OPEC CRACKS APPEAR AS GULF WAR RAGES ON

Tumbling oil prices have again split the Organization of Petroleum Exporting Countries.

When the price of Dubai crude, widely used to calculate Middle Eastern prices, fell about $2 on the week to $12.90/bbl Feb. 19, OPEC Pres. Sadek Boussena of Algeria moved to convene an emergency meeting this week to discuss declining prospects for prices.

But his efforts were snubbed by key Persian Gulf producers, who were content to wait for the next scheduled meeting of OPEC's monitoring committee Mar. 11.

Officials and analysts stepped up criticism of International Energy Agency's 2.5 million b/d strategic oil stockdraw.

Meantime, the continued allied air assault has damaged Iraq's export flexibility and severely damaged that country's entire refining/petrochemical infrastructure.

And key Persian Gulf industrial facilities may be safe from contamination by massive oil slicks there.

PRICE SLIDE

The latest fall in prices was a reaction to the Soviet Union's plan to end the Persian Gulf war. Dubai crude had been trading at about $15/bbl, opening a much wider differential than usual from North Sea Brent blend and West Texas intermediate. News of the peace plan depressed the price, although it recovered to $13.50/bbl on lack of enthusiasm for the concept from President Bush.

In the same period, Brent for 15 day delivery fell $3.40 to $17.50/bbl before recovering to $18.45/bbl as peace hopes dimmed.

Product prices in Europe also slipped in the period. After its early February boom, gas oil dropped $25 to $260/ton and Rotterdam premium gasoline fell $22 to $212/ton. Low sulfur fuel oil fell $7 to $85/ton and high sulfur oil $5 to $67/ton.

In the U.S., light, sweet crude for March delivery on the New York Mercantile Exchange dropped almost $3 on the week to close Feb. 20 at $20.07/bbl. Nymex March products futures also continued their slide in the same period, with unleaded gasoline falling about 5 to close at 58.6/gal and heating oil dropping more than 10 to close at 60.6/gal.

BOUSSENA'S CONCERNS

Boussena issued an informal invitation to all members to a Feb. 25 meeting to discuss erosion of the high price levels seen since Iraq's Aug. 2, 1990, invasion of Kuwait.

Boussena has told members on several occasions the current high level of OPEC output-about 22.6 million b/d-combined with near record stock levels in consuming and producing countries-will result in a price-depressing glut.

Demand traditionally declines in the second quarter, and in some OPEC quarters there are fears the price slump that followed the Soviet peace initiative is a foretaste of a more serious plunge in the second quarter.

The invitation, however was not well received by most Persian Gulf producers. Boussena received a series of reasons for dismissing the Feb. 25 meeting, ranging from difficulty leaving the region while the fighting continues to the proximity of the scheduled monitoring committee Mar. 11.

Even when ministers get together for the monitoring committee, there is little guarantee action will be taken to boost prices in the form of renewed production quotas.

Saudi Arabia is expected to oppose any move to reimpose any form of production control until the fighting in the gulf has ceased.

Elsewhere, Indonesian Minister of Mines and Energy Ginandjar Kartasasmita called on OPEC to cut production to revive flagging oil prices. He cited a needed cut to 21 million b/d in OPEC output to restore prices, adding that he expected such a cut to be forthcoming at the Mar. 11 ministerial meeting.

Kartasasmita said Indonesia would be willing to return to its production quota of 1.37 million b/d from the current 1.5 million b/d and would be satisfied with an oil price of $18-21/bbl.

IEA CRITICIZED

Venezuela's President Carlos Andres Pereze added his voice to the chorus of IEA critics for its decision to release strategic stocks onto the market.

"We have decided to expand our production, and there is no change in that decision," Perez said. "However, what the top will be, and what schedule will be followed to reach that point will all depend on our financial resources. Of course, there would be a delay in the timetable if oil prices go steadily down."

The IEA emergency oil sharing system is "a failure by most standards," claims the Oxford Institute for Energy Studies.

"If implemented, it would require transferring oil from countries suffering the heaviest economic burdens due to the supply disruption to countries better able to adapt, imposing additional economic costs on the former that are in excess of any economic gains to the latter," wrote Hans W. Gottinger in a study for the institute.

Equally proportionate cuts in oil demand can't be justified on grounds of economic efficiency or fairness, Gottinger contends.

"The added economic costs of this system are reflected in the higher average prices that would probably prevail under the IEA mandated allocation of oil, relative to the free market solution."

Gottinger also called IEA's emergency sharing system unworkable because nations where oil prices rise most in an emergency will attract more oil than those where prices are kept low.

"Thus countries with higher prices will have allocation obligations, and countries with low price levels will have allocation rights."

In order to force sales from the former to the latter, he claims, governments will have to subsidize differences between selling prices in countries with allocation obligations and buying prices in countries with allocation rights or simply confiscate the oil.

WAR DAMAGE, SPILL UPDATE

Continuing air raids on strategic targets in Iraq have damaged Iraq's flexibility to make use of either Persian Gulf or Mediterranean export terminals by interchanging crude between the northern and southern oil fields.

One of the key control units on the reversible flow pipeline system, the Haditha K-3 pumping station, was bombed and is reported to be out of action according to reports from people leaving Iraq.

The same sources have confirmed the extent of damage to all lraq's refining and petrochemical facilities.

A change in wind direction has brought temporary respite to coastal oil and gas facilities and public utilities in Saudi Arabia and Bahrain threatened by oil slicks.

Most booms and cleanup equipment are now concentrated on preventing oil from entering seawater intakes for desalination plants and cooling water facilities for refineries and petrochemical and other industrial plants.

The concentration of available equipment has left large areas of coastline undefended from the two Kuwaiti slicks, resulting in worsening daily pollution of beaches and wetlands.

Industry sources say there is still a shortage of information about the progress of the slick released from the Mina al Bakr export terminal into Iraqi waters, The only facilities threatened are thought to be in Iranian waters, and there is currently little chance of the oil moving south.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.