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OPEC Pledges to Increase Oil Production

Posted on: Wednesday, 16 June 2004, 06:00 CDT

LONDON - OPEC signaled it would boost oil production and said it would ask other major oil producers outside the group such as Mexico to do so as well to make up for lost crude exports from sabotaged pipelines in Iraq.

But analysts said pumping the extra oil would strain the world's limited spare production capacity and leave a wafer-thin cushion with which to absorb any future supply disruptions.

An attack on the two southern pipelines serving as Iraq's main export route for oil forced the suspension Wednesday of about 1.5 million barrels in daily Iraqi shipments from the Gulf. The explosion north of the coastal town of Faw was the second such attack in three days, and some analysts estimated that Iraqis would need 10 days to repair the damage.

Oil markets shrugged off the disruption, thanks to signs from the Organization of Petroleum Exporting Countries and its most powerful member, Saudi Arabia, that they would make up for the shortfall in Iraqi crude.

"The policy of Saudi Arabia and of OPEC in general is to make sure there is enough oil in the market and that there is no supply shortage," said a senior Gulf OPEC source, speaking on condition of anonymity.

OPEC would also ask large independent producers such as Russia and Mexico to cooperate by pumping more oil of their own, OPEC President Purnomo Yusgiantoro said in Jakarta, Indonesia.

But Russia and Norway - the world's second and third largest exporters after Saudi Arabia - said they could do little to help.

"We are producing as much as we can," the director of Russia's Federal Energy Agency, Sergei Oganesyan, told the Interfax news agency. In Norway, Deputy Oil Minister Oeyvind Haabrekke told the state radio network NRK that his country had "no excess capacity and no possibility of increasing production."

There was no immediate response from Mexico's energy department.

The state oil company Petroleos Mexicanos currently produces around 3.4 million barrels a day of crude, of which it exports 1.86 million. It is aiming to raise output to about 3.5 million barrels a day this year.

Analysts fear that additional attacks on Iraq's vulnerable oil infrastructure - and a damaging spike in crude prices - could lie ahead as the U.S.-led coalition prepares to hand over political power to Iraqis on June 30. If Iraq's insurgents succeed in disrupting exports well into the summer, analysts worry that an expected increase in oil demand during the second half of the year could use up most of the world's already meager surplus capacity.

Much depends on how quickly Iraq can fix its pipelines and resume exporting. A risk looms that saboteurs might intensify their attacks on oil facilities ahead of the transfer of power in Iraq and that authorities there won't be able to make repairs fast enough.

If that happens, analysts say prices could soar - especially if another major oil producer suffers a simultaneous disruption.

"If something happens in Saudi Arabia, that's the $100 (per barrel) oil. And that might be just for starters," says Adam Sieminski of Deutsche Bank in London.

U.S. crude futures shot to a record high of $42.33 per barrel earlier this month on concerns about the security of Saudi oil supplies after terrorists killed 22 foreigners in the kingdom, home to the world's largest proven reserves. Prices eased after Saudi Arabia pledged to increase output.

Contracts of U.S. light crude for July delivery rose 13 cents to settle at $37.30 per barrel on Wednesday in New York. August contracts of North Sea Brent crude rose 17 cents to settle at $35.20 on the International Petroleum Exchange in London.

"I'm surprised at this muted reaction because spare capacity in the world is only 2.2 million barrels, which is only 2.7 percent of expected third quarter world demand," said Leo Drollas of the Center for Global Energy Studies in London.

Saudi Arabia is the only oil producer with significant spare capacity. It has already committed to raise its output this month to 9.1 million barrels a day and, if necessary, to pump up to its short-term ceiling of 10.5 million barrels.

If OPEC and Saudi Arabia increase production to offset all of Iraq's suspended exports, Drollas calculates that this will leave the world with only 700,000 barrels a day in spare capacity - or 0.9 percent of his estimate for third quarter demand.

"We're lucky we're in a bit of a lull" in seasonal demand, he said. "If this happened in the winter quarter, we'd be in serious trouble."

The Iraqi outage came just as some analysts anticipated a further drop in oil prices. Saudi Arabia, in particular, faces a difficult decision. It can increase output, but if the Iraqis resume and sustain their exports, prices could plunge further than the Saudis would like.

"The issue here is not that of supply and demand, but a political one that has to do with instability in the area, including what is happening in Saudi Arabia," said Kuwaiti economist Jassem al-Saadoun.

If there are no more attacks on Iraq's southern export pipelines, the "psychological effect" on markets should dissipate within 10 days, he said.

Iraq's southern pipeline system is its main economic artery. The country's only other export route for oil - a pipeline from northern oil fields to neighboring Turkey - suffered multiple sabotage attacks after the U.S.-led invasion, and shipments through it are small and intermittent.

The security officer for Iraq's Northern Oil Co., which manages exports to Turkey, was killed in an ambush Wednesday in a crowded public market in the oil hub of Kirkuk.

Iraq has the world's second-largest oil reserves, and earnings from crude exports are essential to the country's reconstruction and political stability.

However, years of U.N. sanctions, wars and mismanagement have hobbled Iraq with run-down and obsolete oil facilities, and Iraqis have failed to restore crude exports to prewar levels of more than 2 million barrels a day.

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