OPEC disarray grows as giant Iraqi supply looms in market's future

Posted on Mon, Apr. 28, 2003 BY MELITA MARIE GARZA centredaily.com-Chicago Tribune

CHICAGO -(KRT) - The prospect of Iraq's return to the company of oil producers is contributing to growing disarray within the OPEC cartel, even though the war-torn country is weeks, if not months, away from resuming shipments.

U.S. crude oil prices, which had fallen 30 percent as U.S. armed forces marched through Iraq, rose 7 percent to close at $30.57 a barrel in the days approaching OPEC's April 24 meeting, in anticipation that the oil cartel would then tighten the spigot.

On Friday, crude oil prices closed at $26.26 a barrel on the New York Mercantile Exchange, down 38 cents from Thursday as traders puzzled over OPEC's surprise deal to raise formal output quotas while promising to cut excess supply.

At the meeting, OPEC decided to curb production by 2 million barrels a day and aim to maintain a price of $25 a barrel, with an accepted minimum of $22.

Iraq's share of the market has been minimal, amounting to less than 2 million barrels a day, and OPEC members have no how much oil Iraq will eventually export, according to John Kingston, global oil expert for Platts, an energy information service of the McGraw-Hill Co.

"Saudi Arabia is one of the last believers in OPEC. They tend to adjust their production based on what the market needs. If they (Iraq) go up to three million barrels a day, that's one million barrels a day that is going to have to come out of somebody's hide," Kingston said John Kingston, global oil expert for Platts, an energy information service of the McGraw-Hill Co.

"It tends to come out of Saudi Arabia's."

The cartel has to deal with the possibility that Iraq soon will be a member and make room for it, said Daniel Yergin, chairman of Cambridge Energy Research Associates, a Massachusetts-based global energy consulting firm.. Iraq has the world's third largest proven oil reserves, after Saudi Arabia and Canada.

Iraq may prove to hold more than 9.3 percent of the world's reserves, but it will take years and billions of dollars of mostly foreign investment to find and develop the fields.

Yergin estimated that Iraq could begin producing oil in six to 10 weeks, though at about half of its prewar level of 2.8 million barrels a day.

"But for Iraq to return to its production level prior to the war, or to get back to its 1990 output of 3.5 million barrels a day of capacity probably would take two-to-three years and $5 billion," Yergin said. "Basically Iraq has not lived up to its potential as an oil producer," he said.

He estimated that it would take seven years and $30 billion to add 2 million barrels a day on top of the original 3.5 million barrels a day.

"They also need a government, a petroleum law, a fiscal system, and negotiations between a government and a company," Yergin said.

The primary hurdle for Iraq is the U.N. Security Council, which must rescind economic sanctions against Iraq that have been in place since Iraq invaded Kuwait in 1990. Sanctions eventually led to the Oil-for-Food program, which initially allowed Iraq to sell only a limited amount of oil in return for humanitarian aid.

Although President Bush on April 16 called for the United Nations to lift the sanctions, the decision will be up to the Security Council, which includes France, Germany and Russia, countries the United States had lambasted for failing to support the war.

Questions about a broader U.N. role in Iraq's reconstruction, which the United States does not want, likely will muddy the decision-making process.

For the time being, the sanctions mean that money to rebuild Iraq will be sharply curtailed. The program requires that 70 percent of the revenues be devoted to humanitarian aid, with most of the rest sent to Kuwait as war reparations.

Robert Ebel, director of energy programs at the Center for Strategic and International Studies in Washington said the United States is not going to "go in and open the valves and flood the market with oil. I don't see any real impact deriving from the re-emergence of Iraqi oil this decade."

Still, Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University in Dallas, said that now was not the time to cut production.

Despite the recession, oil markets remain tight, primarily because of strife in Venezuela and Nigeria.

"There is only one million barrels a day of excess capacity in the world today," Baxter said. "Before the war there was around 4.5 million to 5 million barrels a day of excess capacity."

But Ebel said OPEC is trying to account for the normally slower second and third quarters of the year.

"It has nothing to do with Iraq," Ebel said. "We are now coming out of the winter heating season," Ebel said. "They are thinking that if they don't cut back on production, prices will fall even farther and faster than they already have."

Ebel believes Iraq will remain in the cartel, at least initially.

"I think they will stay in OPEC until they reach parity with Iran in export quotas, and until they think that staying in OPEC will limit future growth," he said.

Yergin agreed: "OPEC was founded in Baghdad in 1960 before Saddam Hussein came to power. The basic interest for the U.S. is to see Iraq generate high oil revenues so that it can rebuild."

© 2003, Chicago Tribune.

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