March 13, 2017

Energy Roundtable with Ibrahim Al-Muhanna

March 10, 2017

As part of its new energy roundtable series, AGSIW hosted a discussion with Ibrahim Al-Muhanna, former advisor to the minister of energy, industry, and mineral resources of Saudi Arabia. International oil markets have entered an unprecedented era of change following the extraordinary rise of technology-driven shale oil production in the United States, and the deep decline in global energy prices to which it has contributed. Al-Muhanna addressed OPEC policy, cooperation with other oil producing countries, and the outlook for the international oil market.

Al-Muhanna focused his remarks on the OPEC and non-OPEC production cut agreement, which took effect January 1, and its impact on the oil market. He noted that there was a great deal of commitment between OPEC and non-OPEC countries to adhere to the new accord but acknowledged that there was uneven compliance by some countries, which is expected to improve.

At numerous meetings during CERAWeek in Houston March 3-10, Al-Muhanna said oil ministers from both OPEC and non-OPEC countries, including Saudi Arabia, the United Arab Emirates, Nigeria, Iraq, Russia, and Mexico, stressed the need for coordination and reaffirmed their commitment to new lower  production targets to hasten the rebalancing of oversupplied markets. He agreed that the market remains skeptical that they will achieve their new output targets and acknowledged that “sometimes they fail, but occasionally they get good results. It takes a great amount of time, effort and, above all, leadership to succeed.”

Al-Muhanna argued that the oil industry needs leadership and an anchor group to take action during times of an oil price crisis and oversupply in oil markets, whether triggered by a global economic slowdown, or most recently the unforeseen advent of technology-driven shale oil, to mitigate the damage to world economies. It was the case with the Texas Railroad Commission, the Seven Sisters, and OPEC. Today, it is a new club of OPEC and non-OPEC producers.

He suggested the latest agreement will be a success because it has six key ingredients, including:

  • Persistently, distorted oil markets marked by oversupply and low oil prices that cannot be managed by OPEC alone
  • Participating countries that are severely affected by the negative economic impact of oversupply and prolonged lower oil prices; their shared economic pain is a uniting factor
  • Political understanding at the highest government level with a willingness to take coordinated action
  • Goodwill and political support among the leaders of the countries heading up the effort
  • A small number of countries willing to take a leading role and make the necessary arrangements
  • Energy ministers with a clear mandate to make a deal and who clearly understand the issues acting on good faith with good personal relationships

There was a great deal of discussion during the roundtable about the stronger and earlier-than-expected rebound in shale oil production, which could slow the rebalancing. Al-Muhanna noted that the market was being misled by the large inland builds in U.S. commercial stocks and argued that global oil stocks are declining, with floating storage at sea significantly drawn down over the past month. He also added that lower Gulf Arab supplies since January will be reflected in import arrivals in April given internal pipeline transit and sailing times of around 60 days. “We need a bit more time to see the full impact of the OPEC and non-OPEC cuts on U.S. and global inventories,” he said.

Discussions also focused on the need for OPEC and non-OPEC producers to extend the production cut agreement to the second half of the year given the unexpected string rebound in shale output. Al-Muhanna said this issue will be looked at during the meeting of the ministerial monitoring committee in Kuwait on March 26 and will be decided at the May 25 OPEC meeting.

Ibrahim Al-Muhanna has had a distinguished career in academia and public service. From 1989 to 2017 he served as advisor to the minister of energy, industry, and mineral resources of the Kingdom of Saudi Arabia. In addition, he was a member of a small team that established an independent research and information center in Saudi Arabia that led to the creation of the King Abdullah Petroleum Studies and Research Center in 2010.

Al-Muhanna retired from the ministry in 2017 and established a new Riyadh-based energy consulting firm, Saudi Energy Consultants. Throughout his career, Al-Muhanna has written, in both Arabic and English, on a wide range of energy, economic, political, and communications issues for news and academic journals. Al-Muhanna has a PhD in international relations from American University in Washington, DC.

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