemic, the virus's capacity for mutation and the occurrence of new virus strains were understated by everybody, so the expectations of pandemic fast localization did not materialize,' Rosneft CEO noted.
According to him, in addition to the persisting risks, the world now sees some new risks: deteriorating traditional economic relations and closing domestic markets; judicial interference; regulatory policy focused on green energy subsidizing, and something that is very important - a dramatic change of the role of minority institutional investors, which are now influencing the development vector of entire industries. 'The new pandemic-triggered risks to be highlighted include an unprecedented reduction in consumption and business activity, which entails rapid deterioration of markets stability and creates, among other things, great challenges to the energy industry,' Sechin stressed.
He said that one of the outcomes of the pandemic is the regionalization of the markets, which appears to replace the globalism. 'Each country seeks its own ways, including ways out of the pandemic,' he explained. The situation has been exacerbated by the fact that the global economy issues have been accumulating over the past 20 years. 'These include debt, unemployment, widening social inequality and many others. The pandemic made these issues even worse,' Rosneft CEO noted.
As a result, an additional framework is being created for developing the multipolar world, establishing powerful regional hubs, enhancing the role of national currencies, Igor Sechin believes.
'The longer the pandemic lasts, the stronger regionalization sings we will see. Meanwhile, it is important to avoid confrontation, ensure a constructive dialog, and refrain from huge unproductive expenditures associated with something that results in producing 'guns before butter',' he emphasized.
Igor Sechin said that the pandemic became the key element that affects the life style and policy, making adjustments to the political agenda. 'It was the pandemic and the progress in countering it that ultimately predetermined the results of elections in USA. In the near future, we'll be able to see its contribution to the shift of the policy elites in other countries as well,' Sechin believes.
According to Rosneft CEO, the success achieved in countering the pandemic along with the mitigation of economic implications turn out to be competitive advantages of the countries that effectively respond to the changing external environment. 'An example of a country dynamically recovering from the crisis is China with their focus on the recovery of the real economy,' Sechin stated.
Chinese economy demonstrates robust recovery because of the set of actions aimed at minimizing the implications of the pandemic and the support to real production. Rosneft CEO noted that, based on 2020 results, the country's GDP grew by 2.3% and may recover to the pre-crisis level as soon as in 2021.
Along with China, India will become another locomotive of the global demand recovery. According to IMF's forecast, India will see a 7.7% GDP growth per annum over the next 5 years, while China's GDP will grow by 5.8% per annum. Demand for energy resources will be growing at outstripping rates in both countries.
Igor Sechin expressed his certainty that the plans of Honorable Prime Minister Shri Narendra Modi to improve energy availability to every citizen of the country will make India the key growth driver of the global demand for energy resources. At that, the Energy Concept of India rather than placing focus on one or two priority areas provides for well-balanced development of all energy sources - renewable energy, biofuels, gas, cleaner use of oil and coal, as well as the transition to new energy sources, including hydrogen.
'Referring to the image of India as a heavenward Sun god's chariot mentioned by Mr. Narendra, we could safely state that the development of Indian economy will make considerable influence on the image of global energy,' Rosneft CEO said.
At the same time, countries that were relatively less successful in fighting the coronavirus had to take additional actions to support their economies, which, along with certain positive effect, may have some long-term negative consequences, Igor Sechin noted in his speech.
This is exemplified by the monetary growth in USA. 'As we see, the US, unlike China, are stimulating the stock market rather than the real production. Inrush of funds to the stock market, which capitalization is already more than doubled the US GDP, may entail - as was the case more than once- a considerable correction comparable with a crash of dotcoms [first Internet companies] in early 2000s. Capitalization of a number of sectors is growing without the support of fundamental factors, thus creating risks to the global economy because of the 'bubbles' occurrence in the financial markets,' Rosneft CEO said.
Energy industry was among the first to suffer from the crisis and became one of the most seriously affected industries of the global economy last year, as it was hit by a one-two punch from a reduction of both demand and prices, Igor Sechin noted.
Based on the last year's performance results, the overall loss of 20 global public petroleum majors was $33 billion, as compared to $242 billion of profit they generated in 2019. In particular, Saudi Aramco showed a decline in profits. In order to support the socioeconomic and budget stability, Saudi Arabia has to spend its forex reserves and is considering an option of privatization of another 1% stake in their national company. Besides, Aramco itself is taking actions to invite investments, including the sale of stakes in their producing assets.
Major shale companies of US suffered no smaller losses, which exceeded $60 billion in 2020. Regardless of the started oil prices reflation, the industry failed to recover from losses. At that, the need to compensate the accumulated losses objectively result in the aggregation and consolidation across the industry: major operators acquire smaller companies and launch a more balanced policy aimed at achieving cost reductions rather than production growth.
A number of European majors are setting goals for transformation from petroleum companies to diversified energy companies. The intention is to achieve the above goals particularly by reducing the hydrocarbon production, which will help them achieve the carbon neutrality. A reduction in oil and gas production by majors, along with the inability to supply sufficient scopes of solar and wind energy to the market may lead to a new wave of mergers. Rosneft CEO believes that consolidation of majors would enable increasing investments in energy transformation, enhancing their competitive positions and improving their bankability.
STABILITY OF OIL SUPPLY AT RISK
With the growing scale of vaccination and reducing impact of the pandemic on the global economy, the demand for oil will recover and we have to be prepared for that, Igor Sechin said in his report.
The demand for energy will keep growing, and new waves of virus disease can only slow down this process, but these cannot stop it, Rosneft CEO said. Nevertheless, the long-term stability of oil supplies is at risk due to underinvestment. This is due to both requirements of various stakeholders to completely cease investments in the petroleum sector and the aspirations of majors to increase shareholder value and shareholder returns through stronger dividend payout and share buyback.
