At first sight, OPEC appears to have a great deal of spare production capacity: over 5 mn bpd in all. On further examination, it is clear that most of this con-sists either of heavy crude oil for which there is little or no market under present conditions, or of capacity that is shut-in by violence and civil unrest. OPEC’s effective spare production capacity is probably less than 1 mn bpd, which may account for its recent deci-sion not to increase output during the second and third quarters of the year. It also makes it unlikely that OPEC will have much additional oil to offer al-ready tight markets as demand undergoes its normal seasonal rise at the end of the year.

Spare capacity

OPEC’s crude oil production in the most recent quar-ter was 30.3 mn bpd. Its production capacity is esti-mated at 35.8 mn bpd, giving it a cushion of 5.5 mn bpd. Of this, some 2.7 mn bpd, or 49%, lies in Saudi Arabia, with a further 0.9 mn bpd, or 16%, in Nigeria and 0.5 mn bpd, or 9% of the total in Iraq. The remaining 26% is distributed amongst nine other countries. In three member-countries there is effec-tively no spare production capacity (see Table A).

Saudi Arabia’s 2.7 mn bpd of unused capacity represents nearly a quarter of its total production ca-pacity of 11.3 mn bpd. Much of this is of medium or heavy sour crude, for which there is little demand at present owing to the tendency of countries across the world to specify lower and lower sulphur limits for refined products such as gasoline and diesel (see ‘Focus’, March 2006).

A further brake on demand for these types of

crude is looming in November, when the English Channel and the North Sea become ‘Sulphur Emis-sion Control Areas’ (SECAs) under International Maritime Organization (IMO) rules that stipulate that marine bunker fuels must contain no more than 1.5% sulphur by weight, compared with a limit of 4.5% at present. The European Union, in fact, wants the lim-its to apply from August.

Marine bunker fuels are produced primarily from medium and heavy sour crudes, such as Arab Me-dium and Arab Heavy from Saudi Arabia. Iran and Venezuela are also important producers of such cru-des. Bunkers have traditionally provided a market of last resort for the heaviest and sourest grades of oil.

Demand for heavy, sour crudes looks set to be squeezed further as further SECAs are established, with the Mediterranean and the Pacific coast of the US next in line after the English Channel and North Sea. There are also proposals by some groups, in-cluding the independent tanker owners’ association, Intertanko, for even lower limits on sulphur than those proposed by the IMO. Intertanko has proposed a 1.0% limit by 2010 and one of 0.5% by 2015.

More light crude?

In these circumstances, it is difficult to see when much of the surplus heavy crude production capacity in Saudi Arabia, Iran or elsewhere might be brought back into use. Some countries appear to be starting to recognize this. Saudi Arabia, for example, is concen-trating on developing fields producing mainly light crudes for future new production.

Around 8.6 mn bpd of Saudi Arabia’s crude oil production capacity consists of lighter crude, making up just over three-quarters of its total output capacity (see Table B). Three new light crude developments are planned between now and 2009 as follows:

These come on top of the Haradh field, which pro-vided a further 0.3 mn bpd of light crude capacity when it was brought on-stream in 2006. Some of this new capacity will replace declining light crude pro-duction elsewhere in the kingdom. Iran’s spare capacity of 0.4 mn bpd is mostly in its heavier crude fields. The country has had particular problems with the sale of crude from its Nowruz and

������

OPEC nears production capacity

© Blackwell Publishing Ltd, 2007

Table A OPEC: Crude Oil Output v Capacity, Second Quarter, 2007

Country Production (2Q07) Capacity Spare

Capacity

Saudi Arabia* 8.6 11.3 2.7 Iran 3.8 4.2 0.4 Iraq 2.0 2.5 0.5 UAE 2.6 2.8 0.2 Kuwait* 2.5 2.7 0.2 Qatar 0.8 0.8 — Nigeria 2.1 3.0 0.9 Libya 1.8 1.8 — Algeria 1.4 1.5 0.1 Venezuela 2.4 2.7 0.3 Indonesia 0.8 0.9 0.1 Angola 1.6 1.6 — Total 30.3 35.8 5.5 * Including half the Neutral Zone Totals may not add owing to rounding Source: Pearl Oil estimate

(mn bpd) (mn bpd) 2007

Khursaniyah 0.5 2008

Shaybah 0.3 2009

Khurais 1.2

Soroosh fields. The National Iranian Oil Company has had to put some of its heavier crudes into floating storage in the Persian Gulf on some occasions when sales have been particularly difficult.

