STATIC TOTALS MASK BIG INTERNATIONAL CHANGES

The only parts of Oil & Gas Journal's Worldwide Report that don't change much this year are the totals.

Estimated reserves of crude oil and lease condensate dropped fractionally to 999.1 billion bbl. Natural gas reserves increased 5.5% to 4.2 quadrillion cu ft. Production of crude and condensate rose 1.4% to 60.3 million b/d. And crude refining capacity increased fractionally to 74.6 million b/cd. But the fairly static totals mask major changes resulting from two historic developments.

One of them is the political change sweeping Eastern Europe and the U.S.S.R. Boundaries have blurred between Communist and nonCommunist areas. The Worldwide list, therefore, no longer divides the world into those categories.

The other historic development is Iraq's invasion of Kuwait Aug. 2. An international embargo cut off oil exports from both countries, and the market has been adjusting ever since.

The adjustments show up in OGJ's estimates of oil production from key individual producing countries such as Saudi Arabia, Nigeria, and Venezuela. They had unused production capacity to tap to help make up for lost Iraqi and Kuwaiti supplies.

The Organization of Petroleum Exporting Countries freed them and other members from quotas in order to fill the gap. And prices $10/bbl and more above preinvasion levels provided the reason to do so.

So OPEC production-which had averaged 23.2 million b/d in July and dropped to 19.9 million b/d in August with Iraq and Kuwait off stream-bounced to 22.2 million b/d in September and 22.6 million b/d in October. The crude price jump, meanwhile, was discouraging consumption.

By November, with production increasing and demand failing, the market had reached a fragile balance. Prices remained above preinvasion levels due to fears of war and the absence of a safety margin of unused production capacity.

But even capacities were increasing. Before the invasion, key OPEC members-among them Saudi Arabia, the U.A.E., Nigeria, and Venezuela-had started or were considering long range projects to boost production capacity. The price and volume increases following the invasion promised to help them fund the buildup.

In just the 5 months since the invasion, estimated OPEC production capacity without Iraq and Kuwait has increased by about 1 million b/d to 23.4 million b/d.

Production of condensates and gas liquids by the exporters' group has increased as well. Before the invasion, output averaged 1.9 million b/d. The average dropped to 1.8 million b/d in August but later recovered and recently reached 2 million b/d.

A remaining problem is crude quality. Crudes produced to offset lost supplies are heavier than Iraqi and Kuwaiti crudes. With demand falling, some of the heavy crudes have been difficult to sell.

MIDDLE EAST PATTERNS

The Iraqi invasion transformed patterns of production and exports from the Middle East.

Throughout the region, shut-in wells and mothballed processing equipment have been brought back into service. Saudi production, which averaged about 5.4 million b/d before the invasion, increased to 7.6 million b/d by late November.

According to reports from the Middle East, Saudi production was expected to average 8.5 million b/d in December. Saudi Arabian Oil Co. (Aramco) is confident that this rate can be sustained for as long as needed.

Initially, Aramco brought heavy crudes to the market. But the final 1 million b/d of incremental supply is almost entirely light and medium crudes from the kingdom's southern area fields.

By the middle of the 1990s, Saudi Arabia expects to have increased its sustainable production capacity to 10 million b/d. The kingdom bases its investment program on forecasts of increased demand for OPEC oil during the second half of the decade.

It's unlikely at present that Saudi Arabia will accelerate the program in response to the invasion.

The effects of the price jump on long term oil demand remain uncertain.

In the Neutral Zone between Saudi Arabia and Kuwait, production continues from offshore fields at about 300,000 b/d. Iraqi troops occupy the Kuwaiti-run onshore fields.

The only other country in the Persian Gulf that has boosted production since the invasion is the United Arab Emirates. Ironically, the U.A.E. had just been persuaded to toe the OPEC line on production quotas and had reduced output from 22.1 million b/d to 1.7 million b/d when Iraq invaded Kuwait.

Abu Dhabi, the swing U.A.E. producer, has again boosted output, pushing the total to about 2.3 million b/d. Further work, particularly onshore, was considered capable of pushing sustainable output to 2.4 million b/d by yearend.

Iran is the only other country in the Persian Gulf with the theoretical ability to increase output. However, apart from a burst in September-when output climbed to 3.4 million b/d-production has averaged 3.1-3.2 million b/d. The International Energy Agency expects Iran to have available capacity of 3.4 million b/d by the end of this year.

But there are still doubts in the industry about sustainability of production and marketability of Iran's heavy crude.

AFRICA'S RESPONSE

Only two of OPEC's African members have been able to capitalize on the market opportunities presented by interruption in supplies from the Middle East.

