Oil:

OPEC President Edmund Daukoru discusses oil prices, potential supply threats

The Organization of the Petroleum Exporting Countries will meet in Vienna, Austria, this week to decide whether to maintain current levels of oil production, amid the the threat of supply disruptions in Iran and Nigeria. During today's OnPoint, OPEC President Edmund Daukoru explains why he thinks $60 per barrel is a "fair" price for oil, and why prices are unlikely to fall much further. Daukoru, the minister of state for petroleum resources for Nigeria, also addresses the rebel insurgency in his own country and questions about whether Iran will continue to supply the market as diplomats work towards a deal on nuclear power.

Transcript

Brian Stempeck: Hello and welcome to OnPoint. I'm Brian Stempeck. Joining me today is Dr. Edmund Daukoru. He's the president of OPEC, also the minister of State for Petroleum Resources for Nigeria. Dr. Daukoru, thank you so much for being here today.

Edmund Daukoru: Thank you, thank you.

Brian Stempeck: Now you said, in an interview recently, that you think the price of $60 per barrel of oil is a quote, "fair price" for oil. Why do you think that is?

Edmund Daukoru: Because it is obtaining in a market that is well supplied. So we cannot assume that it is because of a constrained market. If the market is well supplied the price that prevails then has to be regarded as fair. Second index is to see it against a background of the huge development costs that are attendant on added new capacity. We also have to see it in terms of the strength of the dollar, which actually has lost about 30 percent of value over the past two years. We, again, have to compare that with the cost of alternatives. What would it take to replace oil? And we are looking at about $70 before you can start to contemplate alternatives to oil. What impact does it have on global GDP growth? Hardly any at the price level of about $60, oddly enough at the mid $60s. In the past two years the impact on global GDP is negligible. At most, 1 percent impact on GDP growth. This year is looking as healthy in GDP growth as last year has been and the previous year has been. So if you wrap all these up, one has to come to the conclusion that it is not out of line with the underlying factors, market fundamentals.

Brian Stempeck: Now some OPEC members have suggested that when you have your meetings on March 8 you should actually have a production cut. I know the Venezuelan energy minister said that. Is that something you agree with?

Edmund Daukoru: I encourage, I would expect more OPEC members to make this decision before a major OPEC meeting. This is absolutely normal. We're like a fair debate, a healthy debate. And I hate to make pronouncements that will curtail that debate. We are best served when there is a diversity of views and we pool them together against the background of information available to make a decision that is best for market, best for producing countries, best for consumers.

Brian Stempeck: A lot of energy analysts, CEOs of energy companies we've spoken to have said that they don't think we're ever going to see a $20 or $30 barrel of oil ever again. Do you think that's the case? I mean how we pass a certain divide where we're not going to see oil return to the prices that we saw in the 1990s?

Edmund Daukoru: Yeah, actually I agree entirely, I don't think we'll get back to the $20s. It's a prediction. We can predict probably de facto on it, but it is not very likely that we'll get it back to the $20s.

Brian Stempeck: What do you see as the key factors that are driving that? Obviously people talk about demand from China, demand from developing countries, low refining capacity. What do you see as the key factors that are preventing us from ever going that low again?

Edmund Daukoru: We have to look at the prices also in real terms, not only in nominal terms. In real terms we are nowhere near the $80s and $90s that prevailed back in the mid-70s. In real terms the oil prices are still low, but added to that, indeed perceptions of the market that are not necessarily related to reality. We have to factor that in. The increase we are seeing is also in line with the overall growth in trade worldwide. That's been regular good economy recovery. And China has come in and they're consuming huge amounts of oil. The emergence of China has to be one of the factors. India has also come on board. These are the underlying issues, but mainly I think constraints of the downstream because refining capacity has not been added to for the past 30 years. The high capacity that was carried, excess of supply, excess of demand in the '70s has not also been added to. It's rather been run down. So that has added to perceptions of inadequacy in the upstream, which is actually in reality not true, but has led to perceptions of inadequacy to cope with sudden disruptions. All these factors have compounded the current behavior of prices.

