Dec. 2001 Vol. 222 No. 12  International

Kurt S. Abraham,  Managing/International Editor

Arabian Gulf producers feel post-September price sting

Once again, that tried and true saying, "What goes up must come down," is particularly applicable to global oil prices. Compared to late 2000, when the average price for OPEC’s market basket of crudes was hovering near $30/bbl, the rate today is only about $20/bbl. At least half of that decline has come just since the September 11 terrorist attacks on the U.S. Indeed, OPEC’s reference price in early November tumbled below $19/bbl for the first time since July 1999.

The drastic drop prompted reports that OPEC would cut the group’s output quota by 1.5 million bopd when members met in mid-November in Vienna. Regardless of whether that cut is achieved and takes effect this month, the truth is that this organization cannot completely rescue prices on its own. There will have to be some output discipline exerted by Russia and other non-OPEC producers.

Furthermore, the damage from falling prices and weakening industrial economies has already been inflicted on E&P activity levels worldwide and the finances of key Middle Eastern countries. What is happening to the latter category should give readers pause for thought, considering the tug-of-war between the "have-nots" of Osama bin Laden and the "haves" of some Arab monarchies. After a two-year run of oil revenue windfalls, the so-called petromonarchies have found their economic development programs put at risk by the sudden price drop.

A prime example is Saudi Arabia, where the kingdom during 2000 recorded its first annual budget surplus in 17 years, thanks to high oil prices. If the current decline in rates continues much longer, it will push Saudi’s budget back into the red. This is not healthy, when the state budget accounts for about one-third of an estimated, $170-billion gross domestic product (GDP). In an interview distributed widely among regional newspapers, Saudi economist Ihsan Bu Halaiga said, "It will affect government spending on social programs, health programs, education and poverty reduction programs. And when the economy goes down, you cannot ask for more taxes and fees." Such misfortunes are exactly the issues that bin Laden likes to exploit when trying to convert young minds to his brand of extremism.

The effect on other monarchies, like Kuwait, UAE and Qatar, as well as on Iran, is likely to be significant next year. In all cases, these countries are burdened with high population growth rates (with high proportions of their citizens under 25 years old), soaring energy usage and dependence on oil to generate 70% or more of state revenues. In Iran, each $1 drop in oil prices costs the country nearly $1 billion in lost revenue. Nevertheless, because prices remained near $25/bbl for most of this year before September 11, Gulf region budgets should finish 2001 in decent shape, with small surpluses in some cases. The main effect will come after Jan. 1, 2002, and consequences may be harsh, said Bu Halaiga. "OPEC needs to shoot for $25/bbl, but it cannot move now, because it will be perceived as taking advantage of a war situation. We can hope that things improve as of the second quarter of next year."

Following discovery wells in the eastern and western halves of Kazakhstan’s Kashagan field, the first appraisal well has also struck significant pay.

Kashagan East 2 is a hit. On the Kashagan structure, 75 km (47 mi) south of Atyrau, Offshore Kazakhstan International Operating Co. (OKIOC) has successfully drilled and tested the Kashagan East 2 appraisal. Drilled to a 4,142-m (13,590-ft) TD, the well flowed 7,400 bopd, within constraints applied to the test. This is the third well drilled in the field, discovered last year by the Kashagan East 1 wildcat. Parker Drilling’s Rig 257 will continue an appraisal drilling campaign in the eastern portion of Kashagan field, to fully assess the reservoir’s potential.

Dutch gas find struck offshore. Conoco’s subsidiary, Clyde Petroleum Exploratie, hit a significant natural gas discovery that extends over two blocks in the Dutch North Sea. The Q4-10 find represents the seventh commercial discovery that the firm has drilled offshore the Netherlands within the last three years. The well tested at an unstimulated rate of 43 MMcfgd, gross, and 19.55 MMcfgd, net, from a lower 56-m (184-ft) perforated interval. It also flowed separately from an upper 40-m (131-ft) interval at a rate of 39 MMcfgd, gross, and 17.7 MMcfgd, net. The site is only 6 mi from Clyde-operated production and pipeline facilities.

Correction. Back in our September issue, this page featured a discussion of the world’s oldest producing oil well in Pennsylvania. Unfortunately, we gave credit for the McClintock No. 1’s recent rehabilitation to the wrong group of independent producer volunteers. Members of the Pennsylvania Independent Petroleum Producers, not the Independent Oil & Gas Association of Pennsylvania, are the folks that assisted with the project. By the way, the director of the Drake Well Museum that oversees McClintock No. 1, Barbara Zolli, has asked us to relay her thanks to our many readers that have bought bottles of the well’s oil or offered other financial support to the project since this column was published.

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