SOVIET WOES, MIDDLE EAST CRISIS CUT FIRST HALF WORLD CRUDE OIL PRODUCTION

Robert J. Beck
Economics Editor

The Persian Gulf crisis and the faltering Soviet oil industry spawned a 2.8% dive in world oil production during first half 1991 compared with the same period a year ago.

Total world flow averaged 59.781 million b/d, down 1.728 million b/d from first half 1990 (see table, OGJ, Sept. 9, p. 43).

First half Soviet production fell 1.13 million b/d from a year ago to 10.6 million b/d. Production among members of the Organization of Petroleum Exporting Countries in the first half averaged 22.927 million b/d, down 1.099 million b/d. Non-OPEC production averaged 36.854 million b/d, down from the 1990 first half average of 37.483 million b/d.

OPEC's share of total world production fell to 38.4% for first half 1991 from 39.1% for first half last year.

In 1979 OPEC production was 49.1% of total world production. OPEC's share dropped to 29.9% of the world total in 1985 and had been moving back up since then.

OPEC set new production quotas totaling 22.31 million b/d, reflecting the curtailment of production from Kuwait and Iraq. Production in the first half of 1991 was 2.8% above quota.

Looming in the fourth quarter is the seasonal increase in product demand and with it the possibility of tightening supplies, as a result of a continuing slide in Soviet production and Iraqi/Kuwaiti curtailments, that could push up oil prices.

NON-OPEC PRODUCTION

The decline of 629,000 b/d in non-OPEC production was mainly due to the 9.6% production slide in the U.S.S.R.

Political upheaval coupled with major technical production problems caused the big drop in Soviet flow.

Excluding the U.S.S.R., non-OPEC production moved up 501,000 b/d to 26.254 million b/d.

A Communist nation accounted for the biggest percentage increase in the period. Viet Nam posted a 113.3% jump in production to 64,000 b/d during first quarter 1991 due to development of White Tiger field (OGJ, July 15, p. 23.)

In terms of volume, Norway led the first half gainers with a production increase of 15.9% to 1.854 million b/d. Mexico also increased production sharply with a 7% rise to 2.778 million b/d.

U.S. production was also up from a year ago, rising 51,000 b/d to an average 7.437 million b/d for first half 1991. The increase was mainly due to a rebound in Alaskan production spurred by a big hydraulic fracturing campaign in Prudhoe Bay field and other efforts by North Slope producers to boost production in response to the Persian Gulf crisis.

In the Middle East, Syria boosted production 95,000 b/d to 465,000 b/d, and Oman pushed up production 80,000 b/d to 730,000 b/d.

Other major increases were posted by China, which was up 44,000 b/d at 2.8 million b/d, Turkey, up 27,000 b/d at 89,000 b/d, and Yemen, up 19,000 b/d at 207,000 b/d.

The Soviets weren't the only non-OPEC producers posting production declines.

The U.K. logged a 226,000 b/d drop to an average 1.668 million b/d in the first half. Production in Australia fell 51,000 b/d to 544,000 b/d, and Romanian production was off 30,000 b/d at 130,000 b/d. Production in Colombia and India fell 19,000 b/d from year ago levels to average 408,000 b/d and 675,000 b/d respectively.

OPEC PRODUCTION

Production from OPEC heavyweights Kuwait and Iraq was down sharply due to war damage to the Kuwaiti industry and the continuing United Nations embargo on exports from Iraq.

The loss of more than 5 million b/d in production capacity from the two countries pulled overall OPEC production down 1.099 million b/d to 22.927 million b/d. A substantial portion of the lost production was made up by other OPEC members, notably Saudi Arabia.

Although more than 320 Kuwaiti well fires have been extinguished (OGJ, Sept. 9, p. 33), Kuwait production averaged only 30,000 b/d, compared with 1.792 million b/d for first half 1990.

The U.N. embargo on crude exports from Iraq dragged average production to only 227,000 b/d, down from 3.184 million b/d during first half 1990.

Also caught in the conflict was the Neutral Zone, where production is shared between Kuwait and Saudi Arabia. Neutral Zone production fell 334,000 b/d to average only 27,000 b/d for the first half of this year.

As a result of the Persian Gulf conflict and its aftermath, combined production from Iraq, Kuwait, and the Neutral Zone averaged only 284,000 b/d during the first half, down 5.053 million b/d.

The other 11 OPEC members boosted production to 22.643 million b/d in first half 1991 from 18.869 million b/d last year, making up for nearly 80% of the production decline experienced in Kuwait and the Neutral Zone.

By far the largest increase in production was from Saudi Arabia, where production jumped 44.8% to average 7.963 million b/d. The size of that increase surprised many industry analysts who believed Saudi Arabia was not capable of increasing production by so much so quickly. Prior to the conflict Saudi Arabian sustainable production capacity was estimated at only 7 million b/d.

To help fill the void, the United Arab Emirates increased production 372,000 b/d to an average 2.439 million b/d for first half 1991. Venezuela increased production 309,000 b/d to 2.333 million b/d, and Iran boosted production 286,000 b/d to 3.323 million b/d.

Production from Indonesia moved up 197,000 b/d to 1.456 million b/d. Libya increased its production 175,000 b/d to 1.5 million b/d, and Nigeria pushed up production 109,000 b/d to 1.875 million b/d.

OPEC QUOTA

OPEC adopted a new set of quotas totaling 22.31 million b/d effective last Apr. 1.

The quota reflects the new production alignment and does not include oil from Iraq or Kuwait. First half OPEC production was 2.8% above quota but was not considered significantly excessive and did not lead to a collapse in crude oil prices as in past years.

Most OPEC members produced very close to the new quota during the first half. The U.A.E. average first half production topped its quota by 119,000 b/d, Iran by 103,000 b/d, and Venezuela by 93,000 b/d.

