CERAWeek 2015 Keynote: Managing Through the Cycle (Global Energy Dialogue)

In Monday evening's "Global Energy Dialogue," OAO LUKOIL President Vagit Alekperov discussing the current low oil price as an opportunity for industry wide evolution operationally as well as a driving force behind decreased resource nationalism. Mr. Alekperov's speech was followed by a frank dialogue with IHS Vice Chairman and CERAWeek Conference Chairman Daniel Yergin which focused on the effects that current international sanctions would have on the Russian oil industry, Russia's significant shale oil potential, and the possibility of a decline in resource nationalism across the globe.

Mr. Alekperov's speech focused on how the industry can master the challenges presented by the current low oil prices. In his view, the industry cannot expect a rebound in demand to lead to a price rebound as growth in China and in Asia overall begins to slow. Mr. Alekperov said he expects that oil will not be more than $75 per barrel in the medium term and that this low price will present serious challenges to offshore, deepwater, and oil sands projects. He highlighted that it was critically important that the industry's biggest operators and investors take this opportunity to evolve, diversifying operations and exercising greater cost controls in order to be in the vanguard of changes that the current oil price environment will undoubtedly bring. He said that a wave of merger and acquisition activity would also play an important role in driving increased efficiency in the industry and that the recent deal between Shell and BG Group would certainly not be the last.

One point touched on repeatedly in Mr. Alekperov's prepared remarks as well as in the dialogue with Dr. Yergin was Mr. Alekperov's belief that given the low oil price environment resource nationalism will be of decreasing importance, and governments will demonstrate greater flexibility in attracting foreign investment. When asked by Dr. Yergin to provide examples, Mr. Alekperov highlighted Mexico's recent reforms that open up investment opportunities, which his company is considering. Mr. Alekperov highlighted the importance of this shift in sentiment in some nations as LUKOIL continues to deliberately pursue exploration and development opportunities outside of Russia.

On the effects of international sanctions on Russian crude oil production, Mr. Alekperov was extremely forthright. He stated that the effect of sanctions has been twofold. As Russia's sovereign rating has been downgraded, access to investment capital has been reduced, making it difficult to develop some projects. Additionally the loss of access to advanced drilling technologies is an impediment to developing projects. While he foresees Russian crude production remaining stable in the short term, he does expect it to fall in the medium term as planned projects, particularly in the Artic, are not brought on. This will eventually be corrected, however, either as sanctions are lifted and access to necessary technology is restored or as domestic development of the required technology is successful.

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By Ashley Petersen April 20, 2015

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.