The Organization of Petroleum Exporting Countries has given its members a free hand to increase crude oil production to offset the 4 million b/d shortfall of supplies caused by the United Nations embargo of Iraqi/Kuwaiti exports.
After the OPEC agreement last week, supported by 1 0 of the group's 13 members at an emergency ministerial meeting in Vienna, Saudi Arabia immediately began to step up its crude production.
Oil prices just as quickly plummeted as much as $4/bbl after the meeting and apparently conciliatory gestures from Iraqi President Saddam Hussein that seemed to diminish the threat of war.
After hovering above $30/bbl for 3 days, crude futures on the New York Mercantile Exchange fell to $26.91/bbl at closing Aug. 27. Reports of possible OPEC meeting delays helped push Nymex light sweet crude for October delivery back up to $27.88/bbl Aug. 28. It fell again on Aug. 29 on reports of U.N. Sec. Gen. Javier Perez de Cuellar's impending visit with Hussein, to $25.92/bbl.
A few days before the Aug. 27 meeting, Venezuela took steps to increase its crude production beginning this month, reversing the latest in a string of conflicting stances on the issue that have sparked political controversy domestically. Venezuela will hike crude flow by 500,000 b/d by December.
The United Arab Emirates also is believed to have increased crude production ahead of the ministers' decision.
It is expected to hike production by as much as 500,000 b/d.
However, simply making up the lost volumes barrel for barrel won't eliminate worries of supply shortfalls. Much of the spare productive capacity within OPEC represents heavy crude that can't be processed at many refineries.
In addition, the spare productive capacity won't be enough to accommodate an expected rise in oil demand in the fourth quarter, leading to a likely supply shortfall if the embargo persists (OGJ, Aug. 20, p. 23).
Meantime, the threat of a further squeeze on oil importing countries is showing up in the form of a significant shortfall in light products capacity shut down by the embargo.
The Soviet Union is losing revenues and future investment as a result of the crisis. However, its former satellites are especially hard hit by the embargo, threatening the fledgling democracies' economic growth.
Japan is taking further steps to cushion the effect of a possible oil supply shortfall, including the unprecedented measure of releasing its national oil reserve.
Developing nations in the Far East are leading the international scramble for oil supplies to offset the loss of Iraqi/Kuwaiti imports.
SAUDIS, VENEZUELA TRIUMPH
The OPEC agreement, labeled as in the interest of market stability, was a negotiating triumph for Saudi Arabia and Venezuela.
The two pushed the deal through in the face of opposition from Iran and concern from some other members that OPEC's tradition of consensus politics was being abandoned.
Iraq and Libya declined to attend the meeting. Iran said it would support the concept of higher production levels only if the industrialized nations agreed to draw down stocks at the same time.
By allowing a majority decision, OPEC has effectively avoided the oblivion some analysts were forecasting for it along with permanently higher prices after OPEC's initial reluctance to discuss production policies.
A reminder of the situation came from BP Exploration Chief Executive Officer John Browne, speaking at the Offshore Northern Seas conference in Stavanger last week.
Browne noted that the oil industry was in a very difficult and tense situation that had exposed the vulnerability of the oil market to political action in one small area.
"But that does not mean that we should rewrite our plans, substituting $25 or $30 for $18 or $20," he said.
Browne added that it was very tempting to believe industry was seeing a permanent rise in oil prices, but the history of the last 20 years suggests that high prices 11 can melt like snow in the desert, leaving overoptimistic plans and their authors sinking into the sands."
SAUDI PRODUCTION BOOST
Saudi Arabia has indicated its increased production will be allocated to countries and companies that are directly suffering from the loss of supplies from Iraq and Kuwait.
It reportedly has drawn up a priority list that is topped by developing countries-most notably India, Pakistan, and the Philippines-that formerly relied on Iraq or Kuwait for a big share of their oil imports.
Saudi Aramco told five Japanese companies with contracts to lift 250,000 b/d of Saudi crude that their September allocation will be 460,000 b/d.
Private companies in Europe also are expecting increases in Saudi liftings but have not received formal notification.
CRUDE SLATE CONCERNS
There remain concerns about the volumes and types of crude being produced to replace the lost Iraqi/Kuwaiti supplies in refineries.
Exxon Pres. Lee Raymond, speaking at the Stavanger conference, said the increased OPEC output doesn't quite replace supplies lost from Iraq and Kuwait.
