There's no escaping it: In just a few years the world will need much more crude oil than it now receives from members of the Organization of Petroleum Exporting Countries. Most of the increment will have to come from the Middle East and Venezuela.
Geology and economics make that much fairly certain. From there, the picture blurs.
VOLUME UNCERTAIN
How much OPEC oil the world will need is very uncertain. The volume depends on production from outside the exporter's group and on worldwide demand, neither of which is easy to predict.
One recent study projected the call on OPEC oil at 30.4-34.1 million b/d in 2000 and 34.1-50.1 million b/d by 2010 (see table, OGJ, July 11, p. 36). OPEC members this year have produced about 25 million b/d, roughly 3 million b/d below capacity without Iraq. With Iraq back on stream, OPEC members producing at current capacity would be able to satisfy little more than the lowest projected call on its crude at the turn of the century.
So OPEC's production capacity must grow. But will it?
As long as the resource is no constraint, market theory says oil will be available in sufficient quantity when it is needed. The tens of billions of dollars of capital necessary for new production capacity will be available, too, even if sources and targets cannot now be identified. Yet market theory assumes that capital enjoys reasonable freedom of movement.
For several years, OPEC officials have been calling for help with investments in production capacity. Well they should. The state oil companies that own reserves and control resource access in most OPEC countries no longer have enough free cash to finance major new capacity ventures on their own.
Moreover, OPEC officials have reason to request, if not expect, some sort of market assurance. Their countries face huge, longterm financial and cultural commitments and understandably want to know that demand will be at hand when their oil is ready to flow. While markets do not provide guarantees like this, they do offer ways to manage the risk. OPEC officials can best promote their market security interests by continuing to resist oil tax increases in consuming nations.
But OPEC officials also must acknowledge how some of their most important members restrain the flow of capital to needed investments. With a couple of exceptions, countries with the greatest prospects for production capacity growth strictly limit investments by outsiders or exclude it altogether.
This is beginning to change. Venezuela is slowly welcoming international capital back to its oil fields. Kuwait has been talking with foreign oil and gas companies and seems close to making some deals. Iran has flirted with international capital but must party economic necessity against isolationist pressures. And in a reserves class by itself sits Saudi Arabia: silent, closed to outside exploration and development capital, sliding deeper by the day into debt.
ECONOMIC PRESSURES
Producing countries need to add production capacity-not just to satisfy the world's oil needs but also to sustain their economic development-and lack the cash flow and borrowing power to do so on their own. If the walls of nationalization that OPEC countries built in the 1960s and 1970s don't fall, they will have to develop politically and economically acceptable leaks.
It's only a matter of time. OPEC's production capacity will grow. That no one at the moment knows exactly where the growth will occur should worry no one but OPEC members vexed by the suggestion of chance.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
Issue date: 11/21/94