Venezuela also has some of its heavy crude pro-duction shut-in. About three-quarters of its produc-tion is under 21°API. The Venezuelans though have additional problems, resulting from political troubles in the largely state-run oil industry that began in De-cember 2002 (see ‘Focus’, February 2007).

At that time, workers in the state oil industry went on strike in an unsuccessful attempt to bring down the government of President Hugo Chavez. Widespread dismissals of key workers followed, leading to a loss of skills in the upstream sector, which the govern-ment-owned oil company, Petroleos de Venezuela (PDVSA), has still not replaced in all areas.

Since then the government has tried to increase the role of the state company in oil production, which has also had a deleterious effect on PDVSA’s joint-ventures with foreign oil companies. Output from joint-venture fields has declined by over 100,000 bpd over the last 18 months and could fall even further following the latest round of partial- and full-nationalization of heavy crude production ventures (see ‘The Month in Brief’).

As PDVSA struggles to maintain its output at ex-isting levels, it is doubtful whether Venezuela could raise its crude oil production much above 2.5 mn bpd in almost any circumstances. This, in effect, leaves it with spare capacity of only 0.1 mn bpd, compared with nominal unused capacity of 0.3 mn bpd (see Ta-ble B).

Nigerian woes

The largest spare capacity total after that of Saudi Arabia is Nigeria’s. This is currently in the region of 0.8-0.9 mn bpd, most of which, unlike in the Saudi case, is light, sweet crude production.

The capacity is shut-in mainly as a result of politi-cal unrest in the main oil-producing region of the Ni-ger Delta. At mid-year, the output affected amounted to just over 0.8 mn bpd (see Table C).

The unrest mainly takes the form of sabotage to oil installations and the kidnapping of foreign oil work-ers. Several deaths have resulted from the violence. There are various rebel groups, most of which are protesting against the lack of economic development in the oil-rich Delta region of south-eastern Nigeria. Their enmity is focused both on the foreign oil com-panies and the national government in Abuja, which is accused of corruptly siphoning-off oil revenues to its cronies in the north of the country, a long way from where the oil is actually produced. A series of heavy-handed government crackdowns on earlier, often peaceful protests only served to escalate the dispute.

The principal rebel group is known as the Move-ment for the Emancipation of the Niger Delta (MEND). It was first heard of at the beginning of 2006 when it carried out a series of attacks on oil pro-duction facilities in the Delta region and began kid-napping oil workers. It appears to finance its activi-ties through the sale of stolen oil, which it obtains from tapping into pipelines.

The damage caused to the pipelines is a further cause of disruption to oil production in the Delta. On some occasions, the leakage of oil from the pipelines has led to fires and explosions. It was hoped that the violence would die down in June, when MEND an-nounced that its was suspending its attacks on the oil industry but, on 3rd July, the group announced that its was resuming its operations.

Iraqi sabotage

Iraq’s spare capacity lies principally in the north of the country where parts of the Kirkuk oilfield are shut-in because of repeated sabotage to the two main pipelines serving the field. The one more frequently attacked is the export pipeline to Ceyhan in Turkey, which traverses remote terrain, making it impossible to guard it along its entire length. The line has been

© Blackwell Publishing Ltd, 2007

4 ����������������� ����������������������

Table B Saudi Arabia: Production Capacity by Crude Type Crude Type Capacity (mn bpd) Arab Super Light 0.2 Arab Extra Light 1.6 Arab Light 6.8 Arab Medium 1.4 Arab Heavy 1.4 Total 11.3 Totals rounded Source: Pearl Oil estimate

Table C Nigeria: Oil Production affected by Violence

Production System Volume Shut-in

(th bpd) Brass River 80 Brass River 40 Bonny 52 Escravos 41 Escravos 55

816 Source: International Energy Agency

Field

Akri/Oshi Tebida Nun River/Obagi Ebite Various

Total

Forcados Various 358 Pennington Funiwa 15 Offshore EA 110 Offshore Okono 65

out of action for most of the period since the US-led invasion in 2003.

The other pipeline serving the Kirkuk field is the one connecting it with the refinery at Baiji, which lies to the north of Baghdad. This too is prone to attack though not to the same extent as the line to Ceyhan. The effect of attacks on both pipelines, however, is to restrict production in the northern fields centred on Kirkuk to about 300,000 bpd, compared with their normal production capacity of around 700,000 bpd.

