Editorial: The capacity imperative

Sept. 6, 2004
A drop in prices brings new attention to the necessity of buffer supply in the oil market—and to the issue of who does and who doesn't contribute to it.

A drop in prices brings new attention to the necessity of buffer supply in the oil market—and to the issue of who does and who doesn't contribute to it.

It wasn't just coincidence that prices slid after US Energy Sec. Spencer Abraham and International Energy Agency Executive Director Claude Mandil met Aug. 24 (see related story, p. 32). Rumors that the officials discussed release of strategically stored oil put the buffer of last resort in play. Because of chronically murky conditions of release, the market tends to heavily discount 1.4 billion bbl of oil hoarded by governments of developed nations. When US Vice-Pres. Dick Cheney reiterated policy about the US Strategic Petroleum Reserve on the same day Abraham and Mandil met, the mere reminder that SPR crude would be available in an emergency flushed shortage-minded speculators out of the market.

But it didn't change the fundamentals of a market made vulnerable and reactive by insufficiency, relative to conceivable disruptions, of potential supply from commercial storage and idle production capacity. As long as world demand continues to climb, inventories will remain difficult to rebuild, and future supply will depend on production capacity not now on stream. Of high concern to oil consumers, therefore, should be current efforts to develop capacity—and efforts that should be under way but are not.

OPEC projects

In its August Monthly Oil Market Report, the International Energy Agency reported capacity projects by members of the Organization of Petroleum Exporting Countries (OGJ Online, Aug. 17, 2004). Here's a summary:

• Saudi Arabia is adding a combined 650,000 b/d of production this year from Qatif and Abu Safah fields and 300,000 b/d by 2006 from new facilities in the Haradh area of Ghawar field. Because the kingdom needs to add 600,000-800,000 b/d/year to offset declines, these gains won't boost total capacity over time.

• Kuwait is increasing capacity to 2.5 million b/d from 2.35 million b/d this year through reactivation of a gathering center serving its northern fields. It will further add a combined 450,000 b/d to capacity by 2007 from western fields and new wells and water-handling facilities in the Burgan complex. Additional expansion of northern capacity depends on participation of non-Kuwaiti companies, a framework for which has been slow to develop.

• Increases from offshore fields will raise Nigerian yearend capacities to 2.55 million b/d this year, 2.75 million b/d in 2005, and 3.25 million b/d by 2007. Gains will come from increases in EA, Yoho, Okpoho, and Abo fields and likely production starts in Bonga, Okwori, Erha, Etim/Asasa, Usan, Bosi, and Agbami fields.

• Iran will add 300,000 b/d to capacity, mainly from Darkhovin and Masjid e Suleiman fields onshore and Salman, Foroozan, Doroud, Souroush/Nowruz, and Abuzar fields offshore.

• Abu Dhabi's capacity might rise by 150,000 b/d by 2007 from expansions in Upper Zakum, Lower Zakum, and Umm Shaif fields, all offshore. IEA says plans to add 500,000 b/d by 2007 "may be overambitious."

• Algeria and Libya might add a combined 70,000 b/d of capacity by yearend and an additional 220,000 b/d during 2005-07, mainly from Libya's Elephant field and Algeria's ROD and Block 208 developments.

• Qatar will add 100,000 b/d during 2005-07 through expansions of several fields.

Excluding Venezuela, where net capacity gains are likely to involve nonconventional oil, and Iraq, OPEC's overall capacity increases estimated by IEA will amount to 370,000 b/d by the end of this year, 680,000 b/d in 2005, 850,000 b/d in 2006, and 170,000 b/d in 2007. These totals fall below projections for demand growth in those years. They will, however, be supplemented by capacity increases in Russia, other Caspian producers, western African countries, producers of nonconventional oil, and others. No one source will come close to covering all expected consumption growth. The world needs every increment of capacity that emerges.

US absence

Remarkably absent from lists of countries adding production capacity is the US. The world's biggest consumer of oil has promising exploratory frontiers off its East and West Coasts and in undrilled parts of Alaska. But it won't lease federal land in those areas. Outside the producing industry, in fact, the issue of resource access receives little serious discussion. In view of a growing global need for new production capacity, that position looks, at best, uncooperative. In view of US consumption, it's simply hypocritical.