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Vol. 225 No. 9 |
| KURT S. ABRAHAM, MANAGING/INTERNATIONAL EDITOR |
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Oil prices test the global market's upper limits
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As geopolitical uncertainties have pushed oil prices to new record levels, industry analysts agree that the world's supply cushion has become perilously thin. Their consensus is that whether the amount of spare crude left to pump is 1 million bpd or a greater amount really does not matter. This is because the amount of actual production at risk is even greater. Thus, the mere threat of output disruptions in Iraq, Russia and Venezuela sent crude futures above $46/bbl for the first time on the New York Mercantile Exchange. On Aug. 13, the price of WTI crude surged to $46.58/bbl, an increase of $1.08. Although it set a new record, this price, on an inflation-adjusted basis, was still about $11 below the rate leading up to the first Gulf War. Saudi Arabia said it was willing to put an additional 1.3 million bopd on the market, virtually all of the country's available production. However, some analysts said that such a move would only point up the market's supply limitations.
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OPEC claims that its ability to affect oil prices is limited
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As oil prices climbed to new record levels, OPEC ministers insisted that there is little more that they can do to ease the supply crunch. In Jakarta, OPEC President Purnomo Yusgiantoro told reporters that with the exception of some limited spare capacity still held by Saudi Arabia, the cartel members are all producing at 100% of their capabilities. “There is no additional supply (beyond Saudi Arabia),” said Purnomo. “(Saudi) Minister (Ali) Naimi has said that Saudi Arabia can increase production, but they cannot do it immediately.” Indeed, there is also some controversy among experts as to whether the last Saudi supply cushion is 1.3 million bopd as claimed, or whether the amount is closer to just 1.0 million bopd.
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Chavez survives Venezuelan recall election
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For better or worse, some degree of stability is likely to return to OPEC member Venezuela, now that incumbent President Hugo Chavez has triumphed in a recall election. In the Aug. 15 referendum, Chavez secured 58% of the vote, a figure certified by an international poll-monitoring group led by former US President Jimmy Carter. An ecstatic Chavez wasted no time in bragging that the administration of US President George W. Bush must now deal with him on his terms. One thing that is likely not to happen is a disruption of Venezuelan oil production by unhappy opponents of Chavez, said Alberto Cisneros-Lavaller, President of Global Business Consultants and a senior associate at SEER, Inc. “Speculation that the vote could result in disruption to the country's oil exports represents a severe misreading of the situation in Venezuela and especially the national oil company, PDVSA,” said Cisneros-Lavaller. “The opposition lacks the means, and the loyalists the motivation, to shut down oil production.”
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Many acres of BLM land never see active production
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Even in this current era of high prices, the companies and individuals that own nearly 30 million acres of non-producing, US federal oil and gas leases have done little to transform them into active producers. Under the Freedom of Information Act, the Associated Press gained Bureau of Land Management (BLM) records that show 98% of more than 33,000 leases to be “non-producing” and to never have had an exploratory well drilled on them. Furthermore, 97% of these leases had never had a single application filed with BLM to drill a well. However, industry officials quickly pointed out that such numbers do not tell the complete story, because some non-producing leases have been combined with other leases into larger production units. In these units, exploration is actively underway. Furthermore, some of these units are already producing oil and/or gas. Even so, said AP, if these leases are discounted, there remain 26 million acres of federal land, equal to two-thirds of the total, that have never been explored.
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Ailing Shell girds itself for French bid
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Plagued by controversy over misleading reserve figures, Royal Dutch/ Shell at press time was bracing itself for a possible takeover bid. Shell executives conceded to the media that the firm was vulnerable to a predator. Their greatest fear was that French oil group Total would launch a raid. Total, the world's fourth-largest oil firm, was considered the only company capable of gaining regulatory approval for what would be a giant merger. Ironically, Total is smaller than Shell, with a market capitalization of £68 billion against Shell's capitalization of more than £94 billion. However, Total CEO Thierry Desmarest has a reputation for risk, so a move for Shell would not be out of character. If the two firms merged, competition rules would force them to unload a number of assets. Despite overlapping refining businesses and other related items, analysts did see some obvious synergies. Total's strong Middle Eastern presence would complement that of Shell's, while a combined Shell/ Total unit would be the dominant player in Nigeria. And, unlike Shell, Total has a strong presence in Angola.
Most analysts can see a potential fit, but who would be in charge remained a major issue. For its part, Shell refused to “comment on market rumor or speculation.”