Violence and sabotage affect production in other areas and there are signs that the number of attacks on areas outside the north is increasing. Of Iraq’s ap-proximately 80 oilfields, only about a quarter are in production at any one time. More, even if the attacks on oil installations were to cease altogether, it is by no means certain that Iraq could produce at its full nominal capacity of 2.5 mn bpd owing to the neglect many fields have experienced both during the present troubles and for years before, when the export of oil-field equipment to Iraq was embargoed by the United Nations.

Once Saudi Arabia, Nigeria, Iraq and Venezuela are excluded, OPEC’s spare capacity dwindles to about 0.6 mn bpd. Three countries–Qatar, Libya and Angola–have to all intents and purposes no spare ca-pacity. Two more–Algeria and Indonesia–are within 0.1 mn bpd of their production limits, whilst the UAE and Kuwait possess only 0.2 mn bpd each. In Ku-wait’s case, some of this is heavy crude.

All of this makes it difficult for OPEC to raise its production in the short term, even to meet the normal seasonal increases in demand, which suggests that oil markets could be tight this autumn. It is by no means certain either that capacity can be raised to any large extent in the longer term, given that in two important instances–Nigeria and Iraq–any increases in capacity will depend in part on the ending of widespread vio-lence and unrest.

Future capacity

OPEC countries have ambitious plans to raise capac-ity over the next few years. It is by no means certain, however, how fully these will be achieved in some cases. Moreover, there is considerable uncertainty over many countries’ plans for expansion after about 2010-12.

The largest expansion is scheduled to come from Saudi Arabia (see Table D) where the official target is 12.5 mn bpd, which is due to be achieved by 2009. The increased capacity will come from the three new field developments described above–at Khursaniyah, Shaybah and Khurais–which will add more than enough new capacity to offset the natural decline of

some of the kingdom’s older fields (see GER Survey of Saudi Arabia on www.oilandenergytrends.com).

After Saudi Arabia comes Angola with about half the Saudi increase, coming from both existing and new fields. Included in the new production will be output from the Rosa, Greater Plutonia and Kizomba-C fields. Following these two countries, there will be little increase from the rest of OPEC. Qatar is ex-pected to put on 0.3 mn bpd, of which slightly more than half is likely to come from the al-Shaheen field. Kuwait’s extra 0.2 mn bpd is scheduled to come from the expansion of existing fields at Burgan and Mina-gish. The UAE is also relying on its existing produc-ing-fields, such as Murban and Upper Zakum. Libya should add 0.1 mbd from the Elephant and al-Shahara fields, with a similar total expected from Algeria’s existing Hassi Messaoud field.

Iran, Iraq, Nigeria and Venezuela look like making no additions to capacity between now and 2010, for reasons outlined above. Indonesia’s capacity is ex-pected to decline by 0.1 mn bpd despite attempts us-ing enhanced oil recovery to slow down the country’s natural decline.

There are several plans for expansion in several member-countries after 2010 but as yet few of these exist as firm proposals with definite timetables. Saudi Arabia appears to have formally postponed any expansion beyond its 2009 target of 12.5 mn bpd until it becomes clearer what might happen to demand in the next decade. Other OPEC countries may follow the Saudi lead, thereby applying further pressure to markets that are already tight.

More NGL?

One possible area of relief for future oil markets may be provided by an increase in OPEC’s production of

© Blackwell Publishing Ltd, 2007

����������������� ���������������� 5 ������

Table D OPEC: Crude Oil Output Capacity, 2007 and 2010 Country Capacity 2007 2010 Change Saudi Arabia* 11.3 12.5 1.2 Iran 4.2 4.2 —

Qatar 0.8 1.1 0.3 Nigeria 3.0 3.0 — Libya 1.8 1.9 0.1 Algeria 1.5 1.6 0.1 Venezuela 2.7 2.7 — Indonesia 0.9 0.8 (0.1) Angola 1.6 2.2 0.6 Total 35.8 38.4 2.6 * Including half the Neutral Zone Totals rounded Source: Pearl Oil estimate

(mn bpd)

