Silver lining for OPEC in lengthy low oil price
November 23, 1998
LONDON, Reuters [WS]
For OPEC the prospect is alarming, but more of
this year's crippling price pain may be the
oil cartel's best long-term hope of reasserting
its grip over world petroleum markets.
Senior oil industry figures acknowledge that
the current supply glut, anchoring prices at
their lowest in real terms for a quarter of a
century, could last well into next decade.
This year's price slide alone will strip a third,
or some $50 billion, from the Organisation of
the Petroleum Exporting Countries (OPEC)
precious oil export revenues, a grim backdrop
for its Vienna meeting next week.
But analysts say a bout of weak prices will at
least hasten foreign investment back into the
group's huge low-cost reserves and
undermine the costlier oil output sources
that have drained its market share.
''There is a silver lining to low prices for
OPEC,'' said Mehdi Varzi of Dresdner Kleinwort
Benson bank.
''Little new non-OPEC oil is really profitable
on $12 a barrel. There's been hardly any
increase in non-OPEC output this year,
showing that high-cost production is already
suffering.''
Years of holding in production to try and prop
up prices has left OPEC's eleven members
accounting for little more than a third of
world output, even though they have over
two-thirds of global oil reserves.
The group's spare production capacity has
now swollen to four million barrels per day
(bpd), after it cut some 2.6 million bpd of
output this year in a bid to salvage sunken
prices.
Non-OPEC producers have chipped in with
just 500,000 bpd of pledged cuts.
Key OPEC powers such as Saudi Arabia and
Venezuela are now reluctant to sacrifice
more market share despite the threat of
further price misery.
''We have to increase our share in the oil
market and not to leave the market open for
other producers. As a group we can raise our
income by increasing our share in the
market,'' Saudi Oil Minister Ali al-Naimi said
last month.
OPEC has battled to prop up oil values since
a dramatic price hike in the 'seventies,
sticking to a now-defunct output quota
system for nearly two decades.
But this strategy laid the foundations for the
ruinous supply surplus now hammering oil
prices.
Denied access to OPEC'S low-cost oil after a
wave of nationalisations in the 1970s, the
West was able to hunt out other secure
supply sources, driving down costs with
cutting-edge technology.
Now, a stretch of oil prices near $12 a barrel
would jeopardise new higher-cost projects
threatening OPEC market share such as
those offshore West Africa, in the North Sea
and in the Caspian Sea.
''The difference with the new projects
outside OPEC is that all the infrastructure
needs to be put in place,'' said John Toalster
of SG Securities. ''And new techniques like
gas injection will struggle to be economic if
prices stay this low for long.''
OPEC's cheapest production costs of just $1
of $2 a barrel contrast with a typical $7 a
barrel outlay beyond the group.
Authoritative OPEC insiders deny that the
desire to step up market share is partnered
by a wish to choke off rival production.
New oil output actually embeds oil's
long-term customer base in the face of
challenges from alternative fuels, they say.
''Any oil and gas find anywhere is good for
the oil industry because the more that is
produced the more the industry perpetuates
itself. There is no relief from not finding oil,''
a prominent oil minister said recently. Yet a
new low price environment will spur
international majors to channel their capital
into developing OPEC's low-cost reserves,
just as key OPEC powers start to bring
foreign partners back into the upstream.
Iran and Venezuela are now competing
head-on with non-OPEC projects for foreign
capital and technology. Iraq will open up its
mighty reserves when sanctions allow,
leaving only Kuwait and Saudi Arabia to take
the plunge.
''Everyone wants to increase market share
and the only way to do this is to get the
international oil companies in,'' Franco
Bernabe, chief executive of Italy's ENI said
this week.
''If they all follow the Venezuelan example
then their market share will increase very
rapidly.''
The devastating short-term price impact of a
low-cost production deluge may stop the
group taking the tough decisions that could
produce long-term benefits, analysts
caution.
Yet Bernabe argues that it will strengthen
producer countries' hold over the market as
the world's attention turns back to the
question of declining reserves in the next
century. |
