INTERVIEW-IEA faces tight call on oil release in war

www.forbes.com Reuters, 02.07.03, 9:19 AM ET By Richard Mably

PARIS, Feb 7 (Reuters) - OPEC may hold enough spare capacity to prevent the need for a release of strategic oil reserves from consumer countries should war break out in Iraq, the new head of the West's energy watchdog said in an interview on Thursday. International Energy Agency (IEA) Executive Director Claude Mandil told Reuters that he hoped the cartel would be able to cope with an Iraqi stoppage and stop another damaging spike in world oil prices. If not, the IEA, adviser on energy to 26 industrialised nations, was ready "within hours" to order an emergency release from the huge inventories held to safeguard energy security in countries like the United States, Germany and Japan. Mandil said he expected OPEC to open the pumps towards full capacity should an attack by Washington shut Iraqi exports of nearly two million barrels daily on the world's 40-million-barrel-a-day market. "We expect that to be done. It is only if it is not done or if it is not enough that we will have to assess whether there is a shortage and decide that we need to do something," he said. "We are in very close contact with leading producing countries and when we have to take a decision we will take into account our latest estimate of their spare capacity and whether or not it will meet the shortfall." With OPEC thought to be holding just 2-2.5 million bpd of unused capacity, mostly in the hands of Saudi Arabia, the IEA faces a close call. The industrialised powers which make up its membership could suffer a huge setback to economic recovery should oil prices, already near two-year highs of $35 a barrel, repeat the spike to over $40 seen during the 1990-1991 Gulf War. Set up in 1974 to protect the West after the Arab oil embargo, the IEA requires its member nations to hold stocks equivalent to at least 90 days of forward demand. Stocks now are near 114 days, more than enough to meet any hole in supply that war might create, barring a much longer conflict than most Western military analysts expect. Mandil said the IEA had made no preliminary judgment on whether a release might be needed in the event of war and would not make that decision until an actual stoppage. "We will wait for a supply disruption but if there is a supply disruption we can act within hours," he said. "We are prepared to cope with any kind of supply disruption and we are prepared to do so extremely swiftly."

SAUDI SEES NO IEA RELEASE His remarks followed recent comments from Saudi Arabia suggesting that Riyadh was not expecting to an IEA release of emergency stocks, last used in 1991 after Iraq's invasion of Kuwait. Saudi Oil Minister Ali al-Naimi said in Abu Dhabi at the weekend that discussions with consumer nations had left them confident in OPEC's ability to make up any shortfall without the use of the reserves. Mandil meets with OPEC Secretary-General Alvaro Silva in Vienna on Friday and is expected to discuss the issue. The cartel, fearful of a post-war price crash, will he hoping to convince Mandil that a release is not required unless Iraqi leader Saddam Hussein pulls a surprise and is able to inflict significant damage on Saudi or Kuwaiti facilities. "What will be most important to judge is whether the war will spread and hurt other countries," said Klaus Jacoby, head of emergency planning at the IEA. With fundamentals on world oil markets always difficult to read, the Paris-based agency is faced with a tricky decision. Mandil said the extent of any war damage to Iraqi or neighbouring facilities, growth in Venezuelan production, the weather and the lull in oil consumption after peak winter demand were all factors. Saudi Arabia already is pumping more to make up for a loss from fellow cartel member country Venezuela where exports have been hit by a two-month-old strike aimed at ousting President Hugo Chavez. Venezuelan output also is on the rise again after dipping to less than 700,000 barrels a day on average in January, less than a quarter of normal production. Mandil said the IEA had the flexibility to review any decision to release reserves day by day. "Perhaps we will have to take a decision one day and take a different decision, say, eight days later. We can reassess the situation on a daily basis," he said.