Saudi kite-flying on production rise stirs up reaction Agence France-Presse Habib Trabelsi

July 05, 2000

DUBAI, July 5 (AFP) - Saudi Arabia stirred political reaction in the Gulf after warning it would hike output to bring down oil prices, but analysts on Wednesday maintained it was merely kite-flying.

"The Saudi statement was a test of public opinion to sound out the reactions of other OPEC countries and the effect it would have on the oil market," said Fadhel al-Jalabi, director of the London-based Centre for Global Energy Studies (CGES).

Saudi's Oil Minister Ali al-Nuaimi warned Monday that if prices did not fall, the kingdom, in concert with the other producer countries, would increase production by 500,000 barrels per day (bpd) "very soon".

"This is a message to OPEC to say that the cartel's last production increase agreed upon in Vienna was not enough," Jalabi told the Qatar-based Al-Jazira satellite television channel.

Nuaimi, whose country is the world's largest oil producer nation, has certainly been overwhelmed by reactions, most of which were not positive.

He has seemingly been busy on the hotline since Monday trying to appease panicky fellow regional producers that Saudi Arabia would not act unilaterally and damage the cartel's unity.

Nuaimi on Tuesday contacted both his Kuwaiti and Iranian counterparts to assure them that Saudi Arabia would not take any decision to increase its production without consulting OPEC members and acting within the framework of a cartel accord.

On Wednesday Qatar's Energy Minister Abdallah bin Hamad al-Attiya said he had received the same message from Nuaimi.

One oil expert speaking under the cover of anonymity told AFP that "although under US pressure, Saudi Arabia would not increase its production in a unilateral way."

"It is, after all, Saudi Arabia that led the last two campaigns to increase the cartel's production to boost oil prices to reasonable levels," he said, adding that the Saudi statement had been "misinterpreted and badly exaggerated".

But an official Iraqi newspaper on Wednesday kept up Baghdad's criticism of Saudi Arabia, accusing it of looking to hurt the interests of OPEC members.

"The Saudi decision is an example of irresponsible behaviour aimed at hurting the interests of the member countries of OPEC," charged Babel, run by the eldest son of Iraqi President Saddam Hussein, Uday.

"The Saudi decision would cost OPEC countries enormous losses of not less than five billion dollars a month if the prices were lowered to 25 dollars a barrel," Babel said.

An Iraqi oil ministry official on Tuesday described al-Nuaimi's statement as a "US plot" and urged OPEC member states to stop bowing to pressure to lower prices from the United States -- the world's largest oil consumer.

The UAE reaction was markedly different, with Abu Dhabi saying it would go along with a future OPEC decision to raise output again to keep oil prices down after consultations with oil ministers from the OPEC member states.

The Organisation of Petroleum Exporting Countries (OPEC) decided in June to hike production from July 1 by a modest 708,000 barrels a day -- compared with the one million extra barrels the United States was believed to want.

In the face of the smaller output increase, prices had stubbornly held well above 30 dollars a barrel in London and New York until Nuaimi's statement on Monday.

Achieving a larger output increase at the June OPEC meeting was complicated by the fact that most of the 11 cartel members are producing close to capacity and would not benefit from a decision to pump more oil.

Apart from Saudi Arabia, the only OPEC members with significant spare capacity are believed to be Kuwait and the United Arab Emirates.

The price of crude continued its steep decline Wednesday, falling below 29 dollars a barrel in midday trade in London.

The day before, Brent fell 1.52 dollars a barrel to 29.58, while the New York market was closed for the Independence Day holiday.

http://denver.petroleumplace.com/egatecom/scream/2000/07/05/ANA/0474-0475-Gulf-oil-OPEC.lead...html

-- Cave Man (caves@are.us), July 06, 2000

Answers

BRIDGE ANALYSIS: Venezuela marginalized for now within OPEC

By Robert Campbell Bridge News Caracas--July 6

Amid the current confusion surrounding Saudi Arabia's proposal that OPEC raise oil production by 500,000 barrels per day (bpd), Venezuela, the number three producer in the cartel, is a marginal player in the debate, with little influence to sway other heavyweight producers. Caracas will have to accept whatever other OPEC producers decide.