Brian Stempeck: How do you think the security concerns are playing into today's price? Obviously there's concern about Iran and the talks between the Europeans there. Unrest in your own country, the proposed, you know, the planned attack on Saudi Arabia that was kind of foiled last week. How much of that do you think is affecting the price of oil? Is that $10 a barrel, $15 a barrel? How much of a security cost is there?

Edmund Daukoru: Geopolitical tensions always have, is an overlay on the underlying basic trends. The current situation is no exception to that. The oil never seems to be shut off by one incident or the other, it may be natural disasters, it may be a political face-off. Even mere political rhetoric, as is the case between Venezuela and the U.S., where that is just rhetoric, there is no actual action there, negative action on either side on the ground. But there are small volume traders who take advantage of these perceptions. Big players, you know, rather work on the business, or fundamentals on the business of long-term trends. But small players, you know, attract investors. You know there are flesh and blood investors. They take advantage of these geopolitical situations.

Brian Stempeck: I know that you've said that with the current situation in Iran you're optimistic that oil shipments from Iran will continue. But I mean as we've seen just today talks broke down between the European negotiators and the negotiators from Iran as well. Why are you so optimistic about that situation?

Edmund Daukoru: Well the Iranians themselves have said they were not going to use oil as a political tool. And I have no reason not to believe them. If they were so inclined, we would have started seeing the first signs in there. I don't see any signs that they are going to. They need the revenues anyway. Iran is said to be posturing a nuclear program. Nuclear programs are not cheap things. If really Iran is posturing nuclear programs, I am not to pronounce whether that is true or not. Even by that mere fact, they would need the revenues to back that up. It would not be in the interest of the Iranians to, at this point, use oil as a political tool. Purely from a rational point of view I don't see them doing it. But more especially, they themselves have said they are not going to use oil as a political tool. If discussions break down, we would hope that they are resumed speedily and that some resolution is arrived at.

Brian Stempeck: Do you think at all that Iran might be going down the same path as Iraq? I mean right now you have the U.N. Security Council poised to potentially act. There's a lot of talk about negotiations ongoing. What makes this situation different from what we saw happen with Iraq three years ago?

Edmund Daukoru: It's difficult for me to comment in depth. Really we're going beyond the area of oil and gas and energies, a completely different territory. But I can see a lot of similarities in the two situations. The Iraqi case was based on intelligence, some of which turned out to be not correct, but was seen at the time to be persuasive. The Iran case, the position of the stand of Iranians themselves doesn't leave any room for speculation about undertaking. It is the motives that are subject of debate. Iran has made the point that they are embarking on this program for energy generation only. So it's a different set of motives, rather than actual difference of physical what's on the ground. In the Iraqi case intelligence turned out to be partly not true, but at the time believed to be true. In the Iranian case the hardware, what's on ground, is not the issue. It is motives that are the issue.

Brian Stempeck: Turning to what happened in Saudi Arabia recently and also in your own country with an insurgency attack, still cutting off, I believe, 20 percent of the oil exports from Nigeria. What steps do you think need to be taken to improve security? Obviously this is a fast growing issue. And how much is that affecting the price right now?

Edmund Daukoru: Yeah, I think it is exaggerated. We class them as community problems in the global context of community problems. That is where we always characterize them. The scale of the defied production is more than we have experienced in the past, but as soon as the host of these are out of the way, my calculation and based on what I have been given to understand by Shell is that production can be back within two weeks. At least immediately about half of it can be back, 75 percent can be back quickly because it was shut down only pre-emptively in order not to expose human lives to danger. So it will be dealt with as part of the long-term development program of the Niger Delta, for which government has robust plans. As an intervention the Yangtze, and this administration of Olusegun Obasanjo, has done much more than all of the administrations before it. So basically the efforts will continue. It's not overnight, but we have to also dialogue with the younger generation who are impatient of change and believe that things could be faster. We have to persuade them that at least some of those programs are long-term in nature. We can do what is possible now, but a number of the programs that are in place for major infrastructure are really long-term in nature. Even if the first steps are taken they will not be ready for the next five years. This has to be brought across. We're trying everything we can to get this across.

