CERI: Even small oil supply disruption could cause problems this winter

Jim Stott
Special Correspondent

CALGARY, Jan. 28 -- World crude oil supply is already tight, and even a small additional disruption this winter could cause serious problems, senior industry analysts warn.

The concerns were raised Monday at a Canadian Energy Research Institute (CERI) World Oil Conference in Calgary.

Dr. Paul Horsnell, head of energy research for J.P. Morgan, London, and Guy F. Caruso, administrator of the Energy Information Administration, said supply disruptions in Venezuela and the possibility of war in Iraq are creating supply uncertainty and price volatility.

J.P. Morgan view
Horsnell said the tight market situation began in second quarter 2002 with production policy decisions made by the Organization of Petroleum Exporting Countries and was exacerbated by a strike and political unrest in Venezuela in December. He noted there were also demand side shocks in Japan tied to the loss of nuclear capacity related to safety issues. These, he said, shifted Japan's oil demand from a slow decline to an increase of 500,000-600,000 b/d.

Other factors, said the J.P. Morgan analyst, include the coldest winter in the US in 5-6 years and problems in replacing 1.4 million b/d of heavy crude Venezuela was shipping to specialized Gulf Coast refineries. He said Mexico does not have the capacity to compensate for that to any significant extent.

Horsnell said as much as 500,000 b/d of Venezuelan oil supplies might have been permanently lost, and that nation could face a long period of political instability based on societal problems, similar to the situation in Colombia.

Horsnell said the supply situation is not going to be comfortable, it may not be catastrophic, but a supply shock from even a small producer could worsen the situation. He noted other threats to supply are political instability in Iran and Nigeria.

Caruso also noted that some political instability in Iran and Nigeria are factors in the supply outlook. He said the challenge is getting through this winter without further price spikes. Caruso said the price of oil is likely to remain above $30/bbl (West Texas Intermediate) until the Iraq and Venezuela situations are resolved. He said if both Iraqi and Venezuelan production is out, OPEC could not make up the difference.

Long-term view
The EIA head said that oil prices are likely to average $30/bbl in 2003, but the market now changes so rapidly that it is hard to forecast where prices will be even 1 year from now.

Horsnell said that, in a long-term scenario to 2010, J.P. Morgan is looking at a price of $23/bbl (WTI) and $25-26/bbl to 2025. He noted there is now a large degree of political input in any price projection.

Carl Michael Smith, assistant secretary for fossil energy, US Department of Energy, said a major objective of his department is to increase US domestic supply. But, he said, Canada will play a significant role in meeting US demand for oil and gas. He noted the US now imports 3.7 tcf.of gas from Canada—16% of its annual needs—and 2 million b/d of oil. Smith said the massive oil sands deposits in Alberta constitute a rich asset for Canada, and the US will be a rich market for that production.

Smith said Canada and the US, along with other nations, are cooperating on research into unconventional gas sources, such as gas hydrates and methods of carbon sequestration. He said that gas hydrates are now at the stage where coalbed methane, which today provides 8% of US gas supply, was 10-15 years ago.

Contact Jim Stott at stottj@telus.net.

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