In the past, Venezuela's constant quota-busting and hard bargaining made it a force to be reckoned with in OPEC power politics.In the 1990s, under the de facto leadership of Luis Giusti, the head of state oil company PDVSA, Venezuela's oil policy was aimed at capturing greater market share in the United States.

"When they had Giusti, they were very difficult to negotiate with. He was very skilled," a senior Saudi Arabian OPEC delegate said at the last OPEC meeting held in Vienna on Jun 21.

But the collapse of oil prices in 1998 nearly brought the country to its knees. The Venezuelan state depends on oil revenues for the bulk of its revenues. Amid this crisis, the traditional political elite were dealt a death blow by the election of Hugo Chavez to the presidency in late 1998.

Chavez, a former army officer, led a coup attempt in 1992 in a bid to topple the regime in the name of the people. During the campaign, Chavez blasted the Giusti plan to raise production, saying it was diverting funds that would be better used for t he development of the country. Chavez also sees OPEC as a forum for less developed nations to cooperate and leverage their economic power for world political influence. A key component of his foreign policy is the creation of a "multi-polar" world to balance the power of the United States.

Upon Chavez' assumption of office in 1999, Giusti resigned and PDVSA was ordered to slash its output to its OPEC quotas. Close cooperation with Saudi Arabia and Mexico led to a deal to further reduce oil production quotas. Although oil prices recovered sharply in the second half of 1999, PDVSA was forced to defer or cancel major maintenance projects to conserve cash. The effects of this decision are now being felt.

Venezuelan officials are adamant that the country retains an oil production capacity of 3.5 million bpd. But oil industry observers and private sector contractors say Venezuela has suffered a sharp reduction in production capacity. PDVSA produces from old oil fields which have decline rates of about 20%, senior energy policy officials admit. Private observers say drilling activity has been too limited to have maintained the level of capacity that is claimed by the government. PDVSA rigs are in poor condition, while private drilling companies watch the losses pile up as rigs sit stacked in lots.

The lack of production capacity takes away a key lever from the government in negotiations with other members of the cartel over how any increase in oil output will be divvied up. At the same time, the country is weakened by its willingness to lose ground in the international oil market to maintain OPEC unity.

At the last OPEC meeting in June, Venezuela agreed to a deal that saw a 708,000 bpd increase in OPEC production divided between members on the basis of market share even though its production cuts amounted to about 20% of total cuts in place at the time. Energy and Mines Minister Ali Rodriguez admitted that the result was less than Venezuela would have wanted, but said that "we did not want to cause a fight in OPEC."

The result of Venezuela's conciliatory negotiating stance and depressed production capacity is that Caracas can only stand by and watch as the players with spare capacity, led with Saudi Arabia, fight it out with other members such as Iran, who are happy to use OPEC as a forum for power politics and who do not cleave to Chavez' vision of happy cooperation.

Earlier this week, Chavez urged Saudi Arabia to "resist" political pressure to raise oil production. However, deputy oil minister Bernardo Alvarez conceded Thursday that Venezuela would raise production if that were the decision taken by OPEC.

The extent to which Venezuela remains a marginal player within OPEC depends on how much production capacity is built up over the rest of the year. Growth in capacity will come from, ironically perhaps, the private-sector operators pioneered by Giusti. PDVSA and its partners are set to invest $5.2 billion this year in all aspects of the buisness. Major new production from heavy oil upgraders built in partnership with U.S. oil majors is scheduled to come on line toward the end of 2000. It remains to be seen what Caracas will do with new oil production capacity when it has it.

http://www.petroleumworld.com/story19.htm

-- Cave Man (caves@are.us), July 06, 2000.

Venezuelan officials are adamant that the country retains an oil production capacity of 3.5 million bpd. But oil industry observers and private sector contractors say Venezuela has suffered a sharp reduction in production capacity. PDVSA produces from old oil fields which have decline rates of about 20%, senior energy policy officials admit. Private observers say drilling activity has been too limited to have maintained the level of capacity that is claimed by the government. PDVSA rigs are in poor condition, while private drilling companies watch the losses pile up as rigs sit stacked in lots.

The Saudi's claim spare production of 2.3 MBOPD which would put their max production at about 10.5 MBOPD. The last time the Saudi's produced over 10 MBOPD was 1980. We shall now see if deferred maintenance will affect the Saudi's production capacity.

-- Cave Man (caves@are.us), July 06, 2000.