Further, Raymond voiced concern over the market's ability to absorb the extra 500,000 b/d of crude from Venezuela. Some of the Venezuelan crude would have a gravity of about 100, and industry might have difficulty handling the increased volume of such low gravity crude, Raymond said.
Frederick Leuffer, analyst with C.J. Lawrence, New York, contends that most incremental oil production within OPEC is heavy oil.
"There may not be a home for this oil, since refinery conversion capacity is operating full out," he said.
That in turn suggests a worse oil supply shortfall than just the volume loss from Kuwait and Iraq.
"At the very least, the inability to refine new heavy oil supplies in many regions will necessitate oil transport to be rechanneled. This will lengthen tanker voyages and result in greater depletion of inventories in the near term," Leuffer said.
PRODUCTS SHORTFALLS
There are signs of a squeeze on refined products supplies in addition to the crude exports lost as a result of the Middle East crisis.
The Saudi state marketing company Samarec has declared force majeure on deliveries of middle distillates to Far Eastern destinations. That covers volumes of about 50,000 b/d from Jubail and Ras Tanura that are being redirected to service the military buildup in Saudi Arabia.
Refco Inc., a New York futures brokerage house, noted the potential loss of refinery output in the Persian Gulf could total as much as 1.75 million b/d, or about 4.3% of western nations' demand.
In a worst case scenario posed by Refco analysts John H. O'Connell and James R. Steel, that shortfall breaks out as 500,000 b/d from Kuwait, 200,000 b/d from Iraq, and 350,000 b/d from Saudi Arabia due to export restrictions imposed to meet the needs of U.S. and Saudi military forces. Add to that another 350,000 b/d loss from the Saudis and 300,000 b/d from six refineries in smaller Persian Gulf nations in the event of a war, they estimate.
Salomon Bros. analyst Bernard Picchi noted that there is no spare productive capacity worldwide in light products refining and that products stocks, notably gasoline, are critically tight today.
Even if it ends immediately, the Middle East crisis will cast a pall over the Persian Gulf for many years, Picchi said, noting that the Middle East was to have accounted for 40% of all new refinery capacity in the world the next 3-5 years.
"This region now looks far less hospitable to such massive capital investment-perhaps totaling $20 billion, had all this Middle Eastern capacity been built," Picchi said. "The result of the possible postponement of these facilities could be greater downstream bottlenecks for a longer time than most observers ... would have thought likely before this crisis erupted."
VENEZUELA'S PLANS
Venezuela Energy Minister Celestino Armas said Aug. 22 that the government had ordered state oil company Petroleos de Venezuela SA to begin increasing crude production in September by 300,000-350,000 b/d and by a total of 500,000 b/d by December.
Venezuela's crude production prior to the decision was 1.733 million b/d. An initial increase of 300,000 b/d will put Venezuelan crude production for the fourth quarter at an average 1.9 million b/d, Armas said.
By yearend, however, Venezuelan production should climb to 2.4 million b/d, a Pdvsa official said.
The government told Pdvsa to use the added production to build stocks in Venezuela and overseas.
Venezuela has extensive storage capacity for crude oil and refined products at home and in the Caribbean at Isla refinery, Curacao oil terminal, Bonaire, and the former Citgo Petroleum Corp. refinery in the Bahamas. It also has sizable storage at refineries in which it has interests in Europe and the U.S.-Citgo at Lake Charles, La., Champlin Refining Co. at Corpus Christi, Tex., the Uno-Ven venture with Unocal Corp. at Lemont, III., West Germany's Ruhr Oel GmbH at Gelsenkirchen, and Sweden's Nynas Petroleum.
In the Caribbean, Pdvsa has 63.8 million bbl of storage capacity, including 20 million bbl of capacity acquired when it purchased Chevron's refinery and related assets in the Bahamas (OGJ, Aug. 6, p. 38).
Pdvsa cannot use the former Chevron capacity in the Bahamas immediately but said it could begin storing crude there in October.
Currently Pdvsa has 12 million bbl of crude stocks and 24 million bbl of products stocks in Venezuela. In addition, it has 12 million bbl of crude stocks in Bonaire and Curacao. Armas said Venezuela could provide 350,000 b/d of added oil supplies immediately by increasing production and drawing down stocks.
STRAINED TIES
Venezuela will benefit from the runup in oil prices, getting an extra $1.2-2.4 billion in oil revenues this year from higher export volumes and prices based on an $8/bbl jump in August to $24.50/bbl in the average price of its crude and products exports.
