OPEC Capacity Jeddah Meeting

Por Venezuela Real - 24 de Junio, 2008, 19:00, Categoría: Petróleo/Energía

Energy Economist.com
June 24, 2008

OPEC Capacity

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 investment bankers agreed on the last point. We do expect substantive action from the CFTC, 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 participants will 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 spiral.

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 OPEC's 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% from 2002.

On a percentage basis, OPEC's non-Iraq capacity increase was only marginally better than 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 reserves,
over the last five OPEC clearly underperformed years 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 crude.

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 the U.S.

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. A
s 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.

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