International Politics
Will Gulf states live up to EIA and IEA projections?Either EIA & IEA projections are wrong, or a crisis appears to be imminent. The World Energy Outlook 2000, compiled by the U.S. Energy Information Administration (EIA), and the International Energy Outlook 2001, authored by the International Energy Agency (IEA), indicate that oil production in the Arabian Gulf states must almost double by year 2020 to meet rising world demand. The EIA outlook states, "The reference case projection implies aggressive efforts by OPEC member-nations to apply or attract investment capital, to implement a wide range of production capacity expansion. However, the combination of potential profitability and the threat of competition from non-OPEC supplies argues for the pursuit of an aggressive expansion strategy." The reference case requires Gulf states to increase their oil production 80% by 2020. This means adding about 13 million bopd by 2020 – with Saudi Arabia increasing its capacity by more than 7 million bopd, to about 17 million bopd. This seems highly unrealistic. So, either EIA & IEA are wrong, or a supply crisis is coming, because Saudi Arabia and its neighbors cannot increase production by 80% for many technical, financial and political reasons. Mistaken projections. Two recent studies by prominent oil market experts Guy Caruso (Center for Strategic and International Studies, Washington) and Prof. Deromt Gately (New York University) show that such EIA and IEA projections are wrong. In his study, "How likely is the consensus projection of oil production doubling in the Persian Gulf?", Gately states, "Such projections are not based on behavioral analysis of Gulf countries’ decisions. They are merely the calculated residual demand for OPEC oil, the difference between projected world oil demand and non-OPEC oil supply." He continues to criticize EIA’s projection model. "Their projections exhibit only minimal price responsiveness," said Gately, "which leads to the conclusion that the underlying model is internally inconsistent. . . . Given that OPEC’s oil production capacity has not changed significantly in a quarter-century, it seems unreasonable to expect that it would now double within two decades." What if demand projections are correct? Will Gulf states double their collective oil capacity by 2020? The answer is no, for several reasons, including a lack of economic benefits, lack of capital and foreign investment, a shift toward focusing on natural gas, and Saudi Aramco’s own dominant plans. No economic benefits. What are the benefits from expanding capacity? Gulf states may earn the same amount of revenue, or more, by selling less oil for higher prices. Gately points out that these countries will expand capacity only if they benefit from it, and only if aggressive output expansion makes them significantly better off economically. He concludes, "Modest output growth will do just about as well as aggressive growth. Such rapid expansion of capacity is not profitable for Saudi Arabia and its neighbors." Lack of capital and foreign investment. Adding 13 million bopd to capacity requires an investment of more than $100 billion, and Gulf states cannot afford such a high level. The EIA realized this fact and suggested that these states embrace foreign investment. Given various scenarios of Gulf geopolitics and economics, foreign investment in the oil sector will NOT take place in the next two decades – it just does not make sense. Additionally, it took three years before foreign operators were allowed to sign memorandums of understanding with Saudi Arabia, to invest in the gas sector. It will take many more years for these projects to materialize – one can imagine how long it will take for projects to begin, if Gulf states open their oil sectors. The focus is on gas. Meanwhile, national oil companies in the region are focusing on natural gas, not oil. OPEC’s growing population – especially in the Gulf, where almost half of the population is children – translates into rapid growth in domestic energy demand. State firms are forced to find another source, such as natural gas, to meet this demand. Otherwise, their oil exports will decrease constantly. In addition, state firms are racing against time to make sure that they will get the lion’s share of gas projects before international majors step in. As an example, Saudi Aramco plans to invest $45 billion on gas projects for the next 25 years. Aramco has its own plan. The new Saudi Aramco strategic plan calls for an oil production increase of 100,000 bpd annually for the next five years, to reach sustained output of 8.9 million bpd by 2006. The company utilizes the same method used by EIA and IEA – calculate demand and non-Saudi production, then calculate the call on Saudi oil. Based on this method, Aramco has estimated its production growth, which turns out to be at odds with EIA & IEA projections. New investment figures assembled by Aramco indicate that the firm wants to maintain 1.5 million bpd of excess crude capacity. This will result in productive capacity of around 10.5 million bopd in 2006 – the same historical figure that Aramco has tried to keep for the last 25 years! Recent reports indicate that Saudi Arabia is advancing two new projects that, together, could add about 1.5 million bpd of oil output capacity. The envisaged schemes – Qatif and Khurais fields – could add at least another one million bopd onto Saudi Aramco’s capacity over the next few years, once declines at other fields are taken into account. In conclusion, if demand projections are correct, most
of the growth will be met by an increase in non-OPEC production, which is more responsive to price signals
than OPEC. As for the EIA and IEA projections, they serve a dual purpose – functioning as a wake up call
and offering some one to blame when the market goes awry.  Dr. A. F. Alhajji is an award-winning assistant professor at Colorado School of Mines’ Division of Mineral Economics and author of the book, OPEC and the World Oil Market: An Alternative View. He is a regular contributor to this column. |