However, government waffling over oil policy during the crisis has worsened the rift between the energy ministry and Pdvsa.
Relations between the two are at their lowest level since 1985-86, when the minister at that time refused Pdvsa the freedom to set international oil prices in a rapidly changing market.
Venezuela's action comes after 2 weeks of delays and contradictory public stances that strained ties with the U.S. and between Pdvsa and the administration of President Carlos Andres Perez. Some officials had speculated the Perez government was likely to place its ideological ties to OPEC ahead of commitments to long time clients such as the U.S.
One industry observer in Venezuela called the string of oil policy reversals and delays in responding to the crisis "the worst case of official bumbling since this government took over in 1989."
Until Armas appeared before Venezuela's Congress, the government had made no comment on significant aspects of oil industry activity for more than 2 weeks. Armas told congressmen that relations between his office and Pdvsa were "like a solid marriage," noting that "disagreements and other problems occur even in the best of marriages."
However, one congressman noted that "the problems between these two partners are causing a scandal all over the block."
It is unlikely that Perez will strip Armas of his power over Pdvsa, despite rising sentiment that the ministry's control over the company has been unnecessary since Venezuela nationalized foreign oil companies in 1976.
Industry officials recognize that the delay in announcing a firm production increase was the result of ambivalence on the part of Perez, who remains committed to the idea of OPEC serving as a mediating and stabilizing influence on world oil markets.
Meantime, Venezuela's Defense Ministry plans to step up security at Pdvsa facilities if the Middle East crisis worsens.
The week before Iraq's invasion of Kuwait, Venezuela decided to hike the retail price of gasoline by 1.4/gal/month through yearend, putting the price of 95 octane gasoline at 26/gal last month. It also boosted the price of diesel. Venezuelan gasoline remains the world's cheapest, but the move sparked protests in several cities.
A big jump in gasoline prices in Venezuela last year sparked riots that left 300 persons dead.
EASTERN EUROPE'S WOES
Moscow says the Middle East crisis and resulting oil price spike have transformed eastern Europe's critical liquid fuel shortage into a pervasive economic and financial catastrophe that could slow the area's progress toward democratization.
Soviet reports say that if the price of crude exceeds $25/bbl in 1991, payments for imported oil will absorb 30% of Poland's export revenues, 75% of Czechoslovakia's, and 100% of Bulgaria's.
With Soviet oil deliveries to eastern European nations cut drastically, these countries turned to Iraq for crude. But the embargo against Iraq, in which eastern Europe is reluctantly participating, prevents delivery of oil already contracted for and payments on Iraq's $5 billion debt to eastern European countries.
Bulgaria is hardest hit. Iraq owes Bulgaria $1.2 billion. Apparently no more Iraqi oil will be delivered to Bulgaria this year. Bulgaria will lose another $160 million in embargoed exports to Iraq and Kuwait.
The U.S.S.R. had contracted to deliver 18.25 million bbl of Iraqi crude to Bulgaria in the final 5 months of 1990. But with no Iraqi crude being provided to the U.S.S.R., Moscow probably won't be able to make up the shortfall in supplies to Bulgaria from its own declining production.
Iraq owes Yugoslavia $1.5 billion, with Belgrade expecting repayment in crude. Not only are Iraqi crude deliveries now impossible, but Yugoslavia is also unable to export $1 billion in goods ordered by Iraq.
Faced with unexpected cuts in Soviet oil deliveries, Hungary also turned to Iraq for oil as payment on Baghdad's $150 million debt to Budapest. Some of this oil was received prior to the August embargo.
Hungary, Bulgaria, Czechoslovakia, Poland, and Romania are operating their refineries far below capacity because of crude shortages.
Meanwhile, Cuba, which depended almost entirely on the U.S.S.R. for imported oil, is suffering a severe liquid fuel squeeze. Motorists are unable to obtain even the miserly gasoline rations prevailing earlier this year because of delayed arrivals of Soviet tankers. The government warned of possible gasoline rationing and strict limits on vehicle speed and air conditioning use.
SOVIETS HIT
The Soviet Union has been hit with loss of revenues and future investment as a result of the Persian Gulf crisis.
Moscow has disclosed it was forced to halt work on a $10 million contract at Kuwait's 370,000 b/d Mina AlAhmadi refinery following Iraq's invasion.