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EIA expects a $6 US natural gas market during autumn
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Natural gas spot prices (at the Henry Hub) moved below $6/Mcf in early August, said the US Energy Information Administration, as storage levels continued to track well within normal ranges, and summer demand remained at manageable levels. EIA said that prices are likely to average well above $6/Mcf for the fall and winter. Annual net, new supply of gas (production plus net imports) fell by about 1 Tcf (4.5%) between 2001 and 2003, with drops in both domestic production and net imports contributing to the downturn. Despite high rates of drilling for natural gas in North America, only marginal improvement in the supply picture is likely through 2005. Therefore, natural gas spot prices are expected to remain high.
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Kizomba goes onstream
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Exxon Mobil subsidiary, Esso Exploration Angola (Block 15) Limited, has begun production of the $3.4-billion Kizomba A project, the largest deepwater development offshore West Africa. Estimated recoverable resources from the project total about 1 billion bbl of oil, with an expected production rate of 250,000 barrels a day. “Kizomba A employs the world's largest FPSO, and the start-up of this project is an important milestone in Angola,” said Harry J. Longwell, director and executive vice president, Exxon Mobil Corp. Kizomba A is the first of three world-class production developments on Block 15 that are intended to collectively develop over 2.5 billion barrels of oil.
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Go-ahead given by UK for Saturn Unit Area
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ConocoPhillips said that it has received approval from the UK Dept. of Trade and Industry to begin development of the Saturn Unit Area in the southern UK North Sea. First gas output from the project is expected in fourth-quarter 2005, with an initial rate of about 75 MMcfd. Production should then increase within a year's time to a maximum rate of 170 MMcfgd. The Saturn Unit Area lies in Block 48/10a and 48/10b of the UK Continental Shelf, 23 mi north of the Lincolnshire Offshore Gas Gathering System. Initial development will comprise three wells from an unmanned wellhead platform. A new, 27-mi, 14-in. pipeline will tie the platform back to the Lincolnshire facility.
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Spanish LNG terminal expansion to proceed
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Spanish natural gas supplier Enagas has awarded a major contract for a 300,000-m LNG terminal expansion in Cartagena. The facility will expand to 1.2 million cu m/hr of gas from 900,000 cu m/hr. The project is another indicator of the ongoing expansion of LNG trade in the Mediterranean market. The Spanish firm said it is committed to continuous growth of this business line. Detailed engineering is scheduled for completion by second-quarter 2005. Construction will then begin, and completion of the work is slated for the end of 2006. 
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Opinion
An amazing transition has taken place over the last 12 months, seemingly sneaking up on politicians and economists in various countries, who now profess to be surprised by the turn of events. What I refer to is the sudden consensus that the world has moved from a fairly significant cushion of surplus production capacity to virtually none at all. This represents a turnaround equivalent to the better part of 5 million bopd, throwing the oil trading markets into chaos. It also has forced government officials in many industrialized countries to run for cover and scramble for explanations.
How did so many national officials miscalculate? Well, it seems to be an unfortunate combination of unreliable data and information, misguided assumptions and wishful thinking. First, no one anticipated that global oil demand would grow as fast as it has since mid-2003. Within that category, the emergence of the Chinese demand factor was not adequately gauged until it had already complicated the market far beyond an easy fix. Second, few people seem to have worried about the slow but steady slippage in some, non-OPEC producers' production rates. For instance, British oil output averaged 2.8 million bpd just five years ago, but now it struggles to remain at 2.1 million bpd. Similarly, Colombia was up over 800,000 bopd five years ago, but now the country produces only 530,000 bopd. Oman, which just two years ago was at 900,000 bopd, is already down to 750,000 bopd. Even Norway over the last two years has slipped from 3.33 million to 3.17 million bopd. If one adds up the losses from these four countries, the figure is 1.28 million bopd. Granted, there have been a few gains in other non-OPEC countries, but these merely keep the group total even. So, that leads up to the third faulty bit of logic, that we could always depend on OPEC to make up any shortfall, no matter the amount. Well, guess what – even OPEC has its limits, if demand suddenly balloons. Last but not least, a significant factor was the declaration by US and UK officials that, having defeated Saddam Hussein's forces, they would quickly restore Iraqi oil output to 2.5 million bpd by the end of 2003 and push it to 3.0 million bpd by late 2004. Neither of these goals has been achieved. Instead, thanks to pipeline sabotage and facility attacks, output was only 1.73 million bopd in June 2004. Naturally, if Bush administration officials had done their cultural homework, they would not have been surprised by the difficulties in restoring order to Iraq, and they would not have made such an unattainable prediction. So what can we do about the situation? Basically two things – First, oil companies can begin investing more of the dollars that they have been hoarding and develop more production. Second, the OECD countries, particularly the US, can do a far better job of formulating energy policies, planning for contingencies and following through with sound execution of strategies.
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