Nigeria and Libya have increased output. Algeria has not been able to push production beyond 800,000 b/d, while Gabon was already producing flat-out at about 300,000 b/d.

Before the invasion Nigeria had started to formulate plans for boosting capacity to meet the expected greater call on OPEC crude in the mid-1990s. Output from the West African country was expected to be averaging 2 million b/d by the end of the year.

Libya, with the largest reserves in Africa, is also boosting output from its 1.3 million b/d average of earlier this year. Output has reached 1.4 million b/d. Industry sources estimate yearend capacity at 1.5 million b/d.

UNCERTAINTY IN EUROPE

Uncertainty hovers over volumes of crude oil available from offshore Northwest Europe this winter.

U.K. offshore production, disrupted most of the year by an intensive program by all operators to install or reposition platform emergency shutdown valves, dropped to 1.6 million b/d at the end of summer. The construction work was extended by a series of unofficial strikes by contractors' personnel.

Further disruptions were expected through the final quarter of the year as the Forties and Brent pipelines were scheduled to close to accommodate new construction work.

However, the operators, BP Exploration and Shell-Expro, sought dispensations that would delay the work until the second quarter of next year, when demand for crude is lighter. That would allow U.K. output to remain at about 1.9 million b/d through winter.

Industry sources had been expecting production next year to exceed this level and average at least 1.95 million b/d. But the most recent U.K. government estimate suggested that output in 1991 would not exceed the 1.89 million b/d forecast for the whole of 1990.

Norwegian output should reach a record 1.8 million b/d this winter as high output from Statfjord field coincides with new peaks from Oseberg and Gullfaks fields and first flows from Gyda and Hod fields.

Total oil output from Danish and Dutch sectors of the North Sea remains at about 175,000 b/d.

U.S.S.R., EASTERN EUROPE

Although Communism faded rapidly from the global landscape in 1990, its economic wreckage remains much in evidence-nowhere more so than in the world's No. 1 producing country.

The Soviet Union's production fell below 12 million b/d this year to average an estimated 11.5 million b/d in a trend that will be difficult to reverse.

Giant fields in the two big producing areas-the Volga-Urals region and Western Siberia-are in decline. Equipment is in disrepair. Worker strikes plague the oil fields. Accidents are common.

Best near term hope for slowing the production decline is Tengiz oil field, believed to be the biggest find in the U.S.S.R. since the 1965 discovery of giant Samotlor field. A plant to handle the field's oil and gas, which contain as much as 25% hydrogen sulfide, is nearly ready for start-up.

The Soviet government's economic restructuring has diverted state investment to consumer products and away from the petroleum industry. To compensate, the government has opened the industry to foreign investment, prompting the recent rush of joint venture activity in the country. Despite the international petroleum industry's enthusiasm for Soviet geological prospects, huge problems remain. The country's economy this year has seemed headed for collapse. And Soviet republics are seeking more autonomy.

There's still no basic oil and gas law, and it's unclear what decentralization of the republics means to international companies anxious to begin work on Soviet projects. As a result, the economic lift expected from foreign investment remains at some indistinct point in the future for a country that needs help immediately. And an embargoed Iraq isn't making payments on the $80 billion it owes the U.S.S.R. for weapons used in its 8 year war with Iran.

The production slide, meanwhile, is cutting Soviet exports and, therefore, receipts of desperately needed hard currency. This year's oil export average is expected to be the lowest since the 3.33 million b/d of 1985, down from a peak of more than 4.1 million b/d in 1988.

Before the Iraqi invasion of Kuwait, the Soviet Union had begun reducing its subsidized exports of oil to former Communist satellites in Eastern Europe. So price hikes following the invasion devastated economies in that region.

ASIA-PACIFIC ACTIVE

In contrast to those of Eastern Europe, economies in the Asia-Pacific region generally were strong when crude prices jumped in August. The region has been hurt nevertheless, mainly due to its growing dependence on imported oil.

In late September, East-West Center of Honolulu projected that if crude prices remained at about $30/bbl for 12 months and if consumption patterns didn't change, Asian net oil exporters would earn an additional $9 billion due to the Iraqi invasion. Exporters are China, Viet Nam, Brunei, Indonesia, and Malaysia.

But the oil importing countries would sustain a net increase in foreign exchange expenditures of $44 million.

All of the region's key producers scored oil production increases this year.

India, which leads the region in drilling activity, increased flow by 4.5% to an estimated 679,000 b/d, with most of the gain coming in the offshore Bombay High area.

