Gulf states need to boost investment to avert oil crisis

Jun 24, 2004 02:00 AM

Gulf oil giants need to pump heavy investments into their vast energy sector to expand their crude output capacity and prevent a fresh global oil supply crisis.
A severe supply problem that jolted major consumers in the early 1970s could be repeated in the near future without such expansions as global oil demand is racing at its fastest rate in nearly three decades and security concerns in the region are sending shivers through the international market.

According to new studies on the oil market, persistent bombings against Iraq's crude facilities have given rise to a fresh supply crisis while terror attacks in Saudi Arabia, the world's oil superpower, could dissuade key consumer countries from releasing part of their strategic oil stockpiles in case of emergency.
"The global oil industry appears to be going through a fundamental change -- oil demand is surging on the back of a strong global economic recovery led by the United States and industrialising China," said the London-based Centre for Global Energy Studies (CGES) in its latest monthly report. "After years of lacklustre oil demand growth, with OPEC needing to keep a tight rein on supply to maintain prices, the balance appears to have shifted, with the Organisation now required to boost output to prevent prices from rising to levels that would choke off future demand growth."

With the global economy expected to grow this year at a rate of about 4.6 %, led chiefly by the US at 4.8 % and China at well over 10 %, world oil demand is projected to growth by as much as 2.25 mm bpd or by around 2.8 %, said CGES, which is owned by former Saudi oil minister Sheikh Ahmed Zaki Al Yamani.
"The year to date has already shown growth of over 3 %-on-year with OECD oil demand rising by 1.2 % and consumption in the rest of the world increasing by more than 6 %, the world has not seen the kind of demand increase we are presently experiencing since 1976," it said.

"Although the full strength of this year's oil demand growth has taken everyone by surprise, OPEC still appears to be underestimating the strength of the market in 2004, estimating incremental demand at less than 2 mm bpd.”
“If oil demand continues to grow as strongly as it has over the past year and a half, OPEC's spare production capacity will soon be eroded, requiring significant increases to oil output capacity sooner rather than later in order to prevent a supply shortage. This means major oil producers, mainly those in the Middle East, must consider boosting investment to step up their capacity expansion plans."

Oil prices have remained above $ 30 a barrel over the past few months and surged to their highest level two weeks ago because of the soaring world demand, market speculation and tensions in the region. Although the oil industry argues that too high prices could stifle economic growth and, consequently, oil consumption growth, oil producers believe low oil prices will hinder their capability to invest in capacity expansion projects.
OPEC has struggled to keep prices within a defined $ 22-$ 28 range but experts believe the Organisation has now abandoned that price band and opted for at least $ 30 to cope with new market developments and offset the dollar decline.

"While the financial requirements are enormous in the region and call for an annual investment of at least $ 200 bn in the fossil energy sector, they can be met if certain conditions are fulfilled," said the 10-nation Organisation of Arab Petroleum Exporting Countries (OAPEC).
"The most important of these is maintaining oil prices at levels that suit both producers and consumers... this would allow the world economy to grow steadily and provide a suitable incentive that encourages investment in the producing countries to expand their oil supply sources and prevent future shortages."

According to OAPEC, which groups key Arab oil producers, capacity expansions could lift the output of the UAE along with Saudi Arabia, Kuwait, Qatar and Iraq from around 21.7 mm bpd in 2000 to 42.9 mm bpd in 2020. The projects will push up the output capacity of OPEC from 31.4 mm bpd in 2000 to 38.4 mm in 2010, to 44.8 mm in 2010 and 60.2 mm in 2020.
A breakdown showed the UAE's sustainable capacity will climb from 2.5 mm bpd to 3 mm bpd next year, to 3.7 mm in 2010 and 5.1 mm in 2020. Saudi Arabia, which controls more than a quarter of the international proven crude resources, will lift capacity from 9.4 mm bpd to 12.5 mm, then to 14.6 mm and 22.1 mm in the same period.

Barring unexpected developments, production by conflict-torn Iraq, the world's second oil power, will gradually rise from 2.6 mm bpd to 5.5 mm bpd in 2020 while Kuwait's capacity will grow from 2.5 mm bpd to 4.8 mm bpd. In contrast, Qatar's output will shrink from 900,000 to 700,000 bpd as the tiny OPEC oil producer is concentrating on mega gas projects at its giant North Field.
Capacity expansion projects in the Gulf and other OPEC members will boost the organisation's share of global supplies from 41.5 % in 2000 to 48.5 % in 2010 and57.3 % in 2020, according to the figures.

"Stability in Iraq holds the key to oil price movements over the rest of this year, the expectation has shifted from one of growing Iraqi production to concerns about maintaining supplies at recent levels," said CGES.
"A sustained loss of Iraqi oil exports could not easily be compensated for, though any other disruptions to supply would, if sustained, put pressure on the governments of consuming countries to release oil from their strategic stocks but concerns over Saudi Arabia may delay such action."

Source: Gulf News
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