OGJ NEWSLETTER

The "new world order" within OPEC will get a severe test in the seasonally weak second quarter. OPEC's agreement last week to trim output by 5% to about 22.3 million b/d in the second quarter helped brake the oil price plunge that had been gathering momentum in the wake of the allied forces' rout of Iraq's army.

March 18, 1991

7 min read

The "new world order" within OPEC will get a severe test in the seasonally weak second quarter.

OPEC's agreement last week to trim output by 5% to about 22.3 million b/d in the second quarter helped brake the oil price plunge that had been gathering momentum in the wake of the allied forces' rout of Iraq's army.

Saudi Arabia, clearly in control, spurned other members' requests to cut its production by as much as 3 million b/d in order to push prices back to the OPEC marker target of $21/bbl from a recent low of $16.64/bbl. Instead, the 5% cut was across the board, except for Algeria and Ecuador, which are exempt from the accord because their output has lagged quotas.

Chief beneficiaries are Saudi Arabia and U.A.E., with respective quota increases of about 50% and 55% vs. July 1990 quotas adding to a net gain of 3.14 million b/d--exactly what Iraq's quota was in July 1990. The public display of cohesion--excepting Iraq, which is in chaos and did not attend--firmed oil prices.

Nymex crude for April delivery closed Mar. 13 at $20.45/bbl, up $1.46 in 2 days but about flat with a week ago.

However, 22.3 million b/d will not bring a $21/bbl OPEC basket level, says Joseph Stanislaw of Cambridge Energy Research Associates: "It is more consistent with prices at best where they are now and most likely somewhat lower." IEA puts second quarter demand at 51.5 million b/d, which would put the call on OPEC oil at 21 million b/d, assuming no stockdraw. Demand for OPEC oil could be only 22.3 million b/d in the third quarter, spelling price weakness in summer if there is any cheating.

The crucial test: Can faint stirrings of economic recovery spur demand in the second quarter while oil supplies tighten with declining Soviet exports and shutin North Sea output caused by field maintenance projects? Perhaps even more critical is the fate of huge volumes of oil held in floating storage by Saudi Arabia and Iran. If these stocks are released independent of quota production levels, that will depress markets. And as always, there is the likelihood of quotabreaking--perhaps easier in the absence of a bellicose Iraq. The Saudis will be leading a tenuous balancing act for Persian Gulf producers between generating enough oil revenues to help defray huge war related expenses and not spiking prices enough to depress demand and anger new found allies among consuming nations. It will be even more precarious once Iraqi and Kuwaiti supplies reenter the market.

Kuwait may have 50,000 b/d of production on stream within 2 months--enough to run local power plants, says Kuwait Oil Co.

KOC has identified 30-40 wells not ablaze and at least seven undamaged. Priority after power restoration is another 50,000 b/d to refine for domestic gasoline needs. KOC now has 3 months' stocks of gasoline on hand (see related story, p. 40).

Although most analysts see sliding Soviet oil exports helping firm prices this year, ICF Resources Inc., Fairfax, Va., predicts increased Soviet oil exports will dampen oil price hikes after 1995.

ICF cites tremendous potential for energy efficiency improvements in the U.S.S.R. and eastern Europe and higher, free market prices dampening oil use there, as well as multinational joint venture efforts in the U.S.S.R. upstream helping to boost Soviet oil exports to 6.6 million b/d by 2010 from 2.8 million b/d in 1990. Attempts by Iraq and Kuwait to recover war losses and general OPEC disarray will keep oil prices below $25/bbl through 1995, ICF says. In constant 1990 dollars, oil prices will remain below $30/bbl until 2005, ICF predicts.

Venezuela continues to stump for creating a new world petroleum agency. Elaborating on a proposal last year by President Carlos Andres Perez, Pdvsa Pres. Andres Sosa Pietri says such an entity would act as a permanent consulting forum for oil producers and consumers. Sosa, who says there is considerable interest in the Bush administration for advancing the idea, contends producing and consuming nations should meet in order to avoid mutually damaging swings in oil prices and demand.

Privatization efforts are making more headway in Latin America. By the end of March or mid-April, Venezuela will unveil its new policy for foreign investment in upstream and downstream joint ventures there, says Luis Guisti, Pdvsa coordinator of strategic planning. Of special note is a separate program allowing small, independent operators to develop jointly with Pdvsa 57 marginal fields Venezuela had bypassed in the past because its production was constrained by its OPEC quota.

Argentina is pressing privatization of its marginal oil fields. It sold 133 fields last year and plans sale of another 67 fields May 31, says Ziff Energy Group, Calgary, which is helping coordinate the effort.

The focus is on fields producing less than 11250 b/d or left underdeveloped by state owned YFF. Many require only more advanced development or workover techniques to become more productive. Ziff cites purchases last year that include Norcen acquiring production for less than $2/bbl and British Gas paying more than $80 million for 16 fields at an average $3.50/bbl.

Ecuador's oil sector is working through some turmoil.

Ecuador's congress last week censured Minister of Energy Diego Tamariz for raising fuel prices and electric power tariffs and Petroecuador's alleged mishandling of crude exports. Tamariz is expected to resign. Meantime, production of about 10,000 b/d has been restored in Culebra, Yulebra, Yuca, and Auca fields in the Petroamazonas-Texaco area of Ecuador. Shutin production followed a 13 day seizure of the four fields by local communities demanding more services from the government.

Persian Gulf producers are finding more options for exporting hydrocarbons, notably with pipelines to Pakistan.

Pakistan and Iran have agreed in principle to build a pipeline to supply Pakistan with Iranian oil. The two also plan to build a joint venture refinery at Port Qasim, east of Karachi.

Qatar and Crescent Petroleum Co., Sharjah, plan to build a 1,600 km, mostly subsea pipeline to Pakistan to supply that country with Qatari gas.

Lower oil prices have shut in heavy oil production in western Canada. Esso will out Cold Lake output of 90,000 b/d by 10,000-15,000 6/d, Husky Lloydminster production of 25,000 b/d by 10-15%, and Norcen conventional heavy oil flow by 5,000 b/d.

The proposed 719 MMcfd capacity Altamont Alberta-Wyoming pipeline has received producer requests for 1.68 bcfd of capacity from Alberta producers.

Alberta gas would move through Altamont to Opal, Wyo., then through the Kern River system to California. Scheduled for late 1993 start-up, Altamont is competing with a planned expansion of PG&E-PGT's existing Alberta-California system.

The Bush administration is toughening its stance on ANWR Coastal Plain leasing. DOE Sec. Watkins told Congress last week President Bush will veto energy legislation that fails to provide for Coastal Plain leasing.

Alyeska says 8.5 miles of TAPS in the Atigun River flood plain north of Atigun Pass will be replaced this year as part of a corrosion repair program. It is negotiating to obtain a pig designed to measure pipe curvature and detect settlement.

FERC will study environmental issues regarding a major Northwest Pipeline project at six hearings in western states Mar. 18-26. Northwest has proposed spending $446 million to build 625.7 miles of loop and replacement line, increasing capacity to 534 MMcfd.

API says although gasoline costs rose 160/gal in 1990,

they were still cheaper than a decade ago. Average price for all grades of gasoline, including taxes, was about $1.21/gal last year vs. $1.22 in 1980. If adjusted for inflation and tax increases, the 1980 price would be $1.98/gal.

Meanwhile, General Accounting Office reports consumers are buying more premium gasoline than they need. It says premium sales as a percentage of total gasoline sales exceed the percentage of vehicles on the road that require premium. GAO notes the price difference between premium and regular gasoline sold at the pump is about the same as that at the refinery gate.