Brian Stempeck: President Obasanjo in your country is up for re-election this year. And the insurgents have basically threatened more attacks. They say they want to take out the entire oil infrastructure system. Do you take them at their word or do you think this is something that can be put down more easily than that?

Edmund Daukoru: Yeah, I think it's a negotiating tactic. That every day the policy takers come across, they up the ante. They add more things to their list of demands. But I'm optimistic that they don't intend any harm for the hostages. They just want to draw attention to their problems. But the warning that has to be given to them is that they also expose themselves to a situation where other people with less noble intentions can hijack the thing and then engage in criminal activities. So if it is well meant the challenge for them will be to prove that there are no criminal aspects of it. If there is any criminal aspect a responsible government has to deal with the criminal aspect. And that's an issue that they will have to, on which they will have to convince the wider world.

Brian Stempeck: I want to you to turn to one of the other major trends it's happening right now. We're seeing a lot of countries basically shut their doors to private investment. A country like Venezuela that wants to deal with its own state-owned oil company. What does that mean for OPEC in the future and for the world oil markets?

Edmund Daukoru: Well yeah, private investment is very much needed because the levels of investments required to see clearly future, the energy future, are huge, absolutely huge. Calculations have been made, I don't want to show you with figures, but they run into the trillions, you know, in the long-term to carry adequate capacity that is credible as well as to keep open demand, you know? You meet demand, but you need to carry credible excess capacity. And this is all a very, very huge cost. Now governments are in the business of laying and enabling conditions and making policies, but it is the private sector that has to lead. And this is part of the reason I'm here, to make the point that OPEC countries are good for investment. Oil and gas will be around with us for a long, long time. The Gulf of Guinea specifically, as minister of state for Nigeria I can't help but draw attention to the huge investment potentials in the Gulf of Guinea. And it is private investment that has to do it. The government has all research responsibilities and can only lay down the enabling conditions for investment. And this is part of the message I bring here.

Brian Stempeck: Your country has been working with China in terms of some of the offshore oil and gas development in particular. What do you see as, I guess, the pros and cons of having China come in? We had the former ambassador of Nigeria on our show recently and he was talking about the idea that while the Chinese are helping you build this infrastructure and investing in hospitals and schools and things like that. At the same time they're not necessarily creating a lot of new jobs and they're bringing in Chinese goods. They're actually undercutting your own economy. How would you react to that?

Edmund Daukoru: I cannot judge from what I have not seen. The Nigerian arrangement has a lot of safeguards against abuse of the opportunity for trade and cooperation between the two countries. They are billed to take over one of the existing government-owned refineries as a core investor. They started making surveys of the refineries and will move forward with that. We package that against our wall of fire blocks. The value is set by market forces. So there is still a block for other players in the oil sector. But if the programs, downstream programs fail, government has recourse to taking the blocks back or revoking the licenses. Now you may also have heard an announcement of Chinese buying into an existing indigenous venture. The block was awarded to a Nigerian citizen who took on the mantle of operatorship for the block in partnership with Total Aero fund with PetroGraz. But it's a huge responsibility on his shoulders to have to also fund the 50 percent government share in the venture, on a production sharing basis. Where you spend first and recover your costs from production. So he's brought the Chinese as an ally on his side to be able to carry the funding costs.

Brian Stempeck: All right, we're out of time. Dr. Daukoru, thank you so much for being here today. We appreciate it.

Edmund Daukoru: You're most welcome. Thank you very much. I appreciate it too.

Brian Stempeck: I'm Brian Stempeck. This is OnPoint. Thanks for watching.

[End of Audio]

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