In spite of its push, Saudi Arabia production was 40,000 b/d below quota.

Current estimates place OPEC productive capacity at about 24 million b/d, a little more than first half and current levels of OPEC production.

OIL PRICES

The absence of significant production from Kuwait and Iraq this year has made it easier to control OPEC production at a level close to the quota target, resulting in uncharacteristically stable crude prices.

The average price of world export crude oil for first half 1991 was $17.48/bbl, up from $16.33/bbl for the same period of 1990, Energy Information Administration data show. Last year, prices slipped during first half due to excess OPEC production, falling to as low as $13.09/bbl the week of June 22.

Oil prices started 1991 at an average $22.27/bbl. That price still reflected a war premium because it was uncertain how much more supply disruption would occur once fighting erupted.

After the conflict, prices slipped to an average $17.01/bbl for February and as low as $15.34/bbl the week of Mar. 1. But for the remainder of first half 1991, the weekly average world export crude price ranged from a low of $15.57/bbl to a high of $17.18/bbl.

In the last few weeks prices have begun to move up. The latest available price was $17.48/bbl the week of Aug. 23, 1991.

The OPEC reference price averaged $18.86/bbl for first half 1991. It was $25.95/bbl the first week of January but slipped to $16.97/bbl the first week of March.

The price has ranged from a low of $16.95/bbl the week of Apr. 5 to a high of $18.44/bbl the week of May 10. The OPEC basket price moved up to $19.20 the week of Aug. 23rd.

PRODUCT DEMAND

The International Energy Agency estimated first half world demand for petroleum products at 66.25 million b/d, up from 65.95 million b/d in first half 1990.

Consumption in the Organisation for Economic Cooperation and Development member countries was the same as first half last year at 37.7 million b/d. A sharp drop in North American demand of 650,000 b/d was offset by increases of 450,000 b/d in OECD Europe and 200,000 b/d in the OECD Pacific countries.

IEA reported demand in the U.S.S.R. fell 300,000 b/d in first half 1991 to an average 8.35 million b/d. Demand in non-OECD Europe fell 100,000 b/d.

However, those declines were more than offset by the increase in non-OECD developing countries' consumption. Demand in this group moved up 700,000 b/d to 18.65 million b/d.

U.S. product demand averaged 16.386 million b/d in the first half, compared with 17.012 million b/d last year, EIA said, mainly due to the slowdown in economic activity.

U.S. gasoline demand averaged 7.118 million b/d, compared with 7.192 million b/d during first half 1990. Demand for distillate fuel oil fell to 2.967 million b/d, a drop of 129,000 b/d from the same period last year. Residual fuel oil demand was down 163,000 b/d at 1.159 million b/d for the first half.

Lower product demand stemmed from the recession and competition from low priced natural gas.

STOCKS

IEA estimates show a marginal stock increase this year averaging about 200,000 b/d for the first half.

Stocks were reduced in the first quarter at a rate of 700,000 b/d. In the second quarter there was a stock build of about 1.1 million b/d.

Last year, crude and product stocks increased sharply during the first half as refiners took advantage of declining crude prices. Stocks rose an average 1.8 million b/d during first half 1990.

Stocks increased at a rate of 800,000 b/d in the first quarter and 2.8 million b/d in the second. Stock levels usually are drawn down in the first quarter of the year to meet high winter product demand.

The year to year shift in demand for crude stocks accounts for a drop of about 1.6 million b/d in worldwide crude demand.

The IEA survey of public and company stocks in OECD countries shows total primary stocks as of last July 1 at 3.42 billion bbl, down 58 million bbl from a year earlier. Company stocks were down 51 million bbl at 2.412 billion bbl. Public stocks were down 7 million bbl at 1.004 billion bbl.

Total public and company stocks on July 1 represent 98 days of consumption, up 1 day from a year ago. The public stocks are not generally available for consumption but instead are held for declared emergencies. Public stocks were 32.3% of the total July 1. Company stocks remained at 69 days of supply, the same as a year earlier.

During 1974-84 company stocks represented 76-92 days of consumption and averaged 82.4 days.

During the past 7 years company stocks have amounted to 67-72 days of consumption and averaged only 68.9 days.

OUTLOOK

The winter heating season historically results in a substantial increase in demand for petroleum products, leading to an increase in crude demand. That could cause a tight fit between oil supply and demand situation later this year and place upward pressure on prices.

The IEA projects fourth quarter world demand for petroleum products at 67.1 million b/d, up 2.8 million b/d from the third quarter. The agency projects non-OPEC supplies at 41.3 million b/d in the fourth quarter. The remaining 25.8 million b/d will have to be supplied from OPEC production or from stocks.

If there is no significant change in stock levels, OPEC would be called upon to provide 2 million b/d of natural gas liquids and 23.8 million b/d of crude oil. This is very close to the 24 million b/d estimated crude productive capacity of OPEC. Combined with low stock levels, any surge in demand could result in temporary crude shortages in world markets.

The potential for a tight crude market will intensify in first quarter 1992. IEA estimates world demand will advance 1.3 million b/d to 68.4 million b/d and non-OPEC supply will remain at 41.3 million b/d, leaving 27.1 million b/d of supply that will have to come from stocks or from OPEC.

Stock drawdowns will have to play a role. Without them, the call on OPEC would be for 27.1 million b/d, or 2 million b/d of NGL and 25.1 million b/d of crude oil, again exceeding the current productive capacity of OPEC.

There is some evidence stocks are currently being built in anticipation of supply needs this winter.

Preliminary IEA estimates of OPEC crude production for July and August average 23.4 million b/d. That is 2.2 million b/d more than the estimated demand for OPEC oil in third quarter 1991, based on world demand and non-OPEC supply.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.