Valery Bessel: "OPEC deal must be extended"

OPEC meeting will be held in Vienna tomorrow. Extension of the agreement on oil production cuts, signed between the cartel and other oil producers six months ago, will be discussed. Today, OPEC+ monitoring committee recommended to extend the deal for 9 months instead of six months. The executive vice-president of NewTech Services, professor of the Gubkin Russian State University of Oil and Gas, Valery Bessel, spoke about the results of the first OPEC deal and prospects of its extension in an interview with Vestnik Kavkaza.

- How effective was the first OPEC deal?

- I really hope that this agreement will be an effective measure, but for the time being it seems like it's purpose is to create hype. About 87-90 million barrels of oil are produced every day in the world, and participants of the agreement cut their production by 1-1,5 million barrels per day (about 1.5%). In other words, it doesn't affect oil prices and balance of supply and demand significantly, although hype around it somewhat helps to maintain current prices. Overall, $50-60 per barrel is the comfortable level, which satisfies everyone, since it covers costs of oil production. Reports that Norway, Turkmenistan and Egypt will join the deal can affect markets only psychologically, since Turkmenistan, for example, produces only about 10 million tons of oil per year, which is a very small amount for the world market. At the same time, the United States increase oil production very quickly: if in 2013 America produced 449 million tons of oil, in 2015 it already produced 567 million tons. 

It should be mentioned that there's one more factor, which affects the oil prices, making them low in the long term. Refining capacity of China and the United States, two biggest economies in the world, is significantly higher than their production. Since refining industry produces products with high added value, it's preferable for them to use cheaper raw materials. Due to this, although it's necessary to generate hype, OPEC deal won't have any significant impact on oil prices in the long term.

- How did the situation in the oil markets chang after the deal was signed?

- In my opinion, production cuts weren't noticeable in any participating country. According to preliminary estimates, in 2016 Russia increased oil production by 7 million tons compared to 2015. Everyone increased production before the deal was signed, because even if prices are cheap, no country, especially large ones like Russia and Saudi Arabia, wants to leave the market: as soon as you cut oil supplies to any segment of the market, it's immediately taken away by competitors. It's especially true for the Middle East, for Iraq and Libya, whose supplies aren't controlled by anyone. This oil will reach the market, so everyone fight for their place in the markets.

- What conditions of OPEC's new deal are the most interesting for its participants?

- If the negotiations have already started and certain agreements were reached, they must continue. If we see some effect and we somehow influenced the dynamics of oil prices, we must try to continue this until the end. If we succeed - it will be great, if we won't succeed - we will have to think about other measures. In fact, oil prices will begin to grow only when the world economy grows. There's a stage of decline right now, that's why we see low prices - in order to achieve growth on a world scale it's necessary to either create a unique product, consumed by everyone, or enter a new region. There are certain optimistic expectations about Arctic. However, it can't be developed by one country, only by the entire progressive mankind, and this can lead to growth of the world economy, just like the development of Western Siberia at one time.

- Can we expect that OPEC deal will become more effective after new participants, like Norway, join it, considering the fact that the US and Canada won't participate in it? 

- Norway is by no means a leader in oil production. There are three leaders - Saudi Arabia, the United States and Russia, then China. Norway isn't even in the top ten. In my opinion, the fact that such countries join this deal is similar to participation in American coalition against Daesh, when one country sends two soldiers to protect post office, another one to protect train, but they don't fight against Daesh. The main thing is participation, and it works, the international community views such steps positively, so why not.

- Are there any other measures that oil producers could agree on in order to regulate the balance of supply and demand?

- I don't see these measures yet. Of course, prices will jump after any major local military conflict, but I really hope that it won't come to this. During peaceful time, China, for example, produces a little more than 200 million tons of oil per year and refines more than 500 million tons. It purchases the rest from Iran, other countries of the Middle East and Russia - Chine has no interest in increasing the costs of raw materials . That's why oil exporting countries can't influence anything. They're too small in the balance of world GDP: That's why even though negotiations are necessary, I wouldn't count on in their global and long-term success. 

At the same time, current prices are very comfortable for Russia: we have finally started to deal with the issues of innovative economy. Without this we would experience very big problems in 10-15 years. We would become second Saudi Arabia.Right now we began to create innovative models of equipment, and it's good that our young professionals are creating them, because we have a lot of talented guys, I can see this as a professor.