Attention of the world oil industry fixes on supply this month as the Organization of Petroleum Exporting Countries meets to argue about cutting production. Yet output of crude oil everywhere else in the world is more interesting.
Non-OPEC production has been the story of the 1990s. In the first half of the decade, the question was whether and how it could keep rising. Now, with everyone finally accustomed to steady increases in production from outside of OPEC, the gains seem likely to shrink, cease, or give way to decline.
But which will it be? It's a question that should weigh heavily in OPEC's deliberations.
Range of possibilityForecasts about non-OPEC oil production cover a wide range of possibility. With producers shutting in onshore wells by the thousands in the U.S. and delaying and scaling back large offshore projects around the world, declines are certain. What's uncertain is the net effect on total output volumes.
The International Energy Agency projects a 400,000 b/d gain from the world outside OPEC this year. The Centre for Global Energy Studies (CGES) expects little or no growth. And, in an intriguing analysis published last month, David A. Pursell of Simmons & Co. International, Houston, predicts a 1 million b/d decline.
Pursell bases his forecast on a region-by-region analysis of depletion rates, which together would amount to 15%/year outside of OPEC if no new wells were drilled in a year of flat capital spending. He interpolates between that base level and a 2%/year production increase-assumed on the basis of recent history to result from a 10% increase in capital spending-to relate non-OPEC production to various degrees of spending change.
Pursell assumes that spending will be down 25% this year. Under his depletion-based scheme, a spending decline of that size corresponds to his projected 1 million b/d drop in non-OPEC production, after adjustments for spending efficiencies and lags related to reduced exploratory expenditure. Non-OPEC oil output thus would average 43.6 million b/d.
That would be good news for the oil market. With non-OPEC production at the level Pursell foresees, demand up a modest 1%, and OPEC 75% compliant with cuts announced so far, inventories would fall at a rate of 1 million b/d in 1999, the analyst says. By the end of the year, inventories would be below levels of 1996, when crude prices exceeded $20/bbl.
For OPEC, so large a decline in production by others would of course ease pressure to cut its own output. But what if non-OPEC production doesn't decline?
CGES, on the basis of its own expectations about demand, says pulling global inventories back to normal levels requires cuts totaling 1.5 million b/d. Since it assumes little or no change in non-OPEC flow, members of the exporters' group have to bear the volume load if crude prices are to rise. It's a matter of revenue hopes, says the London consultancy. A 1 million b/d production cut beginning in the second quarter would raise prices in the second half by 8% over those of the first half and boost OPEC's revenues by 6%, CGES says, "while a 2 million b/d cutback would generate a 14% gain."
From OPEC's point of view, the choice should be easy: Less production, more money. But nothing about OPEC-which has, after all, reduced output by about 2 million b/d already-is ever easy. In Houston last week, Sheikh Hamad bin Jassim bin Jabr Al-Thani, Qatar's foreign minister, pointed to Venezuela's refusal so far to cut further and declared, "This is personal."
Politics and economicsProduction-cutting thus remains at least partly a political activity within OPEC and a harshly economic one everywhere else. With no demand spurt in view to rescue producers from the need to make difficult choices, a haunting scenario emerges for March: A closely watched producer's group talks about cutting output and perhaps trims in a minor way while nonmembers make the actual sacrifice.
It wouldn't be the first time.
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