Little Brown Book Is Key To IEA's Oil Stocks Release

sg.biz.yahoo.com Tuesday February 25, 12:17 AM By David Gautier-Villars Of DOW JONES NEWSWIRES

PARIS (Dow Jones)--Of all the weapons that may be deployed in an Iraqi conflict, Klaus-Dietmar Jacoby has the one that will be the least noticed if used successfully.

In a drawer in his Paris office sits a brown plastic notebook containing hundreds of names and numbers of staff at refineries, oil terminals and governments around the world.

If a war in Iraq blows a hole in the world's supply of crude oil, Jacoby, the head of emergency planning at the International Energy Agency, will turn to his notebook to help keep disruption to a minimum.

His job is to gauge where the shortfall will hit hardest. Based on information from Jacoby, the IEA, the watchdog of the strategic oil stockpile for the 26 oil-thirsty members of the Organization of Economic Cooperation and Development, would then decide whether to intervene by releasing reserves.

"We are ready," Jacoby says in his office overlooking the Eiffel Tower. "We've simplified our emergency procedures and if there is a serious supply shortage, we could intervene within 48 hours, even faster if needed."

That's swift compared to 1974, when the IEA was created as a counterweight to the Organization of the Petroleum Exporting Countries. Back then, weeks or even months were thought necessary to act.

In those days, the agency's main weapon against a supply disruption was an intricate reallocation system under which the IEA attempted to spread the pain. The agency would solicit help from private companies and governments for members most affected by a shortage of oil.

If no one volunteered, the IEA would enforce a mandatory sharing system.

"That was bloody complicated," says Nick Tydd, who represents BP PLC (BP) on the IEA's Industry Advisory Board. "And it soon became clear that circumstances had changed significantly since the early days of the IEA and the market would now share the oil far more quickly and more efficiently than any mechanical allocation system."

To keep pace, the IEA introduced a mechanism in 1984 to make oil available to the market more efficiently.

Instead of itself trying to match users and suppliers, it signals where oil is available. If it so chooses, the agency can require members to make part of their oil reserves - equivalent to at least 90 days of net imports - available to the market.

The IEA used the mechanism, rather than the older reallocation system, during the Gulf War in January 1991, the only time it intervened in the market. The move released 2.5 million barrels of oil a day for 30 days.

The move cooled prices and only some of the oil reserves were actually needed, but traders still criticized the agency for taking six months to release stocks, long after Iraq had invaded Kuwait.

Jacoby, who wasn't in his job at the time, says the IEA was right to avoid a knee-jerk reaction. "We couldn't anticipate how long the war would last," he says. "The oil reserves are stored as a last resort, like emergency rations."

BP's Tydd says the agency's mistake was that it failed to communicate enough with the world. "It's important to have a contingency plan in place, but it's even more important to make sure people are aware of it."

Jacoby reckons the oil markets' difficulty was in predicting how the IEA would react to a crisis. In response, the agency has simplified its procedures and improved its visibility, he says.

A year ago, the agency locked 100 oil experts in a room in Paris for a dummy run to test its ability to coordinate with the industry and swiftly release oil reserves. Oil executives, civil servants and traders reacted to a hypothetical major supply disruption after anthrax had been detected at Ras Tanura, the world's largest oil terminal in Saudi Arabia.

Industry participants said the trial helped them understand how the IEA works.

To become more transparent, the IEA provided details last year on the volume of oil it can easily inject into the market. In the event of a supply outage, the agency could draw down its reserves at a maximum rate of 12.9 million barrels a day for a month.

The rate would fall progressively and member governments' reserves would be almost exhausted after eight months.

That figure should more than offset the sudden loss of Iraqi's average daily exports of around 1.8 million barrels, but the oil markets remain jittery.

"It's reassuring to hear the IEA saying it can cope with a crisis," says Regis Collieux, a senior oil expert at BNP Paribas' energy and commodities arm. "But one cannot rule out a malfunction in the system or a mismanagement problem."

Collieux says he is concerned that OPEC countries, excluding Iraq and Venezuela, only have the capacity to add 2.3 million barrels a day to the market.

"If there was another crisis on top of Iraq, we would be testing the limits of the system," he says. "The ice would be very thin."

-By David Gauthier-Villars, Dow Jones Newswires; 33 (0)1 40 1717 40; david.gauthier-villars@dowjones.com