OPEC Capacity Jeddah Meeting
June 24, 2008
The purpose of the meeting was to gather oil producers and
consumers to address the problem of soaring prices. We knew the topics
ahead of time:
OPEC isn't producing enough, the world is consuming too much, and
speculators are taking advantage of everybody.
All in attendance except U.S. energy Secretary Bodman and some
agreed on the last point. We do expect substantive action from the
Congress, SEC and their worldwide counterparts on institutional
investors and position limits in the near future. The intent is to
reduce or eliminate the influence of the long-only index funds.
We loved the irony. If in the long-run the meeting is successful, the
be guilty of price collusion. Even attending this meeting flies in the
face of the NOPEC bill's attempt to make OPEC subject to US anti-trust
law. If prices go down, might independent oil producers have an
antitrust lawsuit against the U.S. government for colluding with OPEC
to lower prices?
The big question: Why have the meeting in the first place? The
Saudis didn't come up with something that moves the market. Unless more
oil is forthcoming many will say it confirms suspicions that even the
Saudis are powerless to halt the relentless rise in oil prices.
On the other hand the King may have more on his agenda. It is possible
that he wanted the hedge funds addressed before adding more oil to the
market. The combination of action on speculators and a large increase
oil supplied might send the market into an uncontrollable downward
In addition to consumers calling for more OPEC production, they want
far more transparency. With concern about Peak Oil,
consuming nations want assurance that OPEC can deliver today and will
be able to do so in the future. No doubt requests were made for full
disclosure of historical production levels on a field and formation
basis. Consuming nations would like access to
even more detailed information including seismic data, well decline
rates and even historical well by well production. It is unlikely
they will ever get it.
Investment, royalties and taxes are another issue discussed and we will
address it later. It is a big issue. However, today we focus on OPEC.
OPEC Production Capacity
Let's revisit the production problem focusing on OPEC. As of April
crude oil production was up 20.3% from the 2002 average. However, its
production capacity increased only 2.9% in that same period.
Check graphics on the original website
It probably isn't fair to include Iraq because of the war. If we
exclude that country the results are not much better. Without
Iraq OPEC capacity increased 5.0% while production was up by 20.9%
On a percentage
basis, OPEC's non-Iraq capacity increase was only marginally better
the rest of the world. While rate of increase in
OPEC production was slightly higher, the rest
of the world added more production capacity over the last five years
than OPEC. Not only that, but they did it with a third of the
proven reserves. OPEC has slightly more than 75% of the world's
proven reserves and in 2007 produced only 43% of the oil.
With the lowest average finding and lifting costs and 75% of the
over the last five OPEC clearly
relative to the rest of the world. If OPEC were a
corporation the CEO would be looking for a job.
OPEC suffers from failure to develop the internal expertise to explore
for oil and to efficiently produce it. There are OPEC members that are
the exception, but as a whole it is amazing that they have not invested
more in the expertise of their own people.
OPEC clearly has the financial resources to increase capacity, but as a
whole it has not made sufficient investment to expand
capacity. Fortunately, the
Saudis are the exception.
In 2002 they had 16-18 rigs targeting oil
compared to 80 today. That five-fold increase in Saudi drilling
activity is reaping rewards. By the end of next year Saudi capacity
should exceed 12 million barrels per day. This year Phase 1 of
the AFK (Abu Hadriya; Fadhili; Khursaniyah) project came on line at
about 300,000 barrels per day. Another 575,000 b/d from various project
is expected next
year. All except the offshore neutral zone is light to super light
There is an easily made
comparison to make our point about the lack of investment in OPEC
capacity. Excluding Iraq and Iran for which we do not have current
data, in 2002 the number of rigs drilling for oil in
OPEC countries averaged 196. In April there were 311 for an increase of
58%. The U.S. had 137 rigs targeting oil in 2002 and that number was up
174% at 375 in April and is currently 389.
The contrast between the U.S. and OPEC is even greater when the
reserves are taken into account. According to BP's latest
estimate U.S.reserves are 25 billion barrels compared to 935 billion
for OPEC. With a 32:1 reserve advantage, OPEC's production capacity is
33.6 million barrels per day compared to 5.2 million b/d. The
production capacity ratio is only 6.5:1. The typical U.S. well
produces 10-11 barrels per day over its lifetime while the average OPEC
well is over 500 b/d.
One need not be a petroleum engineer to come to the conclusion that
OPEC's lack of spare capacity is its own fault. The cost of capacity
expansion is minimal on a per barrel basis, especially when compared
While blame for high prices can be attributed variously to speculators,
rising demand in Asia, a weak dollar and lack of refinery capacity,
OPEC certainly must share in the blame. As we will see in an
upcoming report and summarize below, the ability of speculators to
influence prices is easily controlled by OPEC.
For those of us that thought the King might make a surprise
announcement that Saudi Arabia would add more than 200,000 barrels per
day to the market, the meeting was a disappointment. Overall it was a
rehash of the same issues: Speculators, political uncertainty, rapid
growth in China and other developing countries and a weak dollar.
Perhaps production uncertainty would have been a better term than
political uncertainty, but it comes to the same thing. The King
announced a 200,000 b/d increase in production and the MEND group made
another attack in Nigeria that took a little more than 200,000 b/d out
of production. The net is that there is no more oil after the meeting
than there was before and if the market is the U.S. you just added a
few more weeks of shipping time.