The deal involved four desalting units. Moscow abandoned the project because of inability to obtain necessary equipment, intermittent electricity shutoffs, and unreliable food deliveries.
All 880 Soviet citizens were evacuated from Kuwait by late August. The newspaper Izvestia reported that besides large loans provided by Kuwait to the U.S.S.R. prior to the Iraqi invasion (OGJ Newsletter, Aug. 6), Kuwait had agreed to "subsidize Soviet oil field development in remote areas of Siberia and arctic regions."
This agreement, together with other financial aid, cannot be carried out now, Izvestia said. It added that because of Moscow's economic sanctions, a large number of big Soviet-assisted projects in Iraq will be canceled, causing the U.S.S.R. to lose still more revenue.
JAPAN'S EFFORTS
Japan continues to press efforts to make up the shortfall of crude supplies from Iraq and Kuwait.
Before the crisis, Japan was receiving 12% of its oil supplies from Iraq and Kuwait.
Abu Dhabi has withdrawn its earlier decision to cut Japanese liftings and now will supply Japan 200,000 b/d. The emirate also said it is ready to increase Japanese liftings by another 10% beginning with September shipments. The earlier cut was spurred by U.A.E.'s efforts to cut its production to 1.5 million b/d in line with OPEC's July agreement on production and pricing.
Japan decided to release its national strategic oil reserve in September, the first time the government has taken that step. Japan's national reserve totaled about 322 million bbl, or 88 days of consumption as of July 31.
Combined with private stocks, Japan's total strategic oil reserve as of July 31 was 519.24 million bbl, or about 142 days' consumption.
The release of public stocks was approved after the Japan Petroleum Federation said last month that a 60 day Japanese oil reserve sufficed for now.
SCRAMBLE FOR SUPPLIES
Developing nations in the Far East and are being buffeted by higher oil prices and the scramble to replace supplies from Iraq and Kuwait.
Among recent developments:
- India has asked Venezuela to supply it with 14,000 b/d of Lago medium crude to offset its loss of Middle East crude. Malaysia agreed to supply India with 5.475 million bbl of crude in October. In addition, Malaysia is willing to reserve another 5,000 b/d of spot crude within 1 year beginning in October. India in turn agreed to ship 12 cargoes of urgently needed naphtha to Malaysia. Iran will supply India an extra 2.19 million bbl of spot crude as of the last week of August. India earlier had signed a term contract with Iran covering supply of 30,000 b/d in 199091. India also is negotiating supplemental supplies of crude and products from Indonesia, Saudi Arabia, and the U.S.S.R. India's domestic crude supply situation is worsened by civil strife in Assam state, where students blocked employees from operating six crude production facilities and cut the flow of feedstock to two of the state's three refineries. Assam accounts for about 15% of India's oil output. Indian stocks just prior to the crisis totaled only 5 weeks of supply.
- South Korea's energy minister ordered five South Korean companies to ship home all crude stored at facilities in North Yemen and Egypt after the loss of 75,000 b/d of Kuwaiti oil. South Korea also is seeking supplies from Libya and Mexico.
- Malaysia will hike its oil production by 10,000 b/d to 605,000 b/d to meet increased demand and dedicated half that extra volume to Association of South East Asian Nations members.
- The Philippines is looking at tough measures to cushion the effect of the oil price spike on the economy, including possible drastic conservation measures and a flexible tax on petroleum products. The Philippines is negotiating additional oil supplies with Iran and Saudi Arabia, as well as the absorption by Saudi Arabia of more than 40,000 Filipino contract workers displaced in Iraq and Kuwait by the invasion.
- Singapore government officials urged citizens to begin efforts to conserve energy and use mass transit to cope with a possible oil supply shortfall.
- Venezuela and Mexico renewed the San Jose accord last month for the 10th consecutive year to provide nine Central American and Caribbean nations with as much as 130,000 b/d of oil on special terms, including soft loans. Venezuela agreed to renew oil shipments to Nicaragua, which it halted several years ago when the former Sandinista government failed to pay overdue oil bills. Venezuela also wants to include Haiti in the accord but first must obtain Mexico's approval. The former military government of Haiti was expelled from the program after it had been discovered reselling oil meant for domestic use.
- Nicaraguan service station operators closed the last weekend in August to protest a new 4% tax on gasoline. The tax was imposed because the government is spending an extra $4 million/month to buy higher priced Venezuelan oil supplies as a result of a cutoff of Soviet oil supplies last July.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.