As a result, oil and gas reserves additions have been at their historical minimum over the past years, so that certain deficit of resources can already be forecast. 'This trend may become a 'new norm' for global majors and result in resource base depletion. The world runs the risk of facing an acute deficit of oil and gas,' Igor Sechin said.
A similar scenario has already taken place in the metallurgical industry. The major producers of iron ore understated the demand, and the resulted underinvestment in the industry caused the deficit and have actually doubled iron ore prices by now.
Following these events, CITIBANK made a statement in their report that humankind understates the importance and value of oil and gas for the global economy, Rosneft CEO said. According to the Bank, the current contribution of petroleum companies to the global GDP for the first time exceeded their share in the overall capitalization of the global market. 'That is, the value the petroleum industry creates for the world exceeds the scope of investments it receives. The world consumes oil, but is not ready to invest in it,' Igor Sechin said
THE PROBLEM OF INTERFUEL COMPETITION
Igor Sechin noted that the world is at the crossroads because of the strategic issue of interfuel competition. According to him, the so-called 'green' energy is already a significant force. It became especially visible during the period of oil market volatility last year when the capitalization profile of green companies considerably outpaced the performance of both petroleum majors and the market in general.
The Asia-Pacific Region becomes a development locomotive of renewable energy, given that its renewable energy capacity gains have been several folds higher than that of Europe and the USA over the past 10 years. According to analysts, this trend is going to remain over the next 10 years. This is going to be a well-balanced growth that will take place at the same time with the development of conventional energy.
'It is important that the continued motivation of the green energy industry does not substitute its actual economic efficiency,' Rosneft CEO said.
Thus, the subsidizing of wind and solar energy generation, which saw a 5-fold increase in EU over the 10-year period and actually reached 50 billion Euros per annum, while its scope of generation increased only 3.6 times over the same period. At the same time, despite considerable investments, the renewable energy sector has not become a meaningful reserve of global economic development.
A major challenge has been the lack of technology needed to implement plans for energy transformation and the transition to a low-carbon economy. According to IEA, about half of the low carbon energy technologies that currently undergo development will only reach the stage of prototypes or pilot projects by 2050. Even by 2070, 30% of such technologies will still require fine-tuning, hence, investments, prior to launching their commercial operation.
It will take decades to develop commercial cost-effective technologies. At the same time, the above means a strong demand for investments: according to IEA, it is about $4 trillion per annum, which is equivalent to 4% of the global GDP.
Moreover, new technologies will require a multiplication of the production of certain metals. In May this year, IEA assessed the growth of the global demand for metals required for the growing EV production and power storage: the demand for lithium will see a more than 40-fold increase, the demand for cobalt and nickel will increase about 20-fold by 2040.
Such a considerable growth invites doubts about the sufficiency of the current resources, or investments in exploration and production of these metals. At that, the production of about 80% of ore minerals required for the above metals is either monopolized or located in unstable regions, whilst processing capacities are concentrated in a very limited number of countries, Sechin emphasized.
Increased demand will inevitably lead to prices skyrocketing. At this, IEA notes that if the prices for nickel and lithium double in size, this will work off the anticipated reduction in the unit cost of battery production associated with the doubled production scope.
As a result, the low cost-effectiveness of low-carbon solutions places an additional burden on the consumer. Having received a preferential access to the power grids, generating companies are shoving the burden of their high costs, particularly associated with redundancy, to ordinary consumers, by way of increasing the tariffs. Green tariffs are quite often overstated unreasonably due to the need for repaying the growing debt of the companies generating so-called 'green' energy.
Igor Sechin believes that the speedy energy transition proclaimed by some environmentalists and politicians firstly requires the implementation of renewable energy sources at such high pace that is unrealistic, and secondly, brings up the issues of storage, and assurance of generation reliability and stability.
For instance, the alternative energy's instability was vividly evident in Texas in February, where the impeller blades were failing, the solar panels being snow-bound, and the gas prices skyrocketing.
'This example yet again proves the point that we have tried to communicate on numerous occasions, about the need for developing the energy industry in a balanced manner, avoiding placing focus only on the alternative generation, and about extremely high costs associated with ensuring stable supplies of wind and solar energy,' Rosneft CEO said.
According to some assessments, American consumers have already overpaid $125 billion for electric energy because of the state policy promoting the renewable energy sources.
A dramatic shift of the American energy policy towards renewable energy sources triggered criticism from Congress. The US Administration is abusing its powers and being guided by rather coercive than legal principles in their attempts to 'hinder energy companies' access to financial resources'. These actions distort the tasks of financial regulators and harm investors by casting doubt on the quality and reliability of the reporting standards and the information disclosing system under SEC Standards, Sechin explained.
Thus, new tools emerge and behavioral models are created that enable manipulating the price of shares. 'The question remains open, as to which interests are such investors guided by. Do they have a hidden agenda of making money on the shares market volatility by creating negative publicity May they ultimately aim at forcing management of the companies to buy shares from them at a higher price, to avoid the counteraction and pressure from so-called greenmailers' Rosneft CEO wondered.
An implication of such pressure is majors' exit from a number of petroleum projects; over the past 3 years, they divested assets for the amount in excess of $70 billion.
The public status of the global majors puts them into a position where they have no mandate not only for development but also for sustain. At the same time, this plays into the hands of unregulated market players and provides new impetus to national companies, which will be able to fill the niche, Sechin believes. 'National companies are more insistent in achieving the strategic goals and ensuring the market stability. Objectively, the state-run companies and nonpublic companies are less dependent today from the stock market's volatile mood,' Rosneft CEO said.
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