Two state oil companies lead the activity, but India has attracted international companies to exploration in several areas. Similar efforts account for much of the production increases elsewhere in the Asia-Pacific region.

Indonesia, the area's only member of OPEC, boosted oil production by 3.5% to an estimated 1.3 million b/d this year, largely on the strength of new production from recent discoveries by international companies. But the increase is probably a temporary reversal of a decline that began after production peaked at 1.7 million b/d in 1977.

Natural production declines and rapidly growing internal demand will make it difficult for Indonesia to remain an exporter for many more years. To sustain drilling, state owned Pertamina has signed 10 production sharing contracts with foreign companies in 1988 and 19 in 1989. It expected to sign 20 this year.

Malaysia, too, has been actively signing production sharing contracts with foreign companies. Further gains are likely following this year's estimated 6.7% production increase to 605,000 b/d.

China, the biggest regional producer, managed a fractional gain to 2.755 million b/d this year. And Australia, recently liberalizing its tax regime for the Bass Strait producing region, boosted flow nearly 20% to 582,000 b/d.

Many of the other Asia-Pacific countries have small production now but prospects for increases in the future.

Pakistan continued its steady string of production gains with a 14% increase to 60,000 b/d. Thailand gained 2% to 41,000 b/d and has been actively opening acreage to international companies.

Viet Nam doubled production to 40,000 b/d and has let at least nine production sharing contracts to foreign firms in the past few years.

Myanmar, too, has opened its doors to foreigners.

And Papua New Guinea soon will join the list of producing countries when the Hedinia area fields come on stream.

WESTERN HEMISPHERE

In the Western Hemisphere, spotty production gains in Latin America offset a 5.2% decline in the U.S. and 3.2% drop in Canada.

The biggest increase came from Venezuela-22% to an estimated average of 2.1 million b/d for the year. One of two Western Hemisphere members of OPEC, Venezuela is considering a production capacity increase to 4.2 million b/d by 1995.

Ecuador, the other OPEC member, boosted flow 3% to 287,000 b/d and continues to make acreage available to international companies. And Colombia's 445,000 b/d average this year represents a 10% increase. New pipelines have boosted production in the Upper Magdalena Valley region, and there has been some slowdown in the guerrilla activity disrupting operations of the Cano Limon pipeline.

Capital shortage plagues a number of Latin American countries with potential to produce more than at present.

Peru's oil flow held shakily at 132,000 b/d this year after several years of decline. A cash shortage has kept the country from paying service contractors, which in turn have stopped work-and production-intermittently to await payment and vital supplies.

The government recently announced an overhaul of the petroleum sector, including a cut of domestic product subsidies and a new effort to attract foreign participation in upstream and downstream projects.

Another cash-strapped country with production well below potential is Brazil. Petrobras, the state oil company, has proposed a program to boost flow to 1 million b/d by 1995 from this year's estimated 633,000 b/d.

The country has new production or discoveries in the offshore Campos and Santos basins and onshore in the Upper Amazon region. But Petrobras has been sapped by product subsidies and constitutional restrictions on foreign participation in upstream projects.

Cash problems forced Petrobras last year to scrap plans to boost flow to 1.5 million b/d later this decade.

The company decided to seek a more modest increase after the Iraqi invasion of Kuwait, which shattered its longstanding hopes of profiting from a special trade relationship with Iraq.

Capital problems still hurt Mexico, which also bans foreign capital from upstream work. The country has, however, scored some recent successes in international credit markets.

Upstream work has been slow for at least 5 years due to national austerity programs. The resulting stagnation of production and rapidly rising oil imports threaten Mexico's ability to maintain exports.

Argentina has been opening acreage to foreign companies and more recently began to at least partly privatize the state oil company, Yacimientos Petroliferos Fiscales. The country's production gained 3% to 473,000 b/d this year.

REFINING ACTIVITY

Worldwide refining capacity this year exceeds last year's total by 588,000 b/d.

Some of the plants listed this year in countries in Eastern Europe didn't appear in previous reports because data weren't available. Past reports did, however, include Eastern Europe country totals under Communist categories.

Outside Eastern Europe, refineries new to the list, and therefore increasing the worldwide total, are the 332,500 b/d Petromin Petrola Rabigh Refining Co. facility, which started up this year in Rabigh, Saudi Arabia; the 78,000 b/d Holborn Europa Raffinerie GmbH refinery, which had been idle and restarted in Harburg, Germany; and Iran's 190,000 b/d refinery at Abadan, which restarted after repairs to damage sustained in Iran's war with Iraq. Other regional and country capacity changes reflect changes at existing refineries.