Iraq 2.5 2.5 — UAE 2.8 3.0 0.2 Kuwait* 2.7 2.9 0.2

Trading in North Sea oil fell sharply following changes to the reporting of the price of Forties crude. On 7th June, 2007, the price-reporting service Platt’s announced that it would no longer include Forties crude of less than 37.0°API or more than 0.6% sul-phur in its price assessments. Oil companies com-plained that this was much too restrictive and trading fell amid fears that the market was becoming too nar-rowly based in terms of which crude grades were in-cluded. London’s ICE futures exchange declared that it would not accept price assessments of Forties as narrowly defined by Platt’s. In a further develop-ment, on 8th June, Ekofisk crude was added to the basket constituting the benchmark for dated North Sea crude, which now comprises Brent, Forties, Ose-berg and Ekofisk (BFOE). Problems are affecting benchmark crudes elsewhere. The Dubai Mercantile Exchange’s Oman futures contract, which was launched on 1st June, has been slow to attract partici-pants, as has Dubai futures contract launched by ICE on 21st May. Both need to attract much higher levels of trade if they are to be used as benchmarks for Per-sian Gulf sour crude.

Iraq is preparing to export oil to Turkey following the start-up of the Tawke field in the north of the country. Crude is being delivered by road tanker to northern Iraq pending completion of a spur-line to the main export pipeline to Ceyhan. The 100 mn bbl field is expected to produce 15,000 bpd. Full com-mercial production is being delayed by the inability of the Kurdistan Regional Government and the Bagh-dad government to agree the terms of a national oil law. Kurdistan meanwhile has introduced its own oil law and has announced that it will offer 40 explora-tion blocks to foreign companies. At the other end of the country, Petrel Resources has announced that its redevelopment of the Subba and Luhais fields will be postponed for a year to 2010 because of delays in providing new infrastructure. The redevelopment is designed to increase the field’s output by 150,000 bpd to 200,000 bpd.

Riots followed the introduction of gasoline ration-ing in Iran on 27th June, amid a shortage of supplies across the country. Some rioters ensured that sup-

plies would become even scarcer by setting fire to petrol stations. The government is trying to cut the level of mogas imports, which are now running at 200,000 bpd. A Committee of the US House of Rep-resentatives has meanwhile called for a tightening of economic and investment sanctions against Iran, which would lead to even greater product shortages there. Kuwait’s petroleum sector is beset by allega-tions of corruption. The Oil Minister, Ali a-Jarrah Al Sabah, resigned at the end of June rather than face a parliamentary vote of no confidence. Bahrain is to study methods of privatizing its petrol stations. Saudi Arabia has announced the setting-up of special units to protect its oil installations from terrorists.

A four-day strike hit Nigeria’s already troubled oil industry as trades unions protested against rising fuel prices. The government agreed to halt price increases for the rest of 2007. Tensions remained high, how-ever, as a leading trades union official was shot dead and militant groups continued to occupy oil installa-tions and take foreign hostages. A firm controlled by associates of former state president Olusegun Obasanjo, Bluestar Oil Services, bought 51% of the 110,000 bpd Kaduna refinery, giving rise to accusa-tions of cronyism. Venezuela signed preliminary agreements to raise the state’s shareholding in the country’s four foreign heavy oil joint-ventures from 40% to about 78%. Compensation terms have still to be agreed.

South Korea’s GS Caltex has announced plans to enter China’s retail oil market, whilst ExxonMobil says it will move into the wholesale products sector. The country’s state refiners failed to meet new gaso-line and diesel fuel specifications by the 1st July deadline for new, lower sulphur limits. Shortages of biofuels have also been reported. Singapore’s Joint Asian Derivatives Exchange has launched a palm oil futures contract designed for biodiesel traders.

Plans have been announced for two oil refineries in the US: a 4,000 bpd unit designed to provide fuel for a coal-producer in Wyoming and a 400,000 bpd unit in South Dakota. The latter has not yet received the necessary permits for the development, which local protesters have dubbed the ‘gorilla project’.

6 ����������������� ����������������������

© Blackwell Publishing Ltd, 2007

����������� ����

North Sea troubles, petrol riots in Iran and an American gorilla

This section summarizes downstream developments of the previous month. Exploration & Production are covered in ‘Upstream Review’.

natural gas liquids (NGL). From a total of about 4.5 mn bpd at present, these may rise to 6.5 mn bpd by 2010 thanks to new gas developments, principally in the Persian Gulf. NGLs have the advantage of being

light and generally low in sulphur and OPEC countries have a big incentive to produce more of them since they are not part of the cartel’s production quota sys-tem.