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Strategies & Market Trends : Strictly: Drilling II -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (22509)	12/2/2002 11:59:22 AM
From: isopatch	Read Replies (1) \| Respond to of 36161

<Has OPEC Production Peaked?> Absolutely a MUST read. (Tables are easier to read if you click on the url.) prudentbear.com <November 28, 2002 (Bill Powers is editor of the Canadian Energy Viewpoint, email bill@canadianenergyviewpoint.com) The recent four and half month low in oil prices has many people wondering if the economic slowdown and postponed threat of war will lead to lower oil prices in coming months. I do not know where oil prices will head in the next couple of days, weeks or even months ahead. I find little value in such short sighted predictions. However I find great value in tracking oil supply and demand trends since they ultimately will determine the financial success of firms actively finding and developing oil. Contrary to almost all conventional wisdom I do not believe that OPEC producing countries are sitting on billions of barrels of easily exploited reserves that they can "turn on" at a moment’s notice. There is growing evidence that OPEC is struggling to maintain current production levels even at today’s high prices. While reading the October 14, 2002 issue of the Oil and Gas Journal I found some very interesting production and pricing information in the Statistics section. First 8 Months of 2001 OPEC Daily Production Country 1,000’s Boed % chg prev. year Algeria 834 4.9 Libya 1,393 -0.4 Nigeria 2,066 3.6 Indonesia 1,221 -3.6 Iran 3,813 5.9 Iraq 2,179 -15.9 Kuwait 2,083 2.1 Qatar 700 3.9 Saudi Arabia 8,091 0.4 United Arab Emirates 2,244 2.4 Venezuela 2,885 -4.6 Total* 27,508 -.5 (Source: Nov 12, 2001 OGJ page 94 - May not add due to rounding) World Oil Prices as of 10/26/01 Crude Type Price Dubai Fateh $19.40 Saudi Light $19.70 Algeria Saharan $20.35 Nigeria-Bonny Light $20.35 Indonesia-Minas $18.75 Venezuala Tia Juana Light $18.64 West Texas Intermediate $19.75 (Source: Nov 12, 2001 OGJ page 93) First 7 Months of 2002 OPEC Daily Production Country 1,000’s Boed % chg prev. year Algeria 797 -4.0 Libya 1,299 -6.7 Nigeria 1,916 -7.3 Indonesia 1,131 -7.7 Iran 3,380 -11.6 Iraq 1,943 -11.3 Kuwait 1,869 -10.5 Qatar 611 -12.8 Saudi Arabia 7,319 -9.8 United Arab Emirates 1,991 -12.0 Venezuela 2,316 -16.3 Total 24,573 -10.5 (*Source: Oct 14, 2002 OGJ page 73 - may not add due to rounding) World Oil Prices as of 9/27/02 Crude Type Price Dubai Fateh $27.20 Saudi Light $26.72 Algeria Saharan $28.93 Nigeria-Bonny Light $29.25 Indonesia-Minas $28.12 Venezuela Tia Juana Light $28.49 West Texas Intermediate $26.25 (Source: Oct 14, 2002 OGJ page 72) A review of the above production and pricing data clearly shows that every OPEC member was producing more oil in the first half 2001 than in 2002. Not only was every OPEC member producing more oil in 2001 but every member was selling more oil in 2001 at a price that was approximately 40% lower than 2002 prices. While OPEC production is likely to increase as we head into a period of traditionally higher demand, I believe the 10.5% average decline in OPEC production for the first seven months of 2002 to be very significant. Some might argue the drop in production is due to an increase in OPEC discipline. I see a few holes in this argument. Firstly, OPEC is a cartel designed to maximize the ealized price of oil for its members. Throughout history there have been few cartels that have succeeded because the incentive to cheat on production quotas is more than individual members can resist. OPEC is no different. Most of its members have been cheating on their assigned production quotas for most of its 42 year history. It is unlikely that the members of OPEC have suddenly turned over a new leaf and have decided to sell less oil at higher prices. Others might argue that the decline in OPEC production is a statistical anomaly. I am suspicious of any statistic regardless of its source, particularly government statistics, but I believe the data in the above tables to be reasonably accurate. The Oil and Gas Journal, which has been published for over 100 years, is a well read and highly regarded trade journal. Some might consider OPEC’s production drop in the first seven months of 2002 statistically insignificant. A 10.5% average decline by the 10 OPEC members would be difficult to consider insignificant and is far too large to be considered a rounding error. OPEC’s recent decline in production also calls into question the reliability of OPEC’s reserve estimates. While any reserve estimate the should be viewed with a fair amount of skepticism, reserve estimates from national oil companies should be considered very suspect. OPEC countries have a very valid reason to overstate reserves; each country’s production quota is determined by the amount of reserves the country reports. Colin Campbell, author of "The Coming World Oil Crisis" and a well respected expert on oil supply, has detailed several instances of completely fabricated reserve estimates by OPEC members. Since OPEC reserves are not confirmed by any outside auditor, inflated reserves figures should be considered the norm. M. King Hubbert’s theory, now called Hubbert’s Peak, describes how irreversible production declines set in once half of the recoverable reserves have been depleted from an oil region. Could half of OPEC’s reserves be gone? While the production numbers collected by the Oil and Gas Journal for the first seven months of 2002 should by no means be considered overwhelming evidence of a peak in OPEC oil production, they do provide us with several insights to state of OPEC production capacity. I find Saudi Arabia’s 9.8% drop in oil production to be an incredible figure at a time of high prices. Saudi Arabia’s deteriorating financial situation in recent years, due to the growing needs of it expanding population and the spendthrift ways of the royal family, leads me to seriously doubt the existence of spare production capacity in Saudi Arabia. While the jury may still be out on whether OPEC will be able to raise production above current levels, investors should take a close look at the implications a permanently lower supply from OPEC countries would have on energy investments.>