Oct. 2000 Vol. 221 No. 10  International

Kurt S. Abraham,  Managing/International Editor

OPEC makes a lukewarm effort to mollify consuming nations

Responding to protests from major oil-consuming countries that crude prices rose too high, too fast, OPEC last month hiked its official production ceiling by 800,000 bopd, effective October 1. As the table on this page indicates, roughly half of the increase will come from Saudi Arabia and Iran. Iraqi output is not figured into the total, due to U.N. supervision of Iraq’s upstream sector.

The group’s last and deepest of three output cuts, 1.7 million bopd in March 1999, had brought production down to 22.992 million bopd. At that point, OPEC officially had pulled 4.316 million bopd off the global market. Beginning in March 2000, members have steadily added 3.208 million bopd back to the market via three specific hikes. Last March, 1.7 million bopd were added (effective April 1), returning OPEC production to the pre-March 1999 level. A second hike on June 21, 2000 (effective July 1) added 708,000 bopd. The final increase was last month’s addition of 800,000 bopd.

However, between the second and third increases, OPEC President Alí Rodríguez reminded his colleagues on July 17, that their June 21 accord contained a provision for adding 500,000 bopd, if the basket of reference prices remained too high for a specified time period. Based on information available, including public statements by the Saudis, it appears that Saudi Arabia added at least 250,000 bopd. Overall, OPEC may have added between 350,000 and 375,000 bopd before the September 11 increase. Yet, the group figured last month’s 800,000-bopd increase against the June 21 accord’s level, not against the interim nudge upward that Saudi Arabia appears to have initiated.

Thus, the real impact of OPEC’s latest increase is perhaps only 425,000 to 450,000 bopd. In any event, oil prices have not responded with the kind of downward movement that either Western leaders or OPEC ministers had hoped for. Nor have oil inventories in the U.S. and Europe returned to levels that one might expect for this time of year. In particular, data indicate that U.S. oil demand remains unusually strong, despite high prices. Given such results, one might conclude that A) Something is goofy about the global supply-and-demand figures; B) OPEC members are not producing as much as they say they are; and C) Oil traders’ skepticism about OPEC statements has finally "morphed" into lunatic-like behavior.

This editor suspects that a little of all three items is at work. How else to explain why WTI oil futures actually went up on the day after OPEC announced its latest output increase, finishing above $35/bbl? At what level traders will keep prices remains to be seen – it seems reasonable to believe that prices will stay at or slightly above $30/bbl for the rest of 2000. The chances that prices will drop into OPEC’s "price band" of $22 to $28/bbl and stay there seem slim at the moment. And forgive us for feeling a bit smug, but we did hint strongly in this column last month, that oil prices were headed substantially above $30, with $34 a likely landing point. Little did we know that the jump upward would happen so quickly and top out at over $35. Speaking of price bands, the article on page 131 by our contributing editor, Dr. A. F. Alhajji, offers an excellent explanation as to why OPEC’s price band is bound to fail.

Random notes. While media attention was focused on OPEC, Saudi Aramco did announce its eighth discovery under a stepped-up gas exploration effort around the southern tip of giant Ghawar field. Ghazal 1 originally tested 17 MMcfgd and 2,500 bcpd from a zone between 13,400 and 13,660 ft. However, a second zone was found and tested between 13,790 and 13,850 ft. Ghazal 1’s capacity is now estimated at 40 MMcfgd and 5,400 bcpd. Meanwhile, the kingdom shortlisted a dozen firms for bidding on previously announced gas development projects. The firms include BP, Chevron Conoco, ENI, Enron, ExxonMobil, Marathon, Occidental, Phillips, shell, Texaco and TotalFinaElf. Crown Prince Abdullah was due to meet with these firms late last month in New York.

   Kuwait did its own shortlisting for the highly coveted projects to develop the country’s northern oil fields. The Supreme Petroleum Council’s (SPC’s) list reportedly includes BP, Chevron, Conoco, ENI, ExxonMobil, Shell, Texaco and TotalFinaElf. The SPC was due to officially name the firms late last month, before the actual bidding process begins.

To the west, British Gas and Italy’s Edison struck a find offshore Egypt in the West Delta Deep Marine tract. The well tested about 35 MMcfgd and 1,100 bopd. It is the area’s ninth find in two years. Further west in Algeria, Sonatrach hit an oil and gas discovery at Hassi D’Zabat, in the eastern Sahara. As the area’s second find, it tested 1,253 bopd and 12.5 MMcfgd.

   China said that a large natural gas field was found in the northern Ordos basin, at Tabamiao, and reserves are estimated at about 350 Bcf of gas. Further appraisal is planned. Finally, China vehemently denied that it has mobilized tens of thousands of soldiers and prisoners to protect Chinese oil interests in Sudan from a never-ending civil war. The Foreign Ministry termed reports in London’s Sunday Telegraph, that China would support a Sudanese government offensive against southern rebels, as "absolutely ridiculous."