Iraqi Oil a Threat to Saudi Arabia, OPEC Success (Update2)

Vienna, April 24 (<a href=quote.bloomberg.com>Bloomberg) -- Saudi Arabia may lose its dominance over OPEC as a U.S.-backed Iraq prepares to expand the world's second-largest reserves, analysts said.

OPEC ministers will probably start talks today on how to resume output quotas for Iraq, a founding member of OPEC in 1960. Iraqi oil sales are governed by United Nations sanctions, not agreements among the Organization of Petroleum Exporting Countries. The negotiations may last months, the analysts said.

Since the 1990-1991 Gulf War, Saudi Arabia has pumped more to compensate for Iraq's decline, helping the country become the world's top oil producer. The return of Iraq means the Saudis will have to cede some of their more than 10 percent market share, a move Crown Prince Abdullah may oppose, analysts said.

``The important thing for OPEC is to maintain a businesslike perspective to keep prices close to $25 a barrel,'' said Brad Bourland, chief economist at the Riyadh-based Saudi American Bank. OPEC's success in keeping prices close to its target in the last four years could collapse if members squabble, he said.

OPEC ministers are gathering in Vienna today to discuss how to prevent a glut and stop prices from falling further, after they slid from $34 in early March to $24.43 today in London.

Brent crude oil has averaged $26.50 a barrel since 2000, 50 percent higher than the 1990s average, when the group fought over sales to the U.S. market. Analysts attribute the group's success to the Saudi oil minister, Ali al-Naimi.

Al-Naimi, 67, succeeded by agreeing accords with Venezuela, South America's largest oil producer, to limit output. He also persuaded non-OPEC members, such as Mexico and Norway, to cut sales when needed. The minister is near the end of a second term, raising speculation he may be replaced in a cabinet reshuffle.

Equal to Iran

Iraq may not receive a production quota until output surpasses levels seen before the Persian Gulf War, an OPEC official said yesterday. Production would have to rise to 3.5 million barrels a day, from the 2.5 million earlier this year, for Iraq to receive an allocation, he said.

While preparations for the OPEC meeting got under way in Vienna yesterday, four officials at the Iraqi embassy, across the street from the Intercontinental hotel where delegates gather, said they had lost contact with Baghdad.

The embassy sits on the Ring Strasse, where its faded 19th- century facade stands out against well-scrubbed neighbors, including the Kursalon concert hall.

The (Iraqi) government is inactive,'' OPEC President Abdullah bin Hamad al-Attiyah said yesterday. We're not going to see any Iraqi official here.''

OPEC's information booklet lists Amer Mohammed Rashid, Saddam Hussein's oil minister, as the nation's delegate. Rashid is number 47 of 55 Iraqi officials on the U.S. ``most wanted'' list.

Long Absence

OPEC, which pumps a third of the world's oil, started using quotas in 1982. Iraq hasn't participated in the system since 1990, when its output was set at 3.14 million barrels a day, a level equal to that of Iran, now OPEC's second largest producer.

Iran, which pumped 3.75 million barrels a day last month, earlier this year said it would oppose similar equality now for Iraq. Nigeria and Algeria also said they want a larger share of the group's output to reflect expansion of their oil industries. Nigeria can pump some 2.5 million barrels a day, and Algeria 1.2 million, according to Bloomberg estimates.

Nigeria is pressing the organization to raise its quota from 2.018 million barrels a day to closer to its production capacity.

Nigerian President Olusegun Obasanjo, who won re-election on Saturday, said Africa's top oil producer will remain in OPEC for the four-year life of his administration. The U.K.'s Independent newspaper reported last July that Nigeria was considering quitting OPEC over the quota dispute.

Saudi oil output almost doubled when Iraq's invasion of Kuwait shut production from both countries in 1990. The kingdom has remained close to a level of more than 8 million barrels a day since and will be reluctant to give up shipments, analysts said. The nation's income per head is half of what it was a decade ago.

Tripling in Size

Saudi Arabia will find it difficult not to concede some ground to Iraq in the coming years,'' said Anthony Harris, a former U.K. ambassador to the United Arab Emirates. Boosting Iraq's output provides the U.S. with insurance in times of trouble. The more countries that can pump lots of oil, the better.''

Iraq could boost production to 3.5 million barrels a day once United Nations sanctions that restrict trade and investment are lifted, according to the Centre for Global Energy Studies, founded by former Saudi oil minister Sheikh Zaki Yamani. The project would take some $5 billion and three years.

Iraq could further boost production to 8 million barrels a day over nine years by developing unused oil fields at a cost of about $30 billion, the CGES said.

Exports from Iraq have been suspended since March 20 when the coalition invaded from Kuwait. Unlike the first Gulf War, the damage to oil infrastructure in both countries has been minimal, and Army officials have said exports could resume in months.

Iraq is an important country,'' president al-Attiyah said. I hope Iraq will soon have a very important role. Once we have a new Iraqi government, we will see Iraq coming back.'' Last Updated: April 24, 2